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THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 

SCHOOL  OF  LAW 


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^^^c 


SELECT  CASES 

AND 

OTHER  AUTHORITIES 

ON  THE  LAW  OF 

PRIVATE  CORPORATIONS 


BY 


EDWARD   H.  WARREN 

Story  Professor  of  Law  in  Harvard  University 


LANGDELL  HALL,  CAMBRIDGE 

PUBLISHED    BY    THE    EDITOR 

1916 


7~ 
19/4 

COPYRIGHT,    1916,    BY    EDWARD    H.    WARREN 


PREFACE. 

The  first  edition  of  Cases  on  Corporations  was  published  seven 
years  ago.    In  this  second  edition  there  are  large  changes. 

The  following  subjects  are  considered  at  much  greater  length: 
Unincorporated  Associations;  Issues  of  Stock  at  a  Discount  or  for 
Overvalued  Property;  Offenses  Against  the  Sherman  Anti-Trust 
Act;  Reorganizations  of  Corporations. 

The  more  important  cases  decided  since  1909  are  set  forth,  or 
cited  in  the  notes. 

There  are  numerous  notes  by  the  editor. 

E.  H.  W. 

Langdell  Hall,  Cambridge, 
April,  1916. 


671093 


TABLE  OF  CONTENTS. 


BOOK  I. 
THE  NATURE  OF  A  CORPORATION. 

CHAPTER  I. 
The  Formation  of  a  Corporation: 

A.  Necessity  of  Authority  from  the  State 1 

B.  Grant  of  Authority  from  the  State 9 

CHAPTER  n. 

Distinguishing  a  Corporation  from  an  Unincorporated 
Association  : 

A.  Where  there  is  no  Legislative  Enactment 31 

B.  Where  there  is  some  Legislative  Enactment 51 

CHAPTER  III. 

Under  what,  if  any,  Circumstances  the  Corporate  Fic- 
tion  SHOULD   BE  DISREGARDED  82 

BOOK  II. 

THE  PROMOTION  OF  CORPORATIONS. 

CHAPTER  I. 

Subscriptions  to  Stock  of  a  Corporation  to  be  formed    173 

CHAPTER  II. 

Conveyances  to  Promoters,   and  Contracts  with  Pro- 
moters  RELATING   TO   PROPERTY   OR  SERVICES      .      .      .    183 

CHAPTER  III. 

Issues  of  Stock  at  a  Discount  or  for  Overvalued  Prop- 
erty        200 

CHAPTER  IV. 

Transactions  between  Promoters  and  the  Corporation 

Promoted       334 


VI  CONTENTS, 

BOOK    III. 

THE  POWERS  OF  CORPORATIONS. 

CHAPTER  I. 
Extent  of  the  Powers: 

Section  1.  In  General 380 

Section  2.  To  enter  into  a  Partnership        405 

Section  3.  To  hold  Stock  in  other  Corporations 409 

Section  4.  To  hold  their  own  Stock 439 

CHAPTER  II. 
The  Exercise  of  the  Powers: 

Section  1.  In  whom  the  Powers  are  vested 464 

Section  2.  Mode  of  exercising  the  Powers 487 

BOOK  IV. 
LIABILITY  FOR  TORTS  AND  CRIMES. 

CHAPTER  I. 
In  General 500 

CHAPTER  II. 
Offenses  under  the  Sherman  Anti-Trust  Act    .     .     .     .514 

BOOK  V. 
UNAUTHORIZED  CORPORATE  ACTION. 

CHAPTER  I. 

Collateral  Attack  upon  the  Formation  of  a  Corporation. 

Herein  of  the  Expression  "De  Facto  Corporation": 

Section  1.  WTiere  there  have  been  Dealings  between  the  Parties  on 

a  Corporate  Basis 598 

Section  2.  Where  there  have  been  no  DeaUngs  between  the  Parties 

on  a  Corporate  Basis 638 

CHAPTER  II. 

Collateral  Attack  upon  the  Powers  of  a  Corporation. 
Herein  of  the  Expression  "Ultra  Vires": 
Section  1.  The  English  Authorities 655 


CONTENTS.  VU 

Section  2.  United  States  Authorities: 

A.  Torts 677 

B.  Transfers  of  Property  Rights 686 

C.  Contracts 712 

D.  Quasi  Contracts 740 

E.  Liability  of  Human  Beings 743 

F.  Setting  aside  an  Ultra  Vires  Transaction    ....  753 

BOOK  VI. 
OFFICERS,   STOCKHOLDERS,  AND  CREDITORS. 

CHAPTER  I. 
Directors  and  other  Officers: 

A.  Unauthorized  Action  by  de  jure  Officers 761 

B.  De  Facto  Officers • 764 

C.  Liability  of  Directors  for  Action  or  Inaction 769 

D.  Contracts  with  the  Corporation 782 

E.  Purchases  of  Corporate  Property  or  Obhgations 793 

F.  Relation  to  Stockholders       798 

G.  Dealings  with  Third  Persons 818 

H.  Executive  Officers 821 

CHAPTER  II. 
Stockholders: 
Section  1.  Rights  of  a  Stockholder  even  when  he  is  in  the  Minority: 

A.  To  inspect  the  Corporate  Books  and  Records  .     .     .  827 

B.  To  Dividends 832 

C.  To  subscribe  to  New  Issues  of  Stock 843 

D.  To  enjoin  any  Act  which  the  Corporation  is  unautho- 

rized to  do,  or  which  it  was  unauthorized  to  do 
when  Plaintiff  became  a  Stockholder 850 

E.  To  prevent  and  redress  an  Appropriation  of  Corpo- 

rate Assets  by  the  Majority 857 

F.  To  compel  the  Corporation  to  assert  Valid  Claims, 

and  to  resist  InvaUd  Claims 859 

G.  Procedure  in  a  Suit  by  Stockholder  to  assert  a  Cor- 

porate Right 873 

H.  Rights  of  Persons  who  became  Stockholders  at  a  time 

subsequent  to  the  Commission  of  the  Alleged  Wrong  881 

Section  2.  Transfer  of  Shares 888 

Section  3.  Voting  Trusts 912 


viii  CONTENTS. 

CHAPTER  III. 
Creditors 925 

BOOK  VII. 
THE  REORGANIZATION  OF  CORPORATIONS. 

CHAPTER  I. 
Issues  of  Stock  by  a  Corporation  with  Impaired  Capital  .  937 

CHAPTER  II. 

Right  of  Stockholders  to  prevent  a  Sale,  or  Lease,  of 

Corporate  Assets 947 

CHAPTER  III. 
Rights  of  Creditors  as  affected  by  Reorganizations     .  982 

APPENDIX  OF  CORPORATE  FORMS. 

Certificate  of  Incorporation   of  United  States  Steel 

Corporation 1007 

By-Laws 1013 

Minutes  of  First  Meeting  of  Incorporators    ....  1019 

Minutes  of  First  Meeting  of  Directors 1022 

Listing  of  Securities 1026 

Syndicate  Agreement 1030 

Voting  Trust  Agreement 1037 

Certificate  of  Common  Stock 1042 

Certificate  of  Preferred  Stock 1044 

Bond 1046 

Coupon 1048 

Voting  Trust  Certificate 1050 


TABLE    OF    CASES. 


Andrews  Bros.  Co.  v.  Youngstown 

Coke  Co 74 

Ashbury  Railway  Carriage  and  Iron 

Co.  V.  Riche 657 

Athol    Music    Hall    Company    v. 

Carey 173 

Attorney-General    for   Canada   v. 

Standard  Trust  Co 337 

Automatic    Self-Cleansing    Filter 

Co.  V.  Cuninghame  ....  477 
Ayers    v.    The   South   Australian 

Banking  Co 664 

Bahia  &  San  Francisco  Ry.  Co., 

in  r-e 901 

Baldwin  v.  Canfield 488 

Bank  v.  Trebein 125 

Bank  of  Topeka  v.  Eaton  ...  45 
Bank  of  United  States  v.  Deveaux  .  108 
Baroness  Wenlock  v.  River  Dee 

Co 668 

Bartholomew    v.    Derby    Rubber 

Co 961 

Bates  V.  Coronado  Beach  Co.   .     .  407 
Bath  Gas  Light  Co.  v.  Claffy     .     .  731 
Boston  &  Albany  R.R.  Co.  v.  Rich- 
ardson        ...  902 

Boyce  v.  Towsontown  Station  .  .  600 
Brewer  v.  Boston  Theatre     .     .     .  857 

Brewer  v.  The  State 645 

Brightman  v.  Bates     .....  921 
British    South  Africa    Co.    v.  De 
Beers  Consolidated  Mines,  Ltd. .  655 

Broderip  v.  Salomon 148 

Brown  v.  Winnisimmet  Co.  .  .  393 
Bryant's  Pond  Steam  Mill  .Co.  v. 

Felt 176 

Burroughs  v.  North  Carolina  R.R. 

Co .841 

Bushnell  v.  Consolidated  Ice  Ma- 
chine Co 603 

Butler  Paper  Co.  v.  Cleveland  .     .     25 

California  Bank  v.  Kennedy  .  .415 
California  Bank  v.  Kennedy  .  .  694 
Callender  v.  Painesville  R.R.  Co.   .  598 

Carmichael's  Case       179 

Central  Railroad  Company  v.  Col- 
lins     410 

Central  R.R.  Co.  v.  Smith  .  .  .682 
Central  Transportation    Co.    v. 

Pullman's  Car  Co 728 

Chambers  v.  McKee  &  Bros.    .     .  859 


Charlestown  Boot  Co.  v.  Duns- 
more      483 

Chestnut    Hill    Turnpike    Co.    v. 

Rutter 500 

Chicago  City  Railway  Co.  v.  Aller- 

ton    .     .  ' 466 

Citizens  National  Bank  v.  Apple- 
ton    .     .     740 

Clapp  V.  Peterson 446 

Clews  V.  Friedman .     .     .     .     .     .  897 

Coffin  V.  Ransdell 230 

Coit  V.  Gold  Amalgamating  Co.    .  242 

Cole  V.  Millerton  Iron  Co.    .     .     .  989 
Commercial     National     Bank     v. 

Weinhard 468 

Continental  Securities  Co.  v.  Bel- 
mont        875 

Continental  Tyre  &  Rubber  Co., 

Ltd.,  V.  Daimler  Co.,  Ltd.    .     .  157 

Cook  V.  Burlington 90 

Coppin   V.   Greenlees   &   Ransom 

Co 442 

Cottentin  v.  Meyer      .     .     .     .     .  636 

Cotton  V.  Imperial  Corporation    .  970 

CroweUf.  Jackson 798 

Davenport  v.  Dows 873 

Davenport    v.    Peoria    Insurance 

Co 487 

David  Payne  &  Co.,  Ltd.,  in  re  .     .  666 

Davis  V.  Las  Ovas  Co 346 

Davis  V.  Stevens 628 

Denny  Hotel  Co.  v.  Schram      .     .  409 
Denver  Fire  Insurance  Co.  v.  Mc- 
Clelland    720 

Dodge  V.  Woolsey 868 

Douglass  V.  Ireland 265 

Downing  v.    Mount     Washington 

Road  Company 380 

Dunphy  v.   Traveller   Newspaper 

Association 874 

Dupee  V.  Boston  Water  Power  Co.  449 

East    Birmingham    Land    Co.    v. 

Dennis 890 

East    Norway    Lake    Church    v. 

Froislie 646 

Easton  National  Bank  v.  Ameri- 
can Brick  Co 300 

Eliot  V.  Freeman 48 

Ellis  V.  Marshall 17 

Elyton  Land  Co.  v.  Birmingham 
Co 255 


TABLE    OF    CASES. 


Elyton  Land  Co.  v.  Dowdell     .     .  947 
Erianger  v.  New  Sombrero  Phos- 
phate Co 334 

Ewing  V.  Composite  Brake  Shoe 
Co 982 

Finley  Shoe  &  Leather  Co.  v.  Kurtz  491 
First  National  Bank  v.  National 

Exchange  Bank 423 

Ford     V.     Easthampton     Rubber 

Thread  Co 837 

Fort  Payne  Rolling  Mill  v.  Hill  .  785 

Foss  V.  Harbottle 862 

Franklin  Bridge  Co.  v.  Wood   .     .       9 
Franklin  National  Bank  v.  White- 
head        402 

Furnivall  v.  Coombes       ....  670 

Gallagher  v.  Germania  Brewing  Co.  98 
General  Rubber  Co.  v.  Benedict     .  809 

Gilbert  v.  Finch 779 

Gillett  V.  Chicago  Title  &  Trust 

Co 276 

Goodnow    V.    American    Writing 

Paper  Co 832 

Great  Southern  Fire  Proof  Hotel 

Co.  V.  Jones 78 

Groel  V.  United  Electric  Company  866 
Guarantee  Trust  Co.  v.  Dilworth 

Coal  Co 222 

Guckert  f .  Hacke 653 

Hall's  Safe  Co.  v.  Herring-Hall- 
Marvin  Safe  Co 145 

Handley  v.  Stutz 937 

Harris  v.  Gas  Co 756 

Heckman's  Estate       191 

Henry  v.  Babcock  &  Wilson  Co.    .  829 

Herron  Co.  v.  Shaw 270 

Hibbs  V.  Brown 63 

Hill  V.  Nisbet 429 

Hodges  V.  New  England  Screw  Co.  777 
Hoisting  Machinery  Co.  v.  Goeller 

Iron  Works 492 

Hong  Kong  &  China  Gas  Co.,  Ltd., 

V.  Glen 216 

Hospes  V.   Northwestern  Mfg.   & 

Car  Co 292 

Hubbard  v.  Worcester  Art  Mu- 
seum       704 

Hun  V.  Cary 772 

Hutchinson  v.  Green 473 

Imperial  Building  Co.  v.  Chicago 
Open  Board  of  Trade     .     .     .618 

Indianapolis  Fiu-nace  Co.  v.  Herk- 
imer        649 

Irvine  v.  New  York  Edison  Co.     .  984 

Jackson  v.  Hooper 100 

Jacobus  V.  Jamestown  Mantel  Co.  821 
Janney  v.  Minneapolis  Industrial 
Exposition 793 


John  Foster  &  Sons,  Ltd.,  v.  Com- 
missioners of  Inland  Revenue   .     94 
Joint  Stock  Discount  Co.  v.  Brown  416 
Jourdan  v.  Long  Island  R.R.  Co.  494 

Kelner  v.  Baxter 187 

Kerfoot  v.  Farmers'  Bank    .     .     .  689 

Kraft  V.  Griffon  Co 943 

Kuser  v.  Wright 764 

Lake  Superior  Iron  Co.  v.  Drexel  .  250 

Lantz  V.  Moeller 290 

Linn  Timber  Co.  v.  United  States  .  137 
Liverpool  Insurance  Co.  v.  Massa- 
chusetts       51 

Luthy  V.  Ream 912 

Malone  v.  Lancaster  Gas-Light  Co.  388 

Marvin  v.  Anderson 451 

Mason  v.  Pewabic  Mining  Co.  .  .  955 
MacGregor  v.  Dover  &  Deal  Ry. 

Co 672 

McArthur  v.  Times  Printing  Co.   .  184 

McClure  v.  Law 818 

McDonald  v.  Dewey 908 

McDonald,  Receiver,  v.  Williams  .  932 

McGraw,  Matter  of 699 

McNab  V.  McNab  &  Harlin  Mfg. 

Co 835 

McNeil  V.  Tenth  National  Bank    .  894 
Meyer  v.  Mining  &  Milling  Co.  .  303 
Middlesex  Husbandmen  v.  Davis  .     20 
Minnesota  Gas-Light  Co.  v.  Dens- 
low    605 

Mobile  &  Ohio  R.R.  Co.  v.  Nicho- 
las      917 

Mobile  Improvement  Co.  v.  Gass  .  782 
Mokelumne  Co.  v.  Woodbury   .     .     28 

Monk  V.  Barnett 237 

Monument  National  Bank  v.  Globe 

Works 712 

Moore  &  Handley  Co.  v.  Towers 

Hardware  Co 140 

Morgan  v.  Lewis 456 

Munson  v.  Syracuse  R.R.  Co.     .     .  784 

National  Bank  v.  Matthews  .  .  686 
National  Home  Building  Ass'n  v. 

Home  Savings  Bank     .     .     .     .714 

Natusch  V.  Irving 850 

New  Bedford  Railroad  v.  Old  Col- 
ony Railroad       983 

New  England  Trust  Co.  v.  Abbott  905 
New  York  Cable  Co.  v.  Mayor,  etc., 

of  New  York 651 

Nims    V.    Mount    Hermon    Boys' 

School 677 

North  Milwaukee  Town  Site  No.  2 

V.  Bishop 464 

Northern  Pacific  Railway  Co.  v. 

Boyd 995 

Northern  Securities  Co.  i).  United 

States 532 


TABLE    OF    CASES. 


XI 


Northwestern  Transportation  Co. 
V.  Beatty 787 

Oakes  v.  Turquand 930 

O'Conner  Mining  Co.  v.  Coosa  Fur- 
nace Co 791 

Old  Dominion  Copper  Co.  v.  Bige- 
low 349 

Old  Dominion  Copper  Co.  v.  Lewi- 
sohn .     .     .     . 341 

Ooregum  Gold  Mining  Co.,  Ltd., 
V.  Roper 201 

Parker  v.  Bethel  Hotel  Co.   .     .     .     84 

Parsons  v.  Joseph 885 

Pell's  Case 200 

Penfield  v.  Dawson  Town  &  Gas 

Co 244 

Pennell  v.  Lothrop 183 

Pennsylvania  Transportation  Com- 
pany's Appeal 992 

Penobscot    Boom    Corporation    v. 

Lamson 14 

People  V.  Coleman 59 

People  ex  rel.  Manice  v.  Powell  .     .  484 
People  V.  North  River  Sugar  Refin- 
ing Co 128 

People  V.  Pullman  Car  Co.  .  .  .390 
People  V.  Pullman  Car  Co.  .  .  .  417 
People   V.    Rochester   Railway   & 

Light  Co 510 

People  V.  Stockton  R.R.  Co.  .  .  24 
People  ex  rel.  Tiffany  &  Co.   v. 

Campbell 382 

Phillips  V.  Blatchford        ....     33 
Phillips  V.  Providence  Steam  En- 
gine Co 951 

Pollitz  V.  Gould 881 

Provident  Bank  &  Trust  Co.  v. 
Saxon 631 

Reed  v.  The  Richmond  Street  R.R. 

Co 21 

Richards  v.  Wiener  Co 454 

Richardson  v.  Williamson     .     .     .  673 
Richardson    Fueling   Co.   v.   Sey- 
mour       611 

Riker  &  Son  Co.  r.  L'nited  Drug 

Co .963 

Royal  British  Bank  v.  Turquand  .  761 
Russell  V.  Temple 82 

St.  Louis  Railroad  v.  Terre  Haute 

Railroad 753 

Salomon  v.  Salomon  &  Co.,  Ltd.   .  148 

Sanford  v.  McArthur 743 

Sawyer  v.  Hoag 925 

Schwab  V.  Potter  Co 974 

Scovill  V.  Thayer 220 


Seaton  v.  Grimm 614 

See  V.  Heppenheimer 278 

Seeberger  v.  McCormick       .     .     .  747 
Seymour  v.  Spring  Forest  Ceme- 
tery Association  796 

Sherman  v.  Fitch 498 

Small     V.     Minneapolis     Electro- 
Matrix  Co 958 

Smith  V.  Hurd 805 

Snider's  Sons'  Co.  v.  Troy  .  .  .606 
Society  Rerun  v.  Cleveland  .  .  .  638 
Southworth  v.  Morgan     ....  225 

Spering's  Appeal 769 

Standard  Oil  Co.  v.  United  States  .  552 
State  V.  Atlantic  Citv  and   Shore 

R.R.  Co.    .     .     .    ' 431 

State  V.  Bank  of  Hemingford    .     .  726 

State  V.  Dawson 15 

State  V.  Eastern  Coal  Co.  .  .  .  506 
State  V.  Missouri  Pacific  Ry.  Co.  .  418 
Stevens  v.  Rutland  &  Burlington 

R.R.  Co 852 

Stokes  V.  Continental  Trust  Co.    .  843 

Stoutimore  v.  Clark 616 

Strong  V.  Repide 800 

Swift  &  Co.  V.  United  States     .     .  547 

Tappan  v.  Bailey 31 

Thomas  v.  Dakin 55 

Timmis,  Matter  of 966 

Tisdale  v.  Harris 888 

Trevor  v.  Whitworth 439 

United  States  v.  American  Tobacco 

Co 574 

United  States  v.  E.  C.  Knight  Co.  .  516 
United  States  v.  Freight  Associa- 
tion    520 

United  States  v.  John  Kelso  Co.    .  503 
United  States  v.   Milwaukee  Re- 
frigerator Transit  Co 116 

United  States  v.  Winslow     .     .     .  595 

U.S.  Brewing  Co.r.  Dolese  .     .     .  384 

U.S.  Express  Co.  v.  Bedbury    .     .  613 

U.S.  Steel  Corporation  v.  Hodge   .  786 

Varney  v.  Baker 827 

Vent  V.  Duluth  Coffee  Co.    .     .     .  462 

Wathen  v.  Jackson  Oil  Co.  .  .  .  878 
Weatherford  Ry.  Co.  v.  Granger  .  192 
Whittenton  Mills  v.  Upton  .  .  .  405 
Wilder  Mfg.  Co.  v.  Corn  Products 

Co 622 

Williams  v.  Johnson 397 

Williams  v.  Milton 36 

Winget  V.  Quincy  Building  Ass'n  .  615 

Wood  V.  Whelen 476 

Wragg,  Ltd.,  in  re 213 


CASES  ON   COEPORATIONS. 


BOOK  I. 
THE  NATURE  OF  A  CORPORATION. 


CHAPTER   I. 
THE  FORMATION  OF  A  CORPORATION. 


A .  Necessity  of  Authority  from  the  State. 


BLACKSTONE,   COMMENTARIES. 
Book  I,  pp.  468,  469,  470,  472,  473. 

The  honor  of  originally  inventing  these  political  constitutions  en- 
tirely belongs  to  the  Romans.  They  were  introduced,  as  Plutarch 
says,  by  Numa;  who  finding,  upon  his  accession,  the  city  torn  to 
pieces  by  the  two  rival  factions  of  Sabines  and  Romans,  thought  it 
a  prudent  and  politic  measure  to  subdivide  these  two  into  many 
smaller  ones,  by  instituting  separate  societies  of  every  manual  trade 
and  profession.  They  were  afterwards  much  considered  by  the  civil 
law,  in  which  they  were  called  universitates  as  forming  one  whole  out 
of  many  individuals;  or  collegia,  from  being  gathered  together:  they 
were  adopted  also  by  the  canon  law,  for  the  maintenance  of  ec- 
clesiastical discipline;  and  from  them  our  spiritual  corporations  ar6 
derived.  But  our  laws  have  considerably  refined  and  improved  upon 
the  invention,  according  to  the  usual  genius  of  the  English  nation: 
particularly  with  regard  to  sole  corporations,  consisting  of  one  per- 
son only,  of  which  the  Roman  lawyers  had  no  notion;  their  maxim 
being  that  "tres  faciunt  collegium.'^  Though  they  held,  that  if  a 
corporation,  originally  consisting  of  three  persons,  be  reduced  to  one, 
"si  universitas  ad  unum  redit,"  it  may  still  subsist  as  a  corporation, 
"et  stet  nomen  universitatis." 

Before  we  proceed  to  treat  of  the  several  incidents  of  corporations, 
as  regarded  by  the  laws  of  England,  let  us  first  take  a  view  of  the 
several  sorts  of  them;  and  then  we  shall  be  better  enabled  to  appre- 
hend their  respective  qualities. 

The  first  division  of  corporations  is  into  aggregate  and  sole.  Cor- 
porations aggregate  consist  of  many  persons  united  together  into  one 
society,  and  are  kept  up  by  a  perpetual  succession  of  members,  so 


2  BLACKSTONE,  COMMENTARIES.  [CHAP.  I. 

as  to  continue  forever:  of  which  kind  are  the  mayor  and  commonalty 
of  a  city,  the  head  and  fellows  of  a  college,  the  dean  and  chapter  of 
a  cathedral  church.  Corporations  sole  consist  of  one  person  only  and 
his  successors,  in  some  particular  station,  who  are  incorporated  by 
law,  in  order  to  give  them  some  legal  capacities  and  advantages, 
particularly  that  of  perpetuity  which  in  their  natural  persons  they 
could  not  have  had.  In  this  sense  the  king  is  a  sole  corporation;  so  is 
a  bishop;  so  are  some  deans,  and  prebendaries,  distinct  from  their 
several  chapters;  and  so  is  every  parson  and  vicar.  And  the  neces- 
sity, or  at  least  use,  of  this  institution  will  be  very  apparent,  if  we 
consider  the  case  of  a  parson  of  a  church.  At  the  original  endow- 
ment of  parish  churches,  the  freehold  of  the  church,  the  churchyard, 
the  parsonage  house,  the  glebe,  and  the  tithes  of  the  parish,  were 
vested  in  the  then  parson  by  the  bounty  of  the  donor,  as  a  temporal 
recompense  to  him  for  his  spiritual  care  of  the  inhabitants,  and  with 
intent  that  the  same  emoluments  should  ever  afterwards  continue 
as  a  recompense  for  the  same  care.  But  how  was  this  to  be  effected? 
The  freehold  was  vested  in  the  parson;  and,  if  we  suppose  it  vested 
in  his  natural  capacity,  on  his  death  it  might  descend  to  his  heir,  and 
would  be  liable  to  his  debts  and  encumbrances:  or  at  best,  the  heir 
might  be  compellable,  at  some  trouble  and  expense,  to  convey  these 
rights  to  the  succeeding  incumbent.  The  law  therefore  has  wisely 
ordained,  that  the  parson,  quatenus  parson,  shall  never  die,  any  more 
than  the  king;  by  making  him  and  his  successors  a  corporation.  By 
which  means  all  the  original  rights  of  the  parsonage  are  preserved 
entire  to  the  successor;  for  the  present  incumbent,  and  his  predeces- 
sor who  lived  seven  centuries  ago,  are  in  law  one  and  the  same  per- 
son; and  what  was  given  to  the  one  was  given  to  the  other  also.  .  .  . 

Corporations,  by  the  civil  law,  seem  to  have  been  created  by  the 
mere  act,  and  voluntary  association  of  their  members:  provided  such 
convention  was  not  contrary  to  law,  for  then  it  was  ilUcitum  col- 
legium. It  does  not  appear  that  the  prince's  consent  was  necessary 
to  be  actually  given  to  the  foundation  of  them;  but  merely  that  the 
original  founders  of  these  voluntary  and  friendly  societies,  for  they 
were  little  more  than  such,  should  not  establish  any  meetings  in 
opposition  to  the  laws  of  the  state. 

But,  with  us  in  England,  the  king's  consent  is  absolutely  necessary 
to  the  erection  of  any  corporation,  either  impliedly  or  expressly 
given.  The  king's  implied  consent  is  to  be  found  in  corporations 
which  exist  by  force  of  the  common  law,  to  which  our  former  kings 
are  supposed  to  have  given  their  concurrence;  common  law  being 
nothing  else  but  custom,  arising  from  the  universal  agreement  of  the 
whole  community.  Of  this  sort  are  the  king  himself,  all  bishops, 
parsons,  vicars,  churchwardens,  and  some  others;  who  by  common 
law  have  ever  been  held,  as  far  as  books  can  shew  us,  to  have  been 
corporations,  virtute  officii:  and  this  incorporation  is  so  inseparably 


CHAP.  I.]  BLACKSTONE,  COMMENTARIES.  3 

annexed  to  their  offices,  that  we  cannot  frame  a  complete  legal  idea 
of  any  of  these  persons,  but  we  must  also  have  an  idea  of  a  corpora- 
tion, capable  to  transmit  liis  rights  to  his  successors  at  the  same  time. 
Another  method  of  implication,  whereby  the  Icing's  consent  is  pre- 
sumed, is  as  to  all  corporations  by  prescription,  such  as  the  city  of 
London,  and  many  others,  which  have  existed  as  corporations,  time 
whereof  the  memory  of  man  runneth  not  to  the  contrary ;  and  there- 
fore are  looked  upon  in  law  to  be  well  created.  For  though  the  mem- 
bers thereof  can  shew  no  legal  charter  of  incorporation,  yet  in  cases  of 
such  high  antiquity  the  law  presumes  there  once  was  one ;  and  that 
by  the  variety  of  accidents  which  a  length  of  time  may  produce,  the 
charter  is  lost  or  destroyed.  The  methods  by  which  the  king's  con- 
sent is  expressly  given  are  either  by  act  of  parliament  or  charter. 
By  act  of  parliament,  of  which  the  royal  assent  is  a  necessary  in- 
gredient, corporations  may  undoubtedly  be  created :  but  it  is  observ- 
able, that,  till  of  late  years,  most  of  these  statutes  which  are  usually 
cited  as  having  created  corporations  do  either  confirm  such  as  have 
been  before  created  by  the  king,  as  in  the  case  of  the  College  of  Physi- 
cians, erected  by  charter  10  Hen.  VIII,  which  charter  was  after- 
wards confirmed  in  parliament;  or  they  permit  the  king  to  erect  a 
corporation  in  futuro  with  such  and  such  powers,  as  is  the  case  of 
the  Bank  of  England,  and  the  society  of  the  British  Fishery.  So  that 
the  immediate  creative  act  was  usually  performed  by  the  king  alone, 
in  virtue  of  his  royal  prerogative. 

All  the  other  methods,  therefore,  whereby  corporations  exist,  by 
common  law,  by  prescription,  and  by  act  of  parliament,  are  for  the 
most  part  reducible  to  this  of  the  king's  letters  patent,  or  charter  of 
incorporation. 

Note.  —  From  very  early  times  the  courts  recognized  some  cor- 
porations as  existing  bj^  force  of  the  common  law  alone.  See  Y.B. 
11  Hen.  IV,  2;  Y.B.  37  Hen.  VI,  30;  Y.B.  8  Edw.  IV,  6;  Y.B.  20  Edw. 
IV,  12;  Y.B.  14  Hen.  VIII,  2;  Co.  Lit.  3a;  Finch's  Law,  c.  xvii; 
Keilw.  32a;  2  P.  Wms.  125;  4  Vin.  Abr.  525.  There  is  also  evidence 
tending  to  show  that,  in  early  times,  the  Court  of  Exchequer,  in 
revenue  matters,  allowed  unchartered  bodies  of  men  to  be  sued,  and 
even  to  sue,  as  a  unit.   Madox,  Firma  Burgi,  85,  91. 

"Anciently  a  Gild  either  Religious  or  Secular  could  not  legally 
be  set-up  without  the  Kings  Licence.  If  any  Persons  erected  a  Gild 
without  Warrant,  that  is,  without  the  Kings  leave,  it  was  a  Trespass, 
and  they  were  lyable  to  be  punished  for  it.  For  example.  In  the 
Twenty-sixth  year  of  K.  Henry  II  (1179),  several  Gilds  in  London 
were  amerced  to  the  Crown  as  Adulterine,  that  is,  as  set-up  without 
Warrant  from  the  King."  Madox,  Firma  Burgi,  26. 

In  De  Li})crtates,  Lib.  ii,  c.  24,  fol.  56,  Bracton  puts  the  case  that 
the  king  should  grant  some  liberty  "ut  si  alicui  universitati,  sicut 


4  BLACKSTONE,  COMMENTARIES.  [CHAP.  I. 

civibus  vel  burgensibus  vel  aliquibus  alis  q.  mercatum  habeant."  It 
appears,  from  the  chapter  as  a  whole,  that  he  considered  this  Uberty, 
or  franchise,  together  with  various  other  Uberties,  to  be  under  the 
control  of  the  King  {"in  manu  sua")  ;  and  that  private  persons 
might  enjoy  it,  "  sed  de  gratia  ipsuis  Regis  spedali." 

Y.B.  49  Edw.  Ill,  3  (1375).  A  devised  lands  to  B  for  life,  re- 
mainder "a  deux  des  meliour  homes  de  la  Guild  de  la  Fraternity  de 
Whitawyers  en  Londres"  forever.  A  died  without  heirs,  and  on  the 
death  of  B  the  king  claimed  the  land  by  escheat.  The  court  held 
that  the  devise  (after  B's  life  estate)  was  void.  Belknap  expressed 
his  opinion  that,  even  if  the  devise  had  been  to  "the  Fraternity,"  it 
would  not  have  been  good,  because  the  commonalty  of  London  can- 
not by  their  own  act  create  a  community  within  the  community 
without  the  charter  of  the  king.  A  "  Fraternity  "  is  not  a  term  known 
to  the  law,  nor  can  a  community  exist  without  a  charter.  ("Le 
commen  de  Londres  ne  poet  my  d'eux  mesme  faire  comen  deins  cest 
comen  sans  chartr  le  Roy.  .  .  .  Fraternity  n'est  my  terine  de  ley,  ne 
comen  ne  putt  my  estre  sans  chre")  Knyvet,  Chancellor,  with  greater 
precision  of  thought,  said  that  this  commonalty  of  the  gild,  which  is 
not  confirmed  by  the  king,  could  not  be  adjudged  a  body  capable  of 
taking  an  estate  by  purchase.  {"II  ne  poet  pas  estre  p.  la  ley  q.  c. 
cominalty  de  la  Guilde,  q.  n'est  affirme  p.  chre  le  Roy,  purroit  etre  adjudgee 
un  corps  de  purchace  estate.") 

Y.B.  20  Edw.  IV,  2  (1480).  B,  alderman  of  the  X  gild,  brought 
debt  against  C,  and  counted  upon  an  obligation  made  to  A,  some- 
time alderman  of  the  gild,  and  his  successors.  Objection  that  the 
plaintiff  had  not  shown  how  the  corporation  was  formed.  Littleton 
took  a  distinction  between  a  "corporation  of  common  right"  and 
a  gild.  The  judges  were  all  of  opinion  that,  if  suit  could  be  main- 
tained, it  would  be  by  the  executor  of  A.  See  also  Y.B.  22  Edw. 
IV,  34, 

In  Y.B.  14  Hen.  VIII,  2  (1522),  Fineux  remarked:  "There  is  a 
corporation  by  the  Pope  alone,  as  those  mendicant  brothers  who 
cannot  purchase."  But  Brooke,  writing  after  the  Reformation,  laid 
it  down  that  if  the  Pope  purports  to  create  a  corporation,  "ideo  ceo 
est  usurpation  et  voyd  a  cest  jour  etfuit  imperpetuum."  1  Brooke,  Abr. 
Corp.  33.   See  also  Dyer,  81,  pi.  64. 

In  Terrett  v.  Taylor,  9  Cranch,  43,  Story,  J.,  said  (p.  46):  "At  a 
very  early  period  the  religious  establishment  of  England  seems  to 
have  been  adopted  in  the  colony  of  Virginia;  and,  of  course,  the 
common  law  upon  that  subject,  so  far  as  it  was  applicable  to  the 
circumstances  of  that  colony.  The  local  division  into  parishes  for 
ecclesiastical  purposes  can  be  very  early  traced ;  and  the  subsequent 
laws  enacted  for  rehgious  purposes  evidently  presuppose  the  exist- 
ence of  the  Episcopal  church  with  its  general  rights  and  authorities 
growing  out  of  the  common  law.  What  those  rights  and  authorities 


CHAP.  I.]  ST.  6    GEORGE    I.  5 

are,  need  not  be  minutely  stated.  It  is  sufficient  that,  among  other 
things,  the  church  was  capable  of  receiving  endowments  of  land,  and 
that  the  minister  of  the  parish  was,  during  his  incumbency,  seized  of 
the  freehold  of  its  inheritable  property,  as  emphatically  persona 
ecclesiae,  and  capable,  as  a  sole  corporation,  of  transmitting  that  in- 
heritance to  his  successors.  The  church  wardens,  also,  were  a  cor- 
porate body  clothed  with  authority  and  guardianship  over  the  repairs 
of  the  church  and  its  personal  property;  and  the  other  temporal  con- 
cerns of  the  parish  were  submitted  to  a  vestry  composed  of  persons 
selected  for  that  purpose." 

In  The  Governor  v.  Allen,  8  Humph.  (Tenn.)  176,  the  com-t  held 
that  the  governor  of  the  State  was,  by  force  of  the  common  law,  a 
corporation  sole. 

In  People  v.  Mackey,  255  111.  144,  Mr.  Justice  Vickers  said 
(p.  156) :  "A  private  corporation  is  an  organization  for  the  benefit  of 
its  members.  When  brought  into  being  it  enjoys  certain  rights  and 
privileges  of  great  value  that  are  not  enjoyed  by  natural  persons. 
The  right  to  be  a  corporation  is  not  a  natural  or  a  civil  right  of  any 
person,  and  such  right  can  only  be  acquired  from  the  sovereign 
State.  It  is  a  matter  exclusively  within  the  power  of  the  legislature 
to  determine  whether  it  will  grant  or  withhold  the  privilege  of  form- 
ing corporations.  If  the  legislature  determines  to  exercise  its  discre- 
tion and  grant  the  privilege  it  may  prescribe  the  terms  and  condi- 
tions upon  which  the  right  is  to  be  exercised." 

This  general  statement  by  Mr.  Justice  Vickers  must,  it  is  sub- 
mitted, be  qualified  in  so  far  as,  but  only  in  so  far  as,  the  ancient 
doctrine  of  corporations  at  the  conmion  law  still  has  virility. 


ST.  6  GEORGE  I. 
C.  18,  §§  xviii  and  xix  (1719). 

XVIII.  And  whereas  it  is  notorious,  that  several  undertakings  or 
projects  of  different  kinds  have,  at  some  time  or  times  since  the  four 
and  twentieth  day  of  June  one  thousand  seven  hundred  and  eighteen, 
been  publicly  contrived  and  practised,  or  attempted  to  be  practised, 
within  the  city  of  London  and  other  parts  of  this  kingdom,  as  also  in 
Ireland,  and  other  his  Majesty's  dominions,  which  manifestly  tend  to 
the  common  grievance,  prejudice,  and  inconvenience  of  great  numbers 
of  your  Majesty's  subjects  in  their  trade  or  commerce,  and  other  their 
affairs;  and  the  persons  who  contrive  or  attempt  such  dangerous  and 
mischievous  undertakings  or  projects,  under  false  pretences  of  public 
good,  do  presume,  according  to  their  own  devices  and  schemes,  to  open 
books  for  public  subscriptions,  and  draw  in  many  unwary  persons  to 
subscribe  therein  towards  raising  great  sums  of  money,  whereupon  the 


6  ST.  6   GEORGE   I.  [CHAP.  I. 

subscribers  or  claimants  under  them  do  pay  small  proportions  thereof, 
and  such  proportions  in  the  whole  do  amount  to  very  large  sums; 
which  dangerous  and  mischievous  undertakings  or  projects  do  relate 
to  several  fisheries,  and  other  affairs,  wherein  the  trade,  commerce, 
and  welfare  of  your  Majesty's  subjects,  or  great  numbers  of  them, 
are  concerned  or  interested :  and  whereas  in  many  cases  the  said  un- 
dertakers or  subscribers  have,  since  the  said  four  and  twentieth  day 
of  June  one  thousand  seven  hundred  and  eighteen,  presumed  to  act 
as  if  they  were  corporate  bodies,  and  have  pretended  to  make  their 
shares  in  stock  transferable  or  assignable,  without  any  legal  au- 
thority, either  by  act  of  parliament,  or  by  any  charter  from  the  crown 
for  so  doing;  and  in  some  cases  the  undertakers  or  subscriljers,  since 
the  said  four  and  twentieth  day  of  June  one  thousand  seven  hundred 
and  eighteen,  have  acted  or  pretended  to  act  under  some  charter  or 
charters  formerly  granted  by  the  crown  for  some  particular  or  special 
purposes  therein  expressed,  but  have  used  or  endeavored  to  use  the 
same  charters  for  raiding  joint  stocks,  and  for  malving  transfers  or 
assignments,  or  pretended  transfers  or  assignments  for  their  own 
private  lucre,  which  were  never  intended  or  designed  by  the  same 
charters  respectively;  and  in  some  cases  the  undertakers  or  sub- 
scribers, since  the  said  four  and  twentieth  day  of  June  one  thousand 
seven  hundred  and  eighteen,  have  acted  under  some  obsolete  charter 
or  charters,  although  the  same  became  void  or  voidable  by  non-user 
or  abuser,  or  for  want  of  making  lawful  elections,  which  were  neces- 
sary for  the  continuance  thereof;  and  many  other  unwarrantable 
practices  (too  many  to  enumerate)  have  been,  and  daily  are  and  may 
hereafter  be  contrived,  set  on  foot,  or  proceeded  upon,  to  the  ruin 
and  destruction  of  many  of  your  Majesty's  good  subjects,  if  a  timely 
remedy  be  not  provided :  and  whereas  it  is  become  absolutely  neces- 
sary, that  all  public  undertakings  and  attempts,  tending  to  the  com- 
mon grievance,  prejudice,  and  inconvenience  of  your  Majesty's  sub- 
jects in  general,  or  great  numbers  of  them,  in  their  trade,  commerce, 
or  other  lawful  affairs,  be  effectually  suppressed  and  restrained  for 
the  future,  by  suitable  and  adequate  punishments  for  that  purpose 
to  be  ascertained  and  established:  now  for  suppressing  such  mis- 
chievous and  dangerous  undertakings  and  attempts,  and  preventing 
the  like  for  the  future,  may  it  please  your  most  excellent  Majesty,  at 
the  humble  suit  of  the  said  lords  spiritual  and  temporal  and  com- 
mons, in  this  present  parKament  assembled,  that  it  may  be  enacted; 
and  be  it  enacted  by  authority  of  this  present  parliament,  that  from 
and  after  the  four  and  twentieth  day  of  June  one  thousand  seven 
hundred  and  twenty,  all  and  every  the  undertakings  and  attempts 
described,  as  aforesaid,  and  all  other  pubhc  undertakings  and  at- 
tempts, tending  to  the  common  grievance,  prejudice,  and  inconven- 
ience of  his  Majesty's  subjects,  or  great  numbers  of  them,  in  their 
jirade,  commerce,  or  other  li^wful  affairs,  and  all  pubhc  subscrip- 


CHAP.  I.]  ST.  6    GEORGE    I.  7 

tions,  receipts,  payments,  assignments,  transfers,  pretended  assign- 
ments and  transfers,  and  all  other  matters  and  things,  whatsoever, 
for  furthering,  countenancing  or  proceeding  in  any  such  undertak- 
ing or  attempt,  and  more  particularly  the  acting  or  presuming  to 
act  as  a  corporate  body  or  bodies,  the  raising  or  pretending  to  raise 
transferable  stock  or  stocks,  the  transferring  or  pretending  to  transfer 
or  assign  any  share  or  shares  in  such  stock  or  stocks,  without  legal 
authority,  either  by  act  of  parliament,  or  by  any  charter  from  the 
crown,  to  warrant  such  acting  as  a  body  corporate,  or  to  raise  such 
transferable  stock  or  stocks,  or  to  transfer  shares  therein,  and  all 
acting  or  pretending  to  act  under  any  charter,  formerly  granted  from 
the  crown,  for  particular  or  special  purposes  therein  expressed,  by 
persons  who  do  or  shall  use  or  endeavor  to  use  the  same  charters,  for 
raising  a  capital  stock,  or  for  making  transfers  or  assignments,  or 
pretended  transfers  or  assignments  of  such  stock,  not  intended  or  de- 
signed by  such  charter  to  be  raised  or  transfen-ed,  and  all  acting  or 
pretending  to  act  under  any  obsolete  charter  become  void  or  voidable 
by  non-user  or  abuser,  or  for  want  of  making  lawful  elections,  which 
were  necessary  to  continue  the  corporation  thereby  intended,  shall 
(as  to  all  or  any  such  acts,  matters,  and  things,  as  shall  be  acted, 
done,  attempted,  endeavored,  or  proceeded  upon,  after  the  said  four 
and  twentieth  day  of  June  one  thousand  seven  hundred  and  twenty) 
forever  be  deemed  to  be  illegal  and  void,  and  shall  not  be  practised 
or  in  any  wise  put  in  execution. 

XIX.  And  be  further  enacted  by  the  authority  aforesaid,  that  from 
and  after  the  said  four  and  twentieth  day  of  June  one  thousand 
seven  hundred  and  twenty,  all  such  unlawful  undertakings  and  at- 
tempts, so  tending  to  the  common  grievance,  prejudice,  and  incon- 
venience of  his  Majesty's  subjects,  or  a  great  number  of  them,  in 
their  trade,  commerce,  or  other  lawful  affairs,  and  the  making  or 
taking  of  any  subscriptions  for  that  purpose,  the  receiving  or  paying 
of  any  money  upon  such  subscriptions,  the  making  or  accepting  of 
any  assignment  or  transfer,  or  pretended  assignment  or  transfer,  of 
any  share  or  shares  upon  any  such  subscription,  and  all  and  every 
other  matter  and  thing  whatsoever,  for  furthering,  countenancing,  or 
proceeding  in  any  such  unlawful  undertaking  or  attempt,  and  more 
particularly  the  presuming  or  pretending  to  act  as  a  corporate  body, 
or  to  raise  a  transferable  stock  or  stocks,  or  to  make  transfers  or 
assignments  of  any  share  or  shares  therein,  without  such  legal  au- 
thority, as  aforesaid,  and  all  acting  or  pretending  to  act  under  any 
charter  formerly  granted  from  the  crown  for  any  particular  or  special 
purposes  therein  expressed,  by  persons  making  or  endeavoring  to 
make  use  of  such  charter  for  any  such  other  purpose  not  thereby 
intended,  and  all  acting  or  pretending  to  act  under  any  such  obsolete 
charter  as  is  before  described,  and  every  of  them  (as  to  all  or  any 
such  acts,  matters  or  things  as  shall  be  so  acted,  done,  attempted,  en- 


8  ST.  6    GEORGE   I.  [CIIAP.  I. 

deavored  or  proceeded  upon,  after  the  said  four  and  twentieth  day 
of  June  one  thousand  seven  hundred  and  twenty)  shall  be  deemed  to 
be  a  public  nuisance,  and  nuisances,  and  the  same,  and  all  causes, 
matters,  and  things  relating  thereto,  and  every  of  them,  shall  forever 
hereafter  be  examined,  heard,  tried,  and  determined  as  common  nui- 
sances are  to  be  examined,  heard,  tried,  and  determined  by  or  accord- 
ing to  the  laws  of  this  realm;  and  all  offenders  therein,  being  thereof 
lawfully  convicted  upon  information  or  indictment,  in  any  of  his 
Majesty's  courts  of  record  at  Westminster,  or  in  Edinburgh,  or  in 
Dublin,  shall  be  liable  to  such  fines,  penalties,  and  punishments, 
whereunto  persons  convicted  for  common  and  public  nuisances  are, 
by  any  of  the  laws  and  statutes  of  this  realm,  subject  and  liable;  and 
moreover  shall  incur  and  sustain  any  further  pains,  penalties,  and 
forfeitures,  as  were  ordained  and  provided  by  the  statute  of  provi- 
sion and  praemunire  made  in  the  sixteenth  year  of  the  reign  of  King 
Richard  the  Second. 

Note.  —  This  statute  was  repealed  in  1825,  6  Geo.  IV,  c.  91. 

In  Kinder  v.  Taylor,  L.J.  Ch.  (Old  Series)  vol.  iii,  p.  68,  decided  in 
1825,  Lord  Eldon,  in  speaking  of  this  statute,  said  (p.  81)  that  the 
courts  had  not  explained  or  defined  what  it  was  that  constituted 
acting  as  a  corporation;  that  the  statute  supposes,  and  he  himself 
confidently  believed,  that  to  act  as  a  corporation,  not  being  a  cor- 
poration, was  an  offense  at  common  law;  that  in  dealing  with  trans- 
actions of  this  kind  it  should  never  be  forgotten  that  there  is  com- 
mon law  as  well  as  a  statute  law;  and  that  what  may  not  be  within 
the  comprehension  of  the  statute  may,  nevertheless,  be  within  the 
prohibition  of  the  common  law. 

In  Garrard  v.  Hardey,  5  Man.  &  Gr.  471,  Tindal,  C.  J.,  said 
(p.  483):  "The  raising  and  transfeiTing  of  stock  in  a  company  can- 
not be  held,  in  itself,  an  offence  at  common  law.  .  .  .  We  find  no 
authority  for  holding  that  an  allegation  that  the  parties  raised  and 
transferred  stock  is  simply,  and  per  se,  without  any  statement  of  the 
mode  by  which  it  injures  or  defrauds  the  public,  an  indictable  offence 
at  common  law."  See,  accord,  Harrison  v.  Heathorn,  6  Man.  &  Gr. 
81,  140;  Re  The  Mexican  &  South  American  Co.,  27  Beav.  474,  480. 

This  statute  has,  it  is  submitted,  never  been  in  force  in  any  juris- 
diction in  the  United  States,  although  it  was  not  repealed  until  after 
the  Revolution.  See  Phillips  v.  Blatchford,  137  Mass.  510. 

The  legal  possibility  and  consequences  of  corporate  action,  un- 
authorized by  the  State,  are  considered  below  in  the  Book  on  "Un- 
authorized Corporate  Action." 


CHAP.  I.]  FRANKLIN    BRIDGE    CO.  V.  WOOD. 

B.  Grant  of  Authority  from  the  State. 


FRANKLIN  BRIDGE  CO.   v.   WOOD. 

14  Ga.  80.     1853. 

Assumpsit  in  Heard  Superior  Court.  Tried  before  Judge  Hill, 
May  Term,  1853. 

The  Franklin  Bridge  Company  was  incorporated  under  the  Act  of 
the  Legislature  of  1843,  to  prescribe  the  mode  of  incorporating  com- 
panies for  certain  purposes,  by  an  order  of  the  Inferior  Court  of 
Heard  County. 

The  company  sued  the  defendant.  Wood,  for  his  subscription  to 
their  stock. 

The  defendant  pleaded  that  the  company  was  not  legally  in- 
corporated; contending  that  the  act  of  the  legislature,  referred  to, 
was  unconstitutional  and  void. 

Upon  argument,  the  court  held  that  the  act  aforesaid,  was  uncon- 
stitutional, and  non-suited  the  plaintiffs. 

To  this  decision  plaintiff  excepted. 

By  the  Court.  —  Lumpkin,  J.,  delivering  the  opinion. 

Is  the  act  of  1843,  and  that  of  1845,  amendatory  thereof,  pointing 
out  the  manner  of  creating  certain  corporations  and  defining  their 
rights,  pri\"ileges  and  Uabilities,  unconstitutional? 

By  the  first  section  of  the  act  of  1843,  it  is  provided  "That  when 
the  persons  interested,  shall  desire  to  have  any  church,  camp  ground, 
manufacturing  company,  trading  company,  ice  company,  fire  com- 
pany, theatre  company,  or  hotel  company,  bridge  company,  and 
ferry  company,  incorporated,  they  shall  petition  in  writing  the  Su- 
perior or  Inferior  Court  of  the  county  where  such  association  may 
have  been  formed,  or  may  desire  to  transact  business  for  that  pur- 
pose, setting  forth  the  object  of  their  association,  and  the  privilege 
they  desire  to  exercise,  together  with  the  name  and  style  by  which 
they  desire  to  be  incorporated;  and  said  court  shall  pass  a  rule  or 
order,  directing  said  petition  to  be  entered  of  record  on  the  minutes 
of  said  court." 

Section  2  enacts  "That  when  such  rule  or  order  is  passed,  and  said 
petition  is  entered  of  record,  the  said  companies  or  associations  shall 
have  power  respectively,  under  and  by  the  name  designated  in  their 
petition,  to  have  and  use  a  common  seal;  to  contract,  and  be  con- 
tracted with;  to  sue,  and  be  sued;  to  answer,  and  be  answered  unto 
in  any  court  of  law,  or  equity;  to  appoint  such  officers  as  they  may 
deem  necessary ;  and  to  make  such  rules  and  regulations  as  they  may 
think  proper  for  their  own  government :  not  contrary  to  the  laws  of 


10  FRANKLIN    BRIDGE    CO.  V.  WOOD.  [CHAP.  I. 

this  State:  but  shall  make  no  contracts,  or  purchase,  or  hold  any 
property  of  any  land,  except  such  as  may  be  absolutely  necessary  to 
carry  into  effect  the  object  of  their  incorporation.  Nothing  herein 
contained  shall  be  so  construed  as  to  confer  banking  or  insurance 
privileges  on  any  company  or  association  herein  enumerated;  and 
the  individual  members  of  such  manufacturing,  trading,  theatre,  ice, 
and  hotel  companies,  shall  be  bound  for  the  punctual  payment  of  all 
the  contracts  of  said  companies,  as  in  case  of  partnership." 

By  the  act  of  1845,  the  provisions  of  the  act  of  1843  are  extended 
to  all  associations  and  companies  whatever,  except  Banks  and  In- 
surance companies:  and  the  individual  members  of  all  such  incor- 
porations are  made  personally  liable  for  all  the  contracts  of  said  as- 
sociations or  companies.   (Ibid.) 

The  argument  against  the  validity  of  the  charter  of  the  Franklin 
Bridge  Company,  created  under  these  .statutes,  is  this : 

[1.]  That  in  England,  corporations  are  created  and  exist  by  pre- 
scription; by  royal  charter;  and  by  Act  of  Parliament.  — With  us, 
they  are  created  by  authority  of  the  legislature,  and  not  otherwise. 
That  to  establish  a  corporation,  is  to  enact  a  law;  and  that  no  power 
but  the  legislative  body  can  do  this. 

[2.]  That  legislative  power  is  vested,  under  our  constitution,  in 
the  General  Assembly,  to  consist  of  a  Senate  and  House  of  Repre- 
sentatives, to  be  elected  at  stated  periods,  by  the  citizens  of  the  re- 
spective counties. 

[3.]  And  that  the  General  Assembly  is  bound  to  exercise  the  power 
of  making  laws,  thus  conferred  upon  them,  by  the  people,  in  the 
primordial  compact,  in  the  mode  therein  prescribed,  and  in  none 
other;  and  that  a  law  made  in  any  other  mode  is  unconstitutional 
and  void.  That  the  legislature  is  but  the  agent  of  their  constituents; 
and  that  they  cannot  transfer  authority  delegated  to  them  to  any 
other  body,  corporate  or  otherwise  —  not  even  to  the  judiciary,  a 
coordinate  department  of  the  government,  unless  expressly  empow- 
ered by  the  constitution  to  do  so.  That  to  do  this,  would  be  to  violate 
one  of  the  fundamental  maxims  of  jurisprudence,  as  well  as  of  political 
science,  namely:  delegata  potestas,  non  potest  delegari.  That  to  do 
this,  would  not  only  be  to  disregard  the  constitutional  inhibition, 
which  is  binding  upon  the  representative,  but  by  shifting  respon- 
sibility, introduce  innovations  upon  our  system,  which  would  result 
in  the  overthrow  and  ultimate  destruction  of  our  political  fabric. 

The  constitutional  inquiry  thus  presented  is  an  exceedingly  grave 
one.  It  reaches  far  beyond  the  case  made  in  the  bill  of  exceptions, 
and  extends  to  the  whole  range  of  topics  which  fall  under  legislative 
cognizance.  In  the  view  we  take,  however,  of  the  statutes  before  us, 
no  such  proposition  as  that  which  has  been  discussed,  is  presented 
for  our  adjudication.  And  we  rejoice  that  it  is  so  —  not  only  on  ac- 
count of  the  delicacy  of  the  task,  in  pronouncing  an  act  of  the  legis- 


CHAP.  I.]  FRANKLIN    BRIDGE    CO.  V.  WOOD.  11 

lature  unconstitutional  and  void;  one  which  is  never  justifiable,  un- 
less the  case  is  clear  and  free  from  doubt;  and  even  then,  one  might 
almost  be  forgiven  for  shrinking  from  the  performance  of  a  duty, 
which  would  be  productive  of  such  incalculable  mischief  and  con- 
fusion. Bridges  have  been  built  at  a  heavy  expense;  manufacturing 
and  innumerable  other  associations,  have  been  formed  in  Georgia, 
and  are  in  full  operation,  under  charters  incorporated  under  this  law. 
And  in  view  of  the  consequences,  any  court  might  hesitate,  unless  the 
repugnance  between  the  statute  and  the  constitution  was  so  pal- 
pable as  to  admit  of  no  doubt,  and  produce  a  settled  conviction  of 
their  incompatibility  with  each  other. 

[4.]  It  was  formerly  asserted,  that  in  England,  the  act  of  incor- 
poration must  be  the  immediate  act  of  the  king  liimself ,  and  that  he 
could  not  grant  a  license  to  another,  to  create  a  corporation.  (10 
Reports,  27.)  But  Messrs.  Angell  and  Ames,  in  their  treatise  on 
corporations,  state  that  the  law  has  since  been  settled  to  the  con- 
trarj^;  and  that  the  king  may  not  only  gi-ant  a  Ucense  to  a  subject  to 
erect  a  particular  corporation ;  but  give  a  general  power,  by  charter, 
to  erect  corporations  indefinitely ;  on  the  principle  that  qui  facit  per 
alium,  facit  per  se;  that  the  persons  to  whom  the  power  is  delegated, 
of  estabhshing  corporations,  are  only  an  instrument  in  the  hands  of 
the  Government.    (1  Kyd  50;  1  Black.  Comm.  Ang.  &  Am.  63.) 

Before  the  Revolution,  chartere  of  incorporation  were  granted  by 
the  proprietaries  of  Pennsylvania,  under  a  derivative  authority  from 
the  Crown;  and  those  charters  have  since  been  recognized  as  valid. 
(3  Wilson's  Lectures,  409.)  A  similar  power  has  been  delegated  by 
the  legislature  of  Pennsylvania,  with  regard  to  churches.  (7  S.  &  R. 
517.)  The  acts  of  the  instrument  in  these  cases,  become  the  acts  of 
the  mover,  under  the  familiar  maxim  above  mentioned.  (See  also 
1  Missouri  R.  5.) 

[5.]  Our  opinion  is,  that  no  legislative  power  is  delegated  to  the 
courts  by  the  acts  under  consideration.  There  is  simply  a  ministerial 
act  to  be  performed  —  no  discretion  is  given  to  the  courts.  The  duty 
of  passing  the  rule  or  order,  directing  the  petition  of  the  corporators  to 
be  entered  of  record  on  the  minutes  of  the  court,  setting  forth  to  the 
public  the  object  of  the  association,  and  the  privilege  they  desire  to 
exercise,  together  with  the  name  and  style  by  which  they  are  to  be 
called  and  known,  is  made  obligatory  upon  the  courts;  and  should 
they  refuse  to  discharge  it,  a  mandamus  would  lie  to  coerce  them. 
It  is  true,  the  legislature  has  seen  fit  to  use  the  courts  for  the  purpose 
of  giving  legal  form  to  these  companies.  But  it  might  have  been  done 
in  any  other  way.  Under  the  free  banking  law  of  1838,  instead  of 
petitioning  the  court,  and  having  the  order  passed  and  entered  upon 
its  minutes,  the  certificate,  specifying  the  name  of  the  association;  its 
place  of  doing  business;  the  amount  of  its  capital  stock;  the  names 
and  residence  of  the  shareholders;  and  the  time  for  which  the  com- 


12  FRANKLIN    BRIDGE    CO.  V.  WOOD.  [CHAP.  I. 

pany  was  organized,  is  required  merely  to  be  proven,  and  acknowl- 
edged, and  recorded  in  the  office  of  the  clerk  of  the  Superior  Court, 
where  any  office  of  the  association  is  established,  and  a  copy  filed 
with  the  comptroller-general.    (Cobb's  Digest,  107,  8.) 

And  so  under  the  act  of  1847,  authorizing  the  citizens  of  this 
State,  and  such  others  as  they  may  associate  with  them,  to  prosecute 
the  business  of  manufacturing,  with  corporate  powers  and  privileges. 
The  persons  who  propose  to  embark  in  that  branch  of  business  are 
required  to  draw  up  a  declaration,  specifying  the  objects  of  their 
association,  and  the  particular  branch  of  business  they  intend  carry- 
ing on,  together  with  the  name  by  which  they  will  be  known  as  a 
corporation,  and  the  amount  of  capital  to  be  employed  by  them; 
which  declaration  is  required  to  be  first  recorded  in  the  clerk's  office  of 
the  Superior  Court  of  the  county  where  such  corporation  is  located, 
and  pubHshed  once  a  week  for  two  months  in  the  two  nearest  ga- 
zettes: which  being  done,  it  is  declared  that  said  association  shall 
become  a  body  corporate  and  pohtic,  and  known  as  such,  without 
being  specially  pleaded  in  all  courts  of  law  and  equity  in  this  State ; 
to  be  governed  by  the  provisions,  and  be  subject  to  the  habilities 
therein  specified.    (Cobb's  Digest,  439,  440. ) 

In  these  two  instances,  and  others  which  might  be  cited,  the  leg- 
islature have  dispensed  with  the  action  of  the  courts,  or  of  any  other 
agency  to  carry  out  their  enactments,  with  regard  to  these  various 
associations ;  which  have  become  the  usual  and  favorite  mode  of  con- 
ducting the  industrial  pursuits  of  the  civilized  world  in  modern 
times. 

All  these  statutes  were  complete  as  laws  when  they  came  from  the 
hands  of  the  legislature;  and  did  not  depend  for  their  force  and 
efficacy  upon  the  action  or  will  of  any  other  power.  It  is  true  that 
they  could  only  take  effect  upon  the  happening  of  some  event,  such 
as  the  filing  the  petition  or  declaration,  and  giving  publicity  to  the 
purpose  of  the  association,  in  the  mode  prescribed  by  the  act.  But 
if  this  were  a  good  reason  for  regarding  these  statutes  as  invalid,  then 
how  few  corporations  could  abide  the  test.  For  it  requires  the  ac- 
ceptance of  the  charter,  to  create  a  corporate  body;  for  the  Govern- 
ment cannot  compel  persons  to  become  an  incorporated  body,  without 
their  consent.  And  this  consent,  either  express  or  implied,  is  generally 
subsequent,  in  point  of  time,  to  the  creation  of  the  charter.  And  yet, 
no  charter  that  we  are  aware  of,  has  been  adjudged  invaUd,  because 
the  law  creating  it  and  previously  defining  its  powers,  rights,  capaci- 
ties and  habilities,  did  not  take  effect  until  the  acceptance  of  the 
corporate  body,  or  at  least  a  majority  of  them  was  signified. 

The  result,  therefore,  of  our  deliberation  upon  this  case  is,  that 
the  acts  of  1843  and  1845,  vesting  in  all  associations,  except  for  bank- 
ing and  insurance,  the  power  of  self-incorporation,  do  not  impugn 
the  constitution;  and  that  the  charter  of  the  Franklin  Bridge  Com- 


CHAP.  I.]  FRANKLIN    BRIDGE    CO.  V.  WOOD.  13 

pany,  and  all  others,  created  under  them,  and  in  conformity  to  their 
provisions,  are  legal  and  valid.  With  the  policy  of  these  statutes,  we 
have  nothing  to  do.  The  province  of  this,  and  all  other  courts,  is  jus 
dicere,  not  jus  dare. 

Judgment  reversed. 

Note.  —  Matter  of  N.  Y.  Elevated  R.  R.  Co.,  70  N.  Y.  327.  The 
legislature  authorized  certain  commissioners  to  determine  whether 
elevated  and  underground  railroads  were  necessary,  and,  if  any 
particular  proposed  railroad  was  found  to  be  necessary,  to  fix  the 
route,  prescribe  the  plan  of  construction,  and  fix  the  amount  of 
capital  stock  of  the  corporation  to  be  formed  for  the  purpose  of  build- 
ing such  railroad.  The  court  held  this  act  to  be  constitutional.  Earl, 
J.,  said  (p.  343) :  "It  is  objected  that  the  act  is  unconstitutional,  be- 
cause it  delegates  legislative  power  to  the  mayor's  commissioners. 
.  .  .  The  act  rests  upon  the  legislative  will,  and  in  no  way  depends 
for  its  vitality  upon  the  action  of  the  commissioners.  Corporations 
organized  under  the  act  derive  their  franchises  from  the  legislature, 
and  in  no  proper  sense  from  the  commissioners.  The  commissioners 
perform  no  legislative  acts;  they  enact  no  laws;  they  simply  perform 
administrative  acts  in  carrying  the  law  into  effect  and  appljdng  it. 
The  legislature  is  required  by  the  Constitution  to  pass  general  laws 
for  the  formation  of  corporations  (art.  3,  §  18;  art.  8),  and  it  has 
passed  general  laws  for  the  formation  of  all  kinds  of  corporations. 
In  such  cases,  it  does  not  directly  confer  corporate  franchises;  it 
simpl}^  provides  the  mode  in  which  such  franchises  may  be  acquired 
by  those  desiring  them.  Ordinarily,  individuals  desiring  to  incor- 
porate under  a  general  law  determine  for  themselves  the  necessity  of 
a  corporation,  their  corporate  name,  what  business  they  will  carry 
on,  where  they  will  transact  it,  the  amount  of  their  capital  and  the 
duration  of  their  corporation.  In  making  such  determinations,  it  was 
never  supposed  that  they  were  engaged  in  acts  of  legislation,  or  that 
they  conferred  upon  themselves  corporate  franchises.  They  simply 
act  under,  apply  and  carry  into  effect  a  law  in  reference  to  which 
legislative  power  has  been  properly  evoked.  But  suppose,  instead  of 
leaving  the  determination  of  these  matters  to  individuals,  the  law 
provides  a  tribunal  to  make  the  determination  for  the  individuals, 
is  there  any  more  delegation  of  legislative  power  to  the  tribunal  than 
to  the  individuals,  under  the  general  laws  as  they  are  now  usually 
framed?  Cannot  the  legislature  confer  upon  a  commission  the 
power,  upon  the  application  of  indi\'iduals,  to  make  the  same  deter- 
mination for  the  individuals  which  they  could  make  for  themselves? 
The  proper  answers  to  these  questions  are  not  doubtful.  The  argu- 
ments made  to  show  that  the  legislature  was  not  competent  to 
devolve  upon  these  commissioners  the  powers  given  to  them  in  this 
act,  if  sound  and  logically  applied,  would  nullify  every  general  law 


14  PENOBSCOT    BOOM    CORPORATION    V.  LAMSON.         [CHAP.  I. 

found  upon  our  statute  books  for  the  formation  of  corporations,  and 
thus  nulhfy  the  Constitution  itself,  which  commands  the  passage 
of  such  general  laws." 

See  also  Granby  Mining  Co.  v.  Richards,  95  Mo.  106,  112.  But  cf. 
State  V.  Armstrong,  3  Sneed  (Tenn.)  634,  652. 


PENOBSCOT  BOOM  CORPORATION  v.   LAMSON. 

16  Me.  224.     1839. 

Chapter  236  of  the  Special  and  Private  Acts  for  1832,  passed  by 
the  legislature  of  Maine,  provided:  "  Rufus  Dwinal,  his  associates  and 
successors,  be  and  hereVjy  are  constituted  a  body  corporate,  by  the 
name  of  the  Penobscot  Boom  Corporation,  and  shall  so  continue  for 
the  term  of  thirty  years  —  and  by  that  name  may  sue  and  be  sued; 
have  a  common  seal,  make  by-laws  not  repugnant  to  the  laws  of  this 
State  for  the  management  of  their  corporate  concerns,  and  have  and 
enjoy  all  the  rights  and  powers  of  similar  corporations."  Permission 
to  erect  a  boom  across  the  Penobscot  River  was  given  to  such  cor- 
poration. 

A  suit  was  brought  in  the  name  of  the  Penobscot  Boom  Corpora- 
tion for  boomage  of  logs,  asserted  to  belong  to  the  defendants.  The 
defendants  denied  there  was  such  a  corporation,  alleging  there  had 
been  no  organization  under  the  said  act,  and  no  officers  elected. 

Shepley,  J.  The  existence  of  such  a  corporate  body  is  denied, 
and  it  is  said  that  it  does  not  come  within  the  legal  description  of  a 
corporation,  either  sole  or  aggregate,  as  defined  by  any  code  of  laws. 
Corporations  originating  according  to  the  rules  of  the  common  law, 
must  be  governed  by  it  in  their  mode  of  organization,  in  the  manner 
of  exercising  their  powers,  and  in  the  use  of  the  capacities  conferred. 
And  when  one  claims  its  origin  from  such  a  source,  its  rules  must  be 
regarded  in  deciding  upon  its  legal  existence.  The  legislature  may 
however  create  a  corporation,  not  only  without  conforming  to  such 
rules,  but  in  disregard  of  them;  and  when  a  corporation  is  thus 
created,  its  existence,  powers,  capacities,  and  the  mode  of  exercising 
them,  must  depend  upon  the  law  of  its  creation.  It  was  the  pleas- 
ure of  the  legislature  in  this  case  to  create  a  corporate  body,  without 
requiring  a  conformity  to  the  usual  mode  of  organization  known  to 
the  law.  The  grant  is  to  one  person,  who  was  at  liberty  to  associate 
others,  or  to  have  a  succession  without  it.  No  provision  is  made  for 
a  division  of  the  property  allowed  to  be  held  into  shares,  or  for  the  call 
of  any  meeting,  or  the  choice  of  a  clerk,  or  any  other  officer,  or  the 
keeping  of  any  records,  or  any  mode  of  organization.  And  yet  many 
important  powers  and  privileges  are  granted  with  an  evident  design 
to  permit  their  exercise.   The  grant  being  to  one  person  and  without 


CHAP.  I.]  STATE    V.  DAWSON.  15 

any  such  provisions,  the  inference  necessarily  is,  that  it  was  the  in- 
tention of  the  legislature  to  permit  that  one  person  or  his  successor 
to  exercise  all  the  corporate  powers,  and  to  make  his  acts,  when  acting 
upon  the  subject  matter  of  the  corporation  and  within  its  sphere  of 
action  and  grant  of  power,  the  acts  of  the  corporation.  There  does 
not  appear  to  be  any  other  mode  of  carrying  into  effect  the  intention 
of  the  legislature. 


STATE  V.   DAWSON. 

16  Ind.  40.      1861. 

Appeal  from  the  Clark  Circuit  Court. 

Perkins,  J.  Information  against  the  defendants,  charging  that 
they  are  pretending  to  be  a  corporation,  and  to  act  as  such,  when  they 
are  not  a  corporation.  It  charges  that  in  January,  1849,  the  legisla- 
ture of  the  State  of  Indiana  enacted  a  special  charter  of  incorpora- 
tion (which  is  set  out  at  length)  for  a  railroad  from  Fort  Wayne, 
Indiana,  to  Jeffersonville,  to  be  called  the  Fort  Wajnie  and  Southern 
Railroad;  that  the  persons  named  in  the  charter  as  directors  did  not 
accept  said  charter  till  June  2,  1852,  when  they  did  meet  and  accept 
the  same,  and  organize  under  it.  It  is  alleged  that  the  defendants 
are  assuming  to  act  under  said  charter,  never  having  organized  under 
any  other.  The  court  below  sustained  a  demurrer  to  the  information : 
thus  holding  the  defendants  to  be  a  legal  corporation. 

The  present  constitution  of  Indiana  took  effect  on  November  1, 
1851.  It  contains  these  provisions:  — 

"All  laws  now  in  force  and  not  inconsistent  with  this  constitu- 
tion, shall  remain  in  force,  until  they  shall  expire  or  be  repealed." 
Sched.  (1  sub.  sec.)  of  Const. 

''Corporations,  other  than  banking,  shall  not  be  created  by  special 
act,  but  may  be  formed  under  general  laws."  Art.  11,  sec.  13. 

"All  acts  of  incorporation  for  municipal  purposes  shall  continue 
in  force  under  this  constitution,  until  such  time  as  the  General  As- 
sembly shall,  in  its  discretion,  modify  or  repeal  the  same."  Sched. 
supra,  sub.  sec.  4. 

The  charter  for  the  Fort  Wayne  and  Southern  Railroad  was  not  a 
charter  for  municipal  purposes,  and,  hence,  was  not  specially  con- 
tinued in  existence.  Art.  11,  sec.  13,  above  quoted,  prohibits  the 
creation  of  a  corporation  by  special  act  or  charter,  that  is,  as  we  con- 
strue the  prohibition,  through,  or  by  virtue  of,  such  special  act  or 
charter,  after  November  1,  1851.  The  policy  that  induced  the  pro- 
hibition, as  well  as  its  literal  import,  demands  this  construction.  It 
is  necessary  for  us  to  ascertain,  then,  when  the  defendants,  if  ever, 
were  created  a  corporation.  The  simple  enactment  of  the  charter  for 
the  corporation,  by  the  legislature,  did  not  create  the  corporation. 


16  STATE    V.  DAWSON.  [CHAP.  I. 

It  required  one  act  on  the  part  of  the  persons  named  in  the  charter 
to  do  that,  viz. :  acceptance  of  the  charter  enacted. 

Says  Grant,  in  his  work  on  Corporations  (vide  p.  13):  "Nor  can 
a  charter  be  forced  on  any  body  of  persons  who  do  not  choose  to 
accept  it."  And  again,  at  page  18,  he  says,  "The  fundamental  rule 
is  this :  no  charter  of  incorporation  is  of  any  effect  until  it  is  accepted 
by  a  majority  of  the  grantees,  or  persons  who  are  to  be  the  corporators 
under  it.  Bagge's  case,  2  Brownl.  &  G.  100;  s.  c.  1  Roll.  Rop.  224; 
Dr.  Askew' s  case,  4  Burr.  2200;  Rutter  v.  Chap7nan,  8  M.  &  W.  25; 
per  WiLMOT,  J.,  Rex  v.  Vice-Chancellor  of  Cambridge,  3  Burr.  1661. 
This  is  analogous  to  the  general  rule  that  a  man  can  not  be  obhged 
to  accept  the  grant  or  devise  of  an  estate.  Tawnson  v.  Tickell,  3  B. 
&  Aid.  31."  See,  also,  Ang.  &  Am.  sec.  83,  where  it  is  said,  if  a  charter 
is  granted  to  those  who  did  not  apply  for  it,  the  grant  is  said  to  be 
in  fieri  till  acceptance-  We  need  not  inquire  whether  this  rule  ex- 
tends to  municipal  corporations  in  this  country.  As  to  what  may 
constitute  an  acceptance  we  are  not  here  called  on  to  decide,  as  the 
information  expressly  shows  that  there  was  none  in  this  case  till 
June,  1852,  which  fact  is  admitted  by  the  demurrer. 

The  grant  of  the  charter  in  question,  then,  to  those  who  had  not 
applied  for  it,  was  but  an  offer,  on  the  part  of  the  State;  a  consent 
that  the  persons  named  in  the  charter  might  become  a  corporation, 
might  be  created  such  an  artificial  being,  by  accepting  the  charter 
offered.  But  an  offer,  till  accepted,  may  be  withdrawn.  In  this  case, 
the  offer  made  by  the  State,  in  1849,  was  withdrawn  by  the  State, 
November  1,  1851,  by  then  declaring  that  no  corporation,  after  that 
date,  should  be  created  except  pursuant  to  regulations  which  she, 
in  future,  through  her  legislature  would  prescribe. 

This  pretended  corporation,  then,  was  not  created  before  No- 
vember 1, 1851 ;  and  it  could  be  created  afterward  only  by  the  concur- 
rent consent  of  the  State  and  the  corporators.  But,  at  that  date,  the 
constitution  proliibited  both  the  State  and  corporators  from  giving 
consent  to  such  a  corporation,  to  wit:  one  coming  into  existence 
through  a  special  charter;  and  hence  necessarily  prohibited  the  crea- 
tion thereof.  This  decision  accords  with  that  of  the  Supreme  Court 
of  the  United  States  in  Aspiiiwall  v.  Daviess  County,  22  How.,  p.  364; 
where  it  was  held  that  the  new  constitution  prohibited  a  subscrip- 
tion of  stock  to  the  Ohio  and  Mississippi  Railroad  Company,  au- 
thorized by  the  charter  of  the  corporation,  granted  under  the  former 
constitution,  and  actually  voted  by  the  people  of  the  county,  under 
that  constitution. 

Whether,  as  a  matter  of  fact,  the  charter  in  this  case  was  accepted 
under  the  old  constitution,  must  be  determined  on  a  trial  of  the 
cause  below. 

Had  the  provision  in  our  constitution,  like  that  on  this  subject  in 
the  Constitution  of  Ohio,  ordained  that  the  legislature  should  "pass 


CHAP.   I.]  ELLIS    V.  MARSHALL.  17 

no  special  act  conferring  corporate  powers,"  the  restraint  would 
clearly  have  been  imposed  alone  upon  future  legislative  action;  but, 
in  our  constitution,  the  restraint  is  plainly  imposed  upon  the  creation, 
the  organization,  of  the  corporation  itself.  See  The  State  v.  Roosa, 
11  O.  St.  R.  16. 

Per  Curiam.  —  The  judgment  is  reversed,  with  costs.    Cause 
remanded  for  further  proceedings  in  accordance  with  this  opinion. 


ELLIS  V.  MARSHALL 

2  Mass.  269.     1807. 

Ejectment.  The  plaintiff  claimed  under  a  sale  by  the  "Front 
Street  Corporation  in  the  town  of  Boston,"  established  by  a  law  of 
the  Conmionwealth,  passed  March  6,  1804.  3  Mass.  Special  Laws, 
375.  By  this  statute  sundry  persons,  and  amongst  them  the  de- 
fendant, Marshall,  described  as  "being  owners  and  proprietors  of  the 
lands  and  flats  over  which  the  said  street  will  pass,  and  of  the  lands 
and  flats  adjoining  thereto,"  are  incorporated  for  the  purpose  of 
making  a  street  in  the  town  of  Boston.  By  the  third  section  of  the 
statute,  the  corporation  are  authorised  to  assess  upon  all  the  owners 
and  proprietors  of  said  land  and  flats,  according  to  the  proportion 
they  severally  hold  therein,  such  sums  of  money  as  shall  be  agreed 
upon  by  the  said  proprietors,  or  the  major  part  of  such  of  them  as 
shall  be  assembled  at  any  legal  meeting  to  be  called  for  that  purpose; 
and  if  any  of  the  said  proprietors  shall  neglect  or  refuse  to  pay  the 
smns  of  money  duly  assessed  upon  him  therefor,  for  the  space  of 
three  months,  the  proprietors  are  authorised  to  sell,  at  public  auc- 
tion, so  much  of  such  delinquents  share  of  said  lands  and  flats  as 
shall  be  sufficient  to  pay  the  sums  so  assessed,  and  the  charges  of 
sale:  and  the  said  proprietors  may,  by  their  clerk  or  committee,  exe- 
cute a  good  deed  to  the  purchaser  in  fee  simple. 

At  the  last  March  term  the  parties  agreed  on  the  following  state 
of  facts,  viz. 

"That  the  act,  creating  the  Front  Street  Corporation,  was  passed 
in  consequence  of  the  petition  to  the  General  Court,  of  the  major 
part  in  number  and  interest  of  the  owners  of  the  land  over  and  ad- 
joining to  which  the  said  Front  Street  is  built,  but  that  the  said 
Marshall,  who  was  one  of  the  said  owners,  did  not  subscribe  ihe  said 
petition. 

"That  a  committee  of  the  General  Court,  to  whom  the  said  peti- 
tion was  duly  referred,  to  hear  all  persons  interested,  and  to  report, 
after  giving  public  and  general  notice  to  all  persons,  heard  such  per- 
sons as  appeared,  and  reported  that  the  said  petition  be  granted, 
pui-suant  whereto,  the  said  act  was  passed;  but  that  the  said  Mar- 


18  ELLIS    V.  MARSHALL.  [CHAP.  L 

shall  did  not  appear  before  the  committee,  nor  by  word  or  in  writing 
assent  to  the  said  petition,  or  to  the  passing  of  the  said  act. 

"That  there  is  no  other  William  Marshall,  proprietor  of  lands  and 
flats,  adjoining  said  street,  but  the  defendant,  and  none  other  known 
to  the  parties,  to  whom  the  said  act  can  apply;  and  that  the  Court 
shall  consider  the  defendant  and  William  Marshall,  named  in  the 
said  act,  as  the  same  person,  if  the  facts  before  agreed  to  should,  in 
the  opinion  of  the  court,  be  sufficient  for  a  jury  so  to  find. 

"That,  after  the  said  act  passed,  the  said  Marshall  was  regularly 
notified  to  attend  at  all  the  meetings  of  the  said  corporation,  but 
did  not  attend  at  any  of  them;  and  that  the  said  Marshall's  land 
adjoining  said  Front  Street  is  benefited  by  the  said  street  in  the 
same  proportion,  as  the  other  lands  adjoining  the  said  street  are 
benefited. 

"That  on  the  twelfth  day  of  May,  a.d.  1804,  being  after  the  said 
street  was  begun  to  be  built,  and  before  it  was  finished,  the  said  Mar- 
shall was  requested  by  the  said  proprietors  to  join  them  in  a  cove- 
nant, wherein  they  mutually  agreed  not  to  erect  any  buildings  within 
ten  feet  of  the  western  side  of  said  street,  which  he  refused;  but,  as  a 
substitute,  a  separate  instrument  was  signed  by  him  for  that  pur- 
pose, which  contains  the  following  provision,  'Provided  however, 
that  this  instrument,  or  any  thing  herein  contained  shall  not  be  con- 
sidered as  binding  the  said  William  Marshall  to  pay  any  part  of  the 
expence  of  making  the  road  aforesaid,  but  the  legal  rights  and  rem- 
edies of  all  parties  concerned  in  that  respect  shall  remain  the  same 
as  if  this  instrument  had  not  been  made.' 

"That  on  the  tenth  day  of  October  last  the  land  demanded  in  this 
action,  being  part  of  said  Marshall's  estate  adjoining  said  street,  was 
sold  at  public  auction,  according  to  the  rules  and  regulations  of  the 
Corporation,  and  the  powers  granted  in  said  act,  for  the  purpose  of 
raising  the  amount  of  the  assessment  taxed  on  him  by  said  Corpora- 
tion, as  being  towards  his  proportionate  part  of  the  expence  of  mak- 
ing said  street,  which,  though  often  requested,  he  had  refused  to  pay, 
and  a  deed  of  conveyance  thereof  was  accordingly  given  by  said 
Corporation  to  said  Ellis,  to  hold  the.  premises  demanded,  to  him  in 
fee  simple. 

"If  on  the  foregoing  facts  the  court  should  be  of  opinion  that  the 
said  Corporation  could,  by  virtue  of  the  said  act,  legally  assess  the 
said  Marshall,  and  sell  his  lands  for  non-payment  thereof,  then  it  was 
agreed  that  the  defendant  should  be  defaulted,  and  judgment  should 
be  rendered  for  the  plaintiff;  otherwise  the  plaintiff  was  to  become 
nonsuit,  and  judgment  be  rendered  for  the  defendant.  And  it  was 
further  agreed  that,  if  any  facts  contained  in  the  above  statement 
could  not  by  law  be  given  in  evidence  to  a  jury  in  the  trial  of  the 
cause,  then  such  facts  are  to  be  considered  as  no  part  of  the  state- 
ment." 


CHAP.  I.]  ELLIS    V.  MARSHALL.  19 

Parker,  J.,  after  a  brief  recapitulation  of  the  facts  in  the  cause, 
delivered  the  opinion  of  the  court  as  follows. 

From  the  foregoing  facts  and  the  arguments  thereon  by  the  coun- 
sel, it  appears  that  all  the  proceedings  of  the  corporation  relative  to 
the  assessment  and  sale  were  correct;  so  that  if  Marshall  were,  at  the 
time  thereof,  a  member  of  the  corporation,  the  title  to  the  demanded 
premises  in  Ellis  could  not  be  disputed. 

We  are  therefore  necessarily  brought  to  the  question,  indeed  the 
only  one  in  the  case,  whether  Marshall,  by  virtue  of  the  act  aforesaid, 
became  a  member  of  the  said  corporation,  subject  to  its  rules  and 
regulations,  and  liable  to  be  assessed  for  the  purpose  of  building  said 
street. 

The  counsel  for  the  plaintiff  have  contended. 

1st.  That  by  virtue  of  the  act  itself,  Marshall  being  named  therein, 
he  became  ipso  facto  a  member  of  the  corporation,  the  legislature 
having  competent  power  to  compel  him  thereto : 

2dly.  That  should  tliis  not  be  the  case,  the  foregoing  facts  con- 
tain sufficient  evidence  of  his  consent,  tacit  at  least,  to  the  passing  of 
said  act,  and  the  insertion  of  his  name  therein. 

The  determination  of  the  first  point  requires  that  we  should  ascer- 
tain the  true  nature  and  character  of  this  legislative  proceeding.  If 
it  were  a  public  act,  predicated  upon  a  view  to  the  general  good,  the 
question  would  be  more  difficult.  If  it  be  a  private  act,  obtained  at 
the  solicitation  of  indi%iduals,  for  their  private  emolument,  or  for 
the  improvement  of  their  estates,  it  must  be  construed,  as  to  its 
effect  and  operation,  like  a  grant.  We  are  all  of  opinion  that  this 
was  a  grant  or  charter  to  the  individuals  who  prayed  for  it,  and  those 
who  should  associate  with  them;  and  all  incorporations  to  make 
turnpikes,  canals,  and  bridges  must  be  so  considered. 

Can  then  one,  whose  name  is  by  mistake  or  misrepresentation  in- 
serted in  such  an  act,  refuse  the  privileges  it  confers,  and  avoid  the 
burthens  it  imposes?  If  he  cannot,  then  the  legislature  may,  at  all 
times,  press  into  the  service  of  such  corporations  those  whose  lands 
may  be  wanted  for  such  objects,  whenever  they  may  be  prevailed  on 
to  insert  the  names  of  such  persons,  by  the  intrigue  or  mistake  of 
those  more  interested  in  the  success  of  the  object.  No  apprehension 
exists  in  the  community  that  the  legislature  has  such  power.  That 
the  land  of  any  person,  over  or  through  which  a  turnpike  or  canal 
may  pass,  may  be  taken  for  that  purpose,  if  the  legislature  deem  it 
proper,  is  not  doubted.  The  constitution  gives  power  to  do  this,  pro- 
vided compensation  is  made.  But  it  was  never  before  known,  that 
they  have  power  over  the  person,  to  make  him  a  member  of  a  cor- 
poration, and  subject  him  to  taxation,  nolens  volens,  for  the  promo- 
tion of  a  private  enterprize. 

That  a  man  may  refuse  a  grant,  whether  from  the  government  or 
an  indi\adual,  seems  to  be  a  principle  too  clear  to  require  the  sup- 


20  MIDDLESEX    HUSBANDMEN    V.  DAVIS.  [CHAP.  I. 

port  of  authorities.  That  he  may  decline  to  improve  his  land,  no  one, 
will  doubt.  Although  the  legislature  may  wisely  determine  that  a  cer- 
tain use  of  his  property  will  be  highly  beneficial  to  him,  he  has  a  right 
to  judge  for  himself  on  points  of  this  nature.  The  fact  therefore  in  the 
case,  that  Marshall  is  benefited  equally  with  the  other  owners  by 
the  making  of  this  street,  is  of  no  importance.  In  Bagg's  case,  Roll's 
Rep.  224,  it  seems  to  be  agreed  by  the  court,  that  a  patent  procured 
by  some  persons  of  a  corporation  shall  not  bind  the  rest,  unless  they 
assent.  And  in  Brownlow's  Reports,  100,  there  is  this  passage,  "It 
was  said  that  inhabitants  of  a  town  cannot  be  incorporated  without 
the  consent  of  the  major  part  of  them,  and  an  incorporation  without 
their  consent  is  void." 

In  Comberbach,  316,  Holt,  speaking  of  a  new  charter  made  to  the 
city  of  Norwich,  by  Henry  IV,  and  confirmed  by  Charles  II,  says, 
the  new  charter  had  been  void,  if  the  corporation  had  refused  it,  but 
when  they  accept  it,  and  put  it  in  execution,  it  is  good. 

If  these  principles  were  correct  in  England  in  times  when  preroga- 
tive ran  high,  and  the  crown  or  the  parliament  could  not  force 
charters  or  patents  upon  the  subject  without  his  assent,  surely  in 
this  free  country,  where  the  legislature  derives  its  power  from  the 
people,  such  authority  cannot  be  contended  for. 

Plaintiff  Nonsuit. 

Note.  —  See,  accord,  Askew's  Case,  4  Burr.  2186,  2199. 


MIDDLESEX  HUSBANDMEN  v.   DAVIS. 

3  Met.  (Mass.)  133.     1841. 

Assumpsit  on  a  promissory  note. 

Wilde,  J.  The  first  [objection]  is,  that  there  is  no  sufficient  evi- 
dence of  the  plaintiffs'  acceptance  of  their  act  or  charter  of  incorpora- 
tion, granted  in  1803,  or  of  their  legal  organization  according  to  the 
provision  of  that  act,  or  of  their  acceptance  of  the  additional  act  of 
1819,  c.  73. 

It  is  true  that  it  does  not  appear  by  the  records  of  the  society  that 
the  act  of  incorporation  has  been  accepted  by  an  express  vote  to  that 
effect;  nor  does  it  appear  in  what  manner  the  first  meeting  of  the 
corporation  was  called :  But  the  presumptive  proof,  both  of  the  ac- 
ceptance of  the  act  of  incorporation,  and  of  the  legal  organization  of 
the  society,  is  exceedingly  strong,  and  quite  as  satisfactory  as  direct 
e\'idence.  That  such  presumptive  evidence  is  admissible  and  proper 
is  fully  maintained  b}^  the  decisions  in  Dedham  Bank  v.  Chickering, 
3  Pick.  335,  and  in  Bank  of  United  States  v.  Dandridge,  12  Wheat.  71, 
and  by  the  numerous  authorities  cited  in  the  latter  case.  By  these 


CHAP.  I.]  REED    V.  THE    RICHMOND    STREET    R.R.  CO.  21 

authorities  it  is  now  well  settled,  whatever  may  have  been  the  ancient 
doctrine  as  to  corporations,  that  as  the  acts  of  private  pei-sons,  even 
of  the  most  solemn  nature,  may  be  presumed,  or  proved  by  pre- 
sumptive evidence;  so  as  to  the  acts  of  a  corporation,  if  they  cannot 
be  reasonably  accounted  for  but  on  the  supposition  of  other  acts 
done  to  make  them  legally  operative  and  binding,  they  are  presump- 
tive proofs  of  such  other  acts.  Thus,  as  deeds  and  grants  to  private 
persons,  which  are  beneficial  to  them,  are  presumed  to  have  been 
accepted,  so  also  may  the  acceptance  of  an  act  or  charter  of  incor- 
poration, beneficial  to  the  corporation,  be  presumed,  for  the  like 
reason.  And  a  long  lapse  of  time,  and  the  continued  exercise  of  the 
corporate  powers  granted  to  a  corporation,  sufficiently  justify  the 
presumption  of  the  acceptance  of  the  charter.  So  if  a  particular 
charter  is  applied  for,  and  it  is  granted,  the  acceptance  may  be 
presumed  from  such  previous  application.  All  these  gi-ounds  of 
presumption  seem  to  concur  in  the  present  case;  and  we  think, 
therefore,  that  the  presumptive  proofs  of  the  acceptance  of  the  act 
of  incorporation,  and  the  organization  of  the  society,  are  full  and 
satisfactory. 

Note.  —  The  subject  of  the  formation  of  corporations  by  special 
acts  is  to-day  of  diminished  importance.  Except  in  about  half  a 
dozen  States,  there  are  important  constitutional  Hmitations  on  the 
power  of  the  legislature  to  form  corporations  by  special  act. 


REED  V.   THE  RICHMOND  STREET  R.R.  CO. 

50  Ind.  342.     1875. 

Downey,  J.  This  was  an  action  by  the  appellee  against  the  ap- 
pellant, to  recover  the  amount  of  a  subscription  to  the  capital  stock 
of  the  company.  The  subscription  was  made  to  an  instrument  pur- 
porting to  be  articles  of  association,  and  containing  also  an  agree- 
ment to  pay  for  the  shares  subscribed. 

By  a  demurrer  to  the  complaint,  and  also  to  the  answer,  the 
question  is  presented  as  to  the  proper  construction  of  the  following 
section  of  the  act  relating  to  the  incorporation  of  street  railway 
companies :  — 

"That  any  r^umber  of  persons,  not  less  than  five,  being  sub- 
scribers to  the  stock  of  any  contemplated  street  or  horse  railroad 
company,  may  be  formed  into  a  corporation  for  the  purpose  of  con- 
structing, owning,  and  maintaining  street  or  horse  railroads,  switches, 
or  side-tracks,  upon  or  through  the  streets  of  the  cities  or  towns 
within  the  State,  by  complying  with  the  following  requirements: 
Whenever  stock  to  the  amount  of  at  least  ten  thousand  dollars  shall 


22  REED    V.  THE    RICHMOND    STREET    R.R.   CO.  [ciIAP.   I. 

have  been  subscribed,  the  subscribers  to  such  stock  shall  elect  di- 
rectors for  such  company  from  their  own  number,  and  shall  severally 
subscribe  articles  of  association  in  which  shall  be  set  forth  the  name 
of  the  corporation,  the  amount  of  capital  stock  of  the  company,  the 
number  of  shares  of  which  said  stock  shall  consist,  the  number  of 
directors,  and  the  names  to  manage  the  affairs  of  the  company,  the 
city  or  town  in  which  it  is  proposed  to  construct  such  road."  3  Ind. 
Stat.  422,  sec.  1. 

The  subscription  having  been  made  before  the  organization  of  the 
company,  it  was  necessary  to  a  recovery  thereon  that  it  should  ap- 
pear that  the  subsequent  steps  essential  to  bring  the  corporation 
into  existence  were  duly  taken.  There  was  no  corporation  to  which 
the  benefits  of  the  subscription  could  enure  until  such  steps  had  been 
taken.  The  Indianapolis,  etc.,  Co.  v.  Herkimer,  46  Ind.  142,  and  cases 
cited,  and  Nelson  v.  Blakey,  47  Ind.  3. 

The  complaint  alleges,  "that  after  ten  thousand  dollars  or  more 
of  such  stock  had  been  subscribed,"  etc.,  "on,"  etc.,  "  a  large  number, 
to  wit,  twelve,  of  the  said  subscribers  met  at  the  said  city  for  the  pur- 
pose of  organizing  and  electing  directors  for  said  company,  notice  in 
writing  of  the  time,  place,  and  purpose  of  such  meeting  having  been 
given  by  two  of  said  subscribers  through  the  post-office  of  said  city 
to  the  defendant  and  the  other  subscribers,  pursuant  to  article  No.  4 
of  said  articles  of  association,  and  the  defendant  being  also  personally 
notified  of  the  time,  place,  and  purpose  of  such  meeting;  and  being 
so  met  and  assembled,  the  said  subscribers  and  stockholders  pro- 
ceeded to  organize  said  company,  and  then  and  there  adopted  the 
said  articles  of  association,  and  then  and  there  elected  seven 
of  their  number,  to  wit,"  etc.,  "as  their  directors  to  manage  the 
affairs  of  said  company,  and  thereupon  the  said  association  became 
and  was  a  corporation,  under  the  name  and  style  aforesaid,  for  the 
purpose  aforesaid." 

Counsel  for  the  appellant  contend  that  under  the  section  of  the 
statute  which  we  have  set  forth,  it  was  necessary  that  articles  of  as- 
sociation should  have  been  signed  by  the  subscribers,  in  addition  to 
the  instrument  which  they  had  previously  signed ;  while  counsel  for 
the  appellee  insist  that  the  subscribers  having  already  executed 
the  articles,  when  they  adopted  them  at  the  meeting  of  the  stock- 
holders, this  was  all  that  was  necessary  to  comply  with  the  statute. 

Counsel  for  the  appellee  refer  us  to  Eakright  v.  The  Logansport, 
etc.,  R.R.  Co.,  13  Ind.  404,  as  a  case  in  point  to  sustain  their  views. 
There  is,  we  think,  an  important  difference  between  that  case  and 
the  one  under  consideration.  There,  as  the  court  say  in  the  opinion, 
"all  the  requirements  of  the  statute  have,  in  this  instance,  been 
literally  pursued,  save  that  of  naming  the  directors  in  the  articles  of 
association,  and  that,  it  seems  to  us,  has,  in  effect,  been  done  by  the 
adoption  of  the  articles  when  the  dh-ectors  were  elected." 


CHAP.  I.]  REED    V.  THE    RICHMOND    STREET    R.R.  CO.  23| 

In  the  case  under  consideration,  all  that  is  said  in  the  instrument 
in  question  about  the  directors  is  this :  — 

"Art.  3.  The  affairs,  government,  and  control  of  said  corporation 
shall  be  under  the  management  of  a  board  of  directors,  said  board  to 
consist  of  not  less  than  five  nor  more  than  seven  stockholders." 

Not  only  is  there  a  failure  to  name  the  directors  in  the  articles  of 
association,  but,  also,  there  is  a  failure  to  fix  the  number. 

The  statute  under  which  this  company  attempted  to  organize, 
which  we  have  already  set  forth  in  this  opinion,  requires  the  follow- 
ing things  to  be  done  by  the  subscribers  after  the  requisite  amount  of 
stock  has  been  subscribed :  — 

1.  They  shall  elect  directors  from  their  own  number. 

2.  They  shall  severally  subscribe  articles  of  association,  in  which 
shall  be  set  forth:  1.  The  name  of  the  corporation;  2.  The  amount  of 
the  capital  stock  of  the  company;  3.  The  number  of  shares  of  which 
said  stock  shall  consist ;  4.  The  number  of  directors  to  manage  the 
affairs  of  the  company,  and  their  names;  5.  The  city  or  town  in  which 
it  is  proposed  to  construct  such  road. 

Conceding  that  the  statute  has  been  compHed  with  in  other  re- 
spects, it  seems  to  us  that  there  has  been  an  entire  failure  to  comply 
with  the  fourth  requirement.  If  one  of  these  requirements  can  be 
dispensed  with,  or  held  to  be  directory  merely,  we  do  not  see  where 
we  are  to  stop.  The  case  of  Eakright  v.  The  Logansport,  etc.,  R.R. 
Co.,  supra,  went  as  far  in  this  direction  as  we  are  willing  to  go.  The 
appellant  never,  in  any  way,  assented  to  the  number  or  names  of  the 
directors,  for  they  were  not  stated  in  the  articles  signed  by  him,  and 
he  was  not  at  the  meeting  when  the  number  of  directors  was  desig- 
nated, and  they  were  elected. 

In  our  opinion,  the  court  committed  an  error  in  ruling  this  point 
against  the  appellant. 

The  judgment  is  reversed,  with  costs,  and  the  cause  remanded, 
with  instructions  to  sustain  the  demurrer  to  the  complaint. 

Note.  —  Subscriptions  to  the  stock  may  be  made  a  condition 
precedent  to  incorporation,  but,  if  not,  a  corporation  may  have  legal 
existence  before  it  has  stockholders.  See  Coyotte  Co.  v.  Rutle,  8  Or. 
284,  292.  In  Dancy  v.  Clark,  24  App.  Cas.  D.C.  487,  506,  the  court 
said  that  persons  who  executed  the  certificate  of  incorporation 
(which  did  not  contain  any  subscriptions  to  stock)  were  "stock- 
holders." Sed  qu. 

A  corporation  may  be  formed  in  one  jurisdiction  and  transact  its 
first  business  in  another  jurisdiction.  Hanna  v.  International  Petro- 
leum Co.,  23  Ohio  St.  622. 


24  PEOPLE    V.  STOCKTON    R.R.  CO.  [cHAP.  I. 

PEOPLE  V.  STOCKTON   R.R.  CO. 

46  Cal.  306.     1873. 

Appeal  from  the  District  Court  of  the  Fifth  Judicial  District, 
County  of  San  Joaquin. 

This  was  an  information  filed  by  the  Attorney  General.  The  com- 
plaint averred  that  the  "defendants  had  associated  themselves  to- 
gether under  the  name  of  the  Stockton  and  VisaUa  Railroad  Com- 
pany, unlawfully  claiming  to  be  a  corporation,  and  by  the  name 
aforesaid  are  unlawfully  acting  as  such  pretended  corporation,  and 
have  without  right  or  authority  usurped  the  franchise  and  privilege 
of  a  corporation."  The  complaint  then  stated  the  particulars  wherein 
the  defendant  had  failed  to  comply  with  the  laws  in  relation  to  the 
formation  of  railroad  corporations,  which  are  the  same  mentioned 
in  the  opinion.  Judgment  of  ouster  was  prayed  for.  The  corpora- 
tion was  the  only  defendant. 

The  plaintiff  had  judgment  in  the  Court  below,  and  the  defendant 
appealed. 

Crockett,  J.  Section  two  of  the  Act  of  May  20th,  1861  (Stats. 
1861,  p.  607),  provides  that  there  shall  be  annexed  to  the  articles  of 
incorporation  an  affidavit  "setting  forth  in  substance  that  said 
amount  of  stock  has  been  subscribed,  and  that  ten  per  cent  in  cash 
thereon  has  been  actually  and  in  good  faith  paid  in  as  aforesaid." 

In  this  case  the  affidavit  conforms  strictly  to  the  requirements  of 
the  statute,  in  stating  that  the  ten  per  cent "  in  cash  has  been  actually 
paid  in,"  but  omits  the  words  "in  good  faith." 

In  the  body  of  the  certificate,  however,  it  is  stated  that  more  than 
ten  per  cent  of  the  amount  subscribed  "has  been  actuallj'',  in  good 
faith,  paid  thereon,"  in  cash;  and  the  certificate,  together  with  the 
affidavit,  are  in  all  respects  regular,  except,  as  already  stated,  the 
latter  omits  the  words  "in  good  faith."  But  we  think  this  was  a  sub- 
stantial comphance  with  the  statute,  which  is  all  that  was  necessary. 

Note.  —  See,  accord,  Ex  parte  Spring  Valley  Water  Works,  17 
Cal.  132  (failure  to  describe  the  place  of  business  of  the  corporation 
"as  the  principal  place  of  business");  People  v.  Cheeseman,  7  Col. 
376  (notary  pubHc  failed  to  certify  that  the  parties  acknowledging 
the  articles  were  personally  known  to  him) ;  Van  Pelt  v.  Home  Build- 
ing Association,  79  Ga.  439  (statement  of  purposes  gathered  from 
all  the  papers);  Thornton  v.  Balcolm,  85  Iowa,  198;  Hughes  v.  An- 
tietam  Co.,  34  Md.  316  (number  of  shares  deduced  from  statements) ; 
Bujfalo  Co.  V.  Hatch,  20  N.Y.  157  (payment  in  good  faith  to  directors 
inferred  from  statements);  Carpenter  v.  Frazier,  102  Tenn.  462  (a 
scroll  accepted  as  facsimile  of  a  seal) ;  Rogers  v.  Danby  Society,  19 


CHAP.  I.]  BUTLER    PAPER    CO.  V.  CLEVELAND.  25 

Vt.  187  (intent  to  form  a  corporate  body  gathered  from  statements). 
In  Eakright  v.  Logansport  Co.,  13  Ind.  404,  directors  were  elected, 
but  their  names  were  not  inserted  in  the  articles.  There  is  a  dictum 
that,  on  all  the  facts,  there  was  a  substantial  compHance  with  the 
statutory  provisions.  Sed  qu.  Cf.  Reed  v.  The  Richmond  Street  R.R. 
Co.,  50  Ind.  342,  supra. 


BUTLER  PAPER  CO.   v.   CLEVELAND. 

220  III.  128.     1906. 

Mr.  Justice  Scott.  This  suit  was  brought  in  the  superior  court 
of  Cook  County  by  the  J.  W.  Butler  Paper  Company  against 
Frederick  W.  Chamberlain,  Harold  I.  Cleveland,  and  Harriet  F. 
Cleveland  to  recover  the  sum  of  $1305.80  alleged  to  be  due  the 
plaintiff  for  merchandise  sold  by  it  to  the  defendants  as  officers  and 
directors  of  the  C.  &  C.  Company,  a  corporation  organized  under  the 
statute  of  this  State. 

The  only  question  arising  upon  the  record  in  the  case,  which  is 
presented  by  certain  propositions  of  law  offered  by  the  plaintiff  be- 
low and  refused  by  the  court,  is  whether  there  was  such  a  failure  to 
comply  with  the  provisions  of  "An  act  concerning  corporations" 
(approved  April  18,  1872,  in  force  July  1,  1872),  in  organizing  the 
C.  &  C.  Company,  of  which  the  defendants  were  officers  and  directors 
at  the  time  the  merchandise  was  sold  by  the  plaintiff  to  the  C.  &  C. 
Company,  as  to  render  the  defendants  individually  liable  to  the 
plaintiff  therefor  under  section  18  of  chapter  32,  Kurd's  Revised 
Statutes  of  1903.  That  section,  which  was  construed  by  this  court 
in  Loverin  v.  McLaughlin,  161  111.  417,  reads  as  follows:  — 

"If  any  person  or  persons  being,  or  pretending  to  be,  an  officer 
or  agent,  or  board  of  directors,  of  any  stock  corporation,  or  pretended 
stock  corporation,  shall  assume  to  exercise  corporate  powers,  or  use 
the  name  of  any  such  corporation,  or  pretended  corporation,  without 
complying  with  the  provisions  of  this  act,  before  all  stock  named  in 
the  articles  of  incorporation  shall  be  subscribed  in  good  faith,  then 
they  shall  be  jointly  and  severally  liable  for  all  debts  and  liabilities 
made  by  them,  and  contracted  in  the  name  of  such  corporation,  or 
pretended  corporation . ' ' 

The  sole  ground  relied  upon  by  the  plaintiff  as  showing  a  defec- 
tive incorporation  of  the  C.  &  C.  Company  is  the  fact  that  the  meet- 
ing of  the  subscribers  to  the  capital  stock  of  the  company,  held  for 
the  purpose  of  electing  directors  and  for  the  transaction  of  such  other 
business  as  might  come  before  them,  was  not  called  in  the  manner 
pointed  out  by  the  statute. 

Section  3  of  chapter  32,  supra,  provides  that  notice  of  such  meet- 


26  BUTLER    PAPER    CO.  V.  CLEVELAND.  [ciIAP.   I. 

ing  shall  be  given  "by  depositing  in  the  post-ofRce,  properly  ad- 
dressed to  each  subscriber,  at  least  ten  days  before  tlie  time  fixed, 
a  written  or  printed  notice,  stating  the  object,  time  and  place  of  such 
meeting." 

Frederick  W.  Chamberlain,  Harold  I.  Cleveland  and  Harriet  F. 
Cleveland  were  the  only  subscribers  to  the  capital  stock  of  the 
C.  &  C.  Company.  The  Hcense  to  open  books  of  subscription  to  the 
capital  stock  of  the  company  was  issued  on  December  10,  1902.  On 
December  12,  1902,  the  three  subscribers  above  named  executed  a 
written  instrument  by  which  they  waived  the  notice  provided  for  by 
section  3,  supra,  and  requested  the  commissionei-s  to  convene  the 
meeting  at  twelve  o'clock,  noon,  of  that  day  at  room  913  Monad- 
nock  Block,  in  the  city  of  Chicago,  for  the  purpose  of  electing  direc- 
tors and  the  transaction  of  such  other  business  as  might  come  before 
them.  Prior  to  the  meeting,  in  pursuance  of  this  written  instrument, 
a  notice  was  personally  delivered  to  each  of  the  three  subscribers, 
notifying  them  of  the  object,  time  and  place  of  the  meeting.  The  sub- 
scribers met  at  the  time  and  place  specified  and  elected  a  l)oard  of 
directors,  consisting  of  themselves  and  George  A.  Miller,  who  was 
one  of  the  commissioners  to  whom  the  license  had  been  issued  by  the 
Secretary  of  State. 

A  decision  of  this  case  depends  upon  the  question  whether  the 
C.  &  C.  Company  is  a  corporation  dejure.  Proof  of  a  corporation  de 
facto  does  not  reheve  the  directors  and  officei-s  of  the  corporation 
from  the  liability  imposed  by  section  18,  siipra.  There  must  be  a  cor- 
poration dejure  in  order  to  escape  that  liability.  Loverin  v.  McLaugh- 
lin, 161  111.  417;  Gunderson  v.  Illinois  Trust  and  Savings  Bank,  199 
id.  422. 

The  statute  prescribes  a  certain  coui'se  to  be  pursued  in  organizing 
a  corporation  in  this  State.  It  does  not  necessarily  follow,  however, 
that  anj^  departure  from  that  course  w'ill  prevent  a  corporation  from 
becoming  one  de  jure.  Whether  or  not  such  departure  will  have  that 
effect  depends  upon  the  nature  of  the  provision  which  is  violated. 
If  it  is  a  mandatory  provision,  a  failure  to  substantially  comply  with 
its  terms  will  prevent  the  corporation  from  becoming  one  de  jure; 
but  if  the  provision  is  merely  directory,  then  a  departure  therefrom 
will  not  have  that  consequence. 

In  Cooley's  Constitutional  Limitations  (star  page  78)  it  is  said: 
"Those  directions  which  are  not  of  the  essence  of  the  thing  to  be 
done,  but  which  are  given  with  a  view  merely  to  the  proper,  orderly 
and  prompt  conduct  of  the  business,  and  by  a  failure  to  obey  which 
the  rights  of  those  interested  will  not  be  prejudiced,  are  not  commonly 
to  be  regarded  as  mandatory ;  and  if  the  act  is  performed,  but  not  in 
the  time  or  in  the  precise  mode  indicated,  it  rtiay  still  be  sufficient, 
if  that  which  is  done  accomphshes  the  substantial  purpose  of  the 
statute." 


CHAP.  I.]  BUTLER    PAPER    CO.  V.  CLEVELAND.  27 

The  provision  of  the  statute  here  under  consideration,  requu-ing 
notice  of  the  first  meeting  to  be  given  to  the  subscribers  to  the  capital 
stock  of  a  corporation  being  organized,  by  mailing  to  them  notices 
stating  the  object,  time  and  place  of  such  meeting,  at  least  ten  days 
before  the  time  fixed  for  such  meetiiig,  is  evidently  intended  only 
as  a  direction  "given  with  a  view  merely  to  the  proper,  orderly  and 
prompt  conduct"  of  the  commissioners  in  calhng  such  meeting,  and 
a  failure  to  obey  that  provision  will  not  prejudice  the  rights  of  any 
persons  interested  therein  if  the  same  result  is  reached  in  some  other 
mode.  The  only  persons  interested  in  the  result  to  be  attained  by 
giving  notice  of  the  object,  time  and  place  of  a  meeting  of  the  sub- 
scribers to  the  capital  stock  of  a  corporation  for  the  purposes  speci- 
fied in  the  statute  are  the  subscribers  themselves.  We  perceive  no 
reason  why  such  persons,  where  all  agree  thereto,  may  not  waive 
the  giving  of  the  statutory  notice,  if  the  meeting  is  actually  held,  as 
the  purpose  of  the  statute  in  requiring  the  notices  to  be  given  has  in 
such  case  been  accomplished. 

The  mere  fact  that  the  word  "shall"  is  used  in  the  statute  in 
providing  for  the  notice  does  not  render  the  provision  mandatory. 
Canal  Commissioners  v.  Sanitary  District,  184  111.  597. 

In  the  case  of  Newcomb  v.  Reed,  12  Allen  (Mass.)  362,  in  discussing 
the  effect  upon  the  legality  of  a  corporation  where  the  call  for  the 
first  meeting  w^as  signed  by  only  one  of  the  persons  named  in  the  act 
of  incorporation  instead  of  by  a  majority  of  such  persons,  as  required 
by  the  statute  of  Massachusetts,  the  court  said:  "The  organization 
was  not  strictly  regular,  but  can  hardly  be  considered  even  as  de- 
fective. And  if  the  object  of  the  statute  is  regarded,  by  which  it  is 
required  that  the  first  meeting  shall  be  called  by  a  majority  of  the 
persons  named  in  the  act  of  incorporation,  it  will  be  evident  that  it 
is  dii'ectory,  merely,  and  only  designed  to  secure  the  rights  con- 
ferred by  the  charter  to  those  to  whom  it  was  granted,  among  them- 
selves, by  providing  an  orderly  method  of  organization.  Thus,  if  all 
the  persons  interested  should  come  together  without  any  notice  or 
call  whatever,  and  proceed  to  accept  the  charter  and  do  the  other 
acts  necessary  to  constitute  the  corporation,  we  cannot  doubt  that 
their  action  would  be  valid,  and  that  neither  the  public,  nor  any  per- 
sons not  belonging  to  the  association,  would  have  any  interest  to 
question  their  proceedings.  The  purpose  of  the  statute  was  probably 
to  avoid  such  difficulties  as  were  disclosed  in  the  case  of  Lechmere 
Bank  v.  Boynton,  11  Cush.  369,  where  two  parties  had  attempted 
to  organize  separately  under  the  same  charter,  each  claiming  to  be 
the  corporation." 

Cases  have  also  arisen  in  this  State  in  which  the  effect  of  a  failure 
to  give  notice  of  corporate  meetings  in  the  manner  provided  by 
statute  have  been  considered,  and  it  has  been  uniformly  held  that  it 
is  immaterial  whether  or  not  such  notice  has  been  given  in  the  man- 


28  MOKELUMNE    CO.  V.  WOODBURY.  [CHAP.  I, 

ner  pointed  out  by  the  statute,  if  the  persons  entitled  to  such  notice 
actually  attend  the  meeting  and  participate  in  the  business  there 
transacted.  Thomas  v.  Citizens'  Horse  Railway  Co.,  104  111.  462;  Gade 
V.  Forest  Glen  Brick  Co.,  165  id.  367. 

This  case  is  distinguishable  from  Loverin  v.  McLaughlin,  supra, 
which  is  relied  upon  by  appellant,  in  that  notice  of  the  first  meeting 
of  subscribers  is  not  intended  for  the  benefit  of  the  public,  as  no  pub- 
hcity  of  such  meeting  is  required,  but  is  merely  for  the  benefit  of  the 
subscribers,  while  in  the  Loverin  case  the  provision  which  was  not 
complied  with  was  that  requiring  the  certificate  of  complete  organi- 
zation issued  by  the  Secretary  of  State  to  be  filed  and  recorded  in  the 
ofl&ce  of  the  recorder  of  deeds  of  the  county  in  which  the  principal 
office  of  the  corporation  is  located,  and  a  compliance  with  the  statute 
in  that  regard  was  essential  because  the  provision  was  one  for  the 
benefit  of  the  public,  and  could  not  be  waived. 

It  is  urged  that  the  fact  that  section  4  of  the  act  in  question  re- 
quires a  copy  of  the  notice  provided  for  by  section  3,  supra,  to  be 
included  in  the  report  made  to  the  Secretary  of  State,  shows  that 
the  statute  contemplates  compliance  with  the  statute  in  regard  to 
giving  notice.  We  think  this  provision  is  fully  satisfied  by  including 
in  such  report  the  written  instrument  signed  by  all  the  subscribers  in 
which  such  notice  is  waived. 

The  superior  court  did  not  err  in  refusing  the  propositions  of  law 
and  in  entering  judgment  upon  the  stipulation  of  facts  in  favor  of  the 
defendants  and  against  the  plaintiff  for  costs. 

The  judgment  of  the  Appellate  Court  will  be  affirmed. 

Judgment  affirmed. 

Note.  —  See,  accord,  Judah  v.  American  Live  Stock  Co.,  4  Ind. 
333,  339;  Braintree  Water  Supply  Co.  v.  Braintree,  146  Mass.  482, 
488;  Ossipee  Co.  v.  Canney,  54  N.H.  295,  312;  Jackson  v.  Crown 
Point  Co.,  21  Utah,  1 ;  Grays  v.  Turnpike  Co.,  4  Rand.  (Va.)  578,  581. 


MOKELUMNE  CO.   ?;.   WOODBURY. 

14  Cal.  424.     1859. 

Cope,  J.,  delivered  the  opinion  of  the  Court  —  Baldwin,  J.,  and 
Field,  C.J.,  concurring. 

It  is  alleged  in  the  complaint  that  the  plaintiff  is  a  corporation, 
and  this  allegation  being  denied  in  the  answer,  the  case  was  tried 
in  the  court  below  upon  that  issue  alone.  The  plaintiff  dates  its 
corporate  existence  as  far  back  as  1852,  and  claims  to  have  been 
duly  and  regularly  incorporated  under  the  general  act  of  1850,  pro- 
viding for  the  formation  of  corporations  for  manufacturing,  mining, 
mechanical,  and  chemical  purposes.  Section  122  of  that  act  pro- 
vides that  any  three  or  more  persons,  who  may  desire  to  form  a  com- 


CHAP.  T.]  MOKELUMNE  CO.  V.   WOODBURY.  29 

pany  for  either  of  these  purposes,  "may  make,  sign,  and  acknowl- 
edge, before  some  officer  competent  to  take  the  acknowledgment  of 
deeds,  and  file  in  the  office  of  the  clerk  of  the  county  in  which  the 
business  of  the  company  shall  be  carried  on,  and  a  duplicate  thereof 
in  the  office  of  the  Secretarj'-  of  State,  a  certificate  in  writing,"  etc. 
Section  123  provides,  that  "when  the  certificate  shall  be  filed  as 
aforesaid,"  the  persons  executing  the  same  and  their  successors, 
shall  be  a  body  politic  and  corporate.  Section  130  provides,  that 
"the  copy  of  any  certificate  of  incorporation  filed  in  pursuance  of 
this  act,  certified  by  the  county  clerk  or  his  deputy  to  be  a  true  copy, 
and  of  the  whole  of  such  certificate,  shall  be  received  in  all  courts  and 
places  as  presumptive  legal  evidence  of  the  facts  therein  stated.  On 
the  trial  of  the  case,  it  was  shown  that  a  certificate,  in  conformity 
with  the  requirements  of  the  act,  had  been  filed  in  the  office  of  the 
clerk  of  the  proper  county,  and  a  certified  copy  thereof  was  produced 
and  read  in  evidence,  but  it  was  not  shown  that  a  duplicate  had  been 
filed  in  the  office  of  the  Secretary  of  State.  It  appeared  in  proof  that 
the  company  had  been  doing  business  as  a  corporation  since  1852, 
but  the  court  held,  that  as  it  was  not  shown  that  a  duplicate  had 
been  filed  as  required  by  the  act,  the  evidence  did  not  estabhsh  the 
fact  of  incorporation. 

The  general  rule  is,  that  the  existence  of  a  corporation  may  be 
proved  by  producing  its  charter,  and  showing  acts  of  user  under  it; 
but  this  rule  has  no  appHcation  to  a  corporation  formed  under  the 
provisions  of  a  general  statute,  requiring  certain  acts  to  be  performed 
before  the  corporation  can  be  considered  in  esse,  or  its  transactions 
possess  any  validity.  The  existence  of  a  corporation  thus  formed, 
must  be  proved  by  showing  at  least  a  substantial  comphance  with 
the  requirements  of  the  statute.  But  there  is  a  broad  and  obvious 
distinction  between  such  acts  as  are  declared  to  be  necessary  steps 
in  the  process  of  incorporation,  and  such  as  are  required  of  the  in- 
dividuals seeking  to  become  incorporated,  but  which  are  not  made 
prerequisites  to  the  assumption  of  corporate  powers.  In  respect  to 
the  former,  any  material  omission  will  be  fatal  to  the  existence  of  the 
corporation,  and  may  be  taken  advantage  of,  collaterally,  in  any 
form  in  which  the  fact  of  incorporation  can  properly  be  called  in 
question.  In  respect  to  the  latter,  the  corporation  is  responsible 
only  to  the  government,  and  in  a  direct  proceeding  to  forfeit  its 
charter.  The  right  of  the  plaintiff  to  be  considered  a  corporation,  and 
to  exercise  corporate  powers,  depends  upon  the  fact  of  the  perform- 
ance of  the  particular  acts  named  in  the  statute  as  essential  to  its 
corporate  existence.  Under  the  issues  presented  in  the  pleadings, 
there  is  no  doubt  that  performance  of  these  acts  should  have  been 
shown,  and  if  the  filing  of  the  dupHcate  of  the  certificate  of  incor- 
poration is  to  be  regarded  as  one  of  them,  the  court  below  properly 
held  that  the  existence  of  the  corporation  had  not  been  established. 
But  we  do  not  see  upon  what  principle  such  a  construction  of  the 


30  MOKELUMNE    QO.  V.  WOODBURY.  [CHAP.  I. 

statute  is  admissible.  It  is  certainly  not  justified  by  the  natural  and 
ordinary  import  of  the  language  used,  which  must  furnish  the  rule  of 
construction  unless  a  contrary  intention  clearly  appear.  Section  122 
of  the  act  provides,  as  we  have  seen,  for  the  filing  of  a  certificate  with 
the  clerk,  and  a  duphcate  with  the  Secretary  of  State;  but  Section 
123  declares  that  when  the  certificate  shall  be  filed,  the  persons  exe- 
cuting the  same  and  their  successors,  shall  be  a  body  politic  and  cor- 
porate. The  intention  of  the  legislature  clearly  was,  that  so  far  as 
individuals  are  concerned,  the  corporation  should  acquire  a  valid 
legal  existence  upon  the  filing  of  the  certificate.  The  filing  of  the 
duplicate  is  exclusively  a  matter  between  the  corporation  and  the 
State.  The  rights  and  privileges  conferred  by  the  statute  vest  in 
the  corporation  upon  the  filing  of  the  certificate,  and  can  be  divested 
only  by  a  direct  proceeding  for  that  purpose.  If  the  duphcate  has 
not  been  filed,  the  assumption  of  corporate  powers  amounts  simply 
to  a  usurpation  of  the  sovereign  rights  of  the  State,  the  remedy  for 
which  rests  with  the  State  alone. 
Judgment  reversed,  and  cause  remanded  for  a  new  trial. 

Note.  —  No  case  comes  within  the  scope  of  the  doctrine  of  de 
facto  coiporations  (see  the  Book  on  "Unauthorized  Corporate  Ac- 
tion," infra)  if  the  failure  to  comply  with  the  legislative  enact- 
ments is  within  the  doctrine  of  People  v.  Stockton  R.R.  Co.,  supra,  or 
of  Butler  Paper  Co.  v.  Clevelayid,  supra,  or  of  the  principal  case. 

The  doctrine  of  de  facto  corporations  is  reached  only  when  the 
court  feels  bound  to  hold  that  the  defect  in  organization  amounts  to 
a  failure  substantially  to  perform  a  mandatory  provision,  the  pei'- 
formance  of  which  the  legislature  intended  should  be  a  condition 
precedent  to  incorporation. 

Failure  to  conform  to  the  legislative  command  may  be  intended 
to  be  merely  a  cause  of  forfeiture  of  the  corporate  franchise,  to  be 
enforced  at  the  option  of  the  State  alone,  and  in  such  case  no  col- 
lateral attack  upon  the  legal  existence  of  the  corporation  will  be 
permitted.  See  Sparks  v.  Woodstock  Co.,  87  Ala.  294;  Chiniquy  v. 
Catholic  Bishop  of  Chicago,  41  111.  148,  156  (corporation  sole);  Wal- 
ton V.  Riley,  85  Ky.  413;  Lord  v.  Essex  Ass'n,  37  Md.  320,  326;  Mer- 
rick V.  Reynolds  Co.,  101  Mass.  381;  In  re  Shakopee  Co.,  37  Minn. 
91;  Granhy  Mining  Co.  v.  Richards,  95  Mo.  106;  Vanneman  v. 
Young,  52  N.J.L.  403;  Hughesdale  Co.  v.  Vanner,  12  R.I.  491;  Cheraw 
Co.  V.  White,  14  S.C.  51 ;  Harrod  v.  Hamer,  32  Wis.  162;  Wells  Co.  v. 
Gastonia  Co.,  198  U.S.  177. 

Even  if  the  legislature  enacts  that,  in  a  certain  event,  the  grant  of 
the  corporate  franchise  shall  be  null  and  void,  the  courts  strongly  in- 
cline to  hold  that,  on  the  happening  of  the  event,  the  corporate  exist- 
ence is  not,  ipso  facto,  ended,  but  that  there  is  merely  a  cause  for  its 
forfeiture.  See  Brown  v.  Wyandotte  Co.,  68  Ark.  134,  and  cases  cited. 


CHAP.  II.]  TAPPAN    V.  BAILEY.  31 


CHAPTER   II. 

DISTINGUISHING  A  CORPORATION   FROM  AN 
UNINCORPORATED  ASSOCIATION. 


A.   Where  there  is  no  Legislative  Enactment. 


TAPPAN  V.  BAILEY. 

4  Met.  (Mass.)  529.     1842. 

Assumpsit  by  the  indorsee  of  the  following  note:  " Norridgewock, 
Me.,  April  1st,  1837.  For  value  received  I  proinise  to  pay  Albert  G. 
Manley,  or  his  order,  three  hundred  dollars,  at  the  Lincoln  Bank  in 
Bath,  on  the  first  day  of  September,  1838,  with  interest  after  the 
first  day  of  July  next.  David  Wilder,  Jr.,  as  agent  of  the  Kennebec 
Lumber  Co." 

At  the  trial,  the  plaintiff,  in  order  to  prove  that  the  defendants 
were  members  of  the  Kennebec  Lumber  Company,  and  that  Wilder 
was  the  agent  of  the  company,  introduced  evidence  tending  to  show 
that  there  was  a  company,  of  many  individuals,  formed  in  the  county 
of  Worcester,  in  1835,  to  purchase  a  township  of  land  in  Maine,  and 
to  manage  the  same  by  disposing  of  the  lumber  upon  it;  that  the 
defendants  had  either  attended  the  meetings  of  the  company,  or 
acknowledged  themselves  to  be  members  of  it;  and,  among  other 
evidence,  he  introduced  articles  of  agreement,  whereby  sundry  per- 
sons associated  together  as  the  Kennebec  Lumber  Company;  which 
agreement  was  signed  by  the  defendants,  among  others. 

This  agreement  contained  the  following  provisions :  — 

And  it  has  been  agreed  and  is  intended  by  all  the  several  persons, 
parties  to  this  indenture,  of  the  first  part,  that  they,  with  their  as- 
sociates, shall  form  a  joint  stock  company,  under  the  name  and  style 
of  the  Kennebec  Lumber  Company,  to  raise  the  sum  of  $123,168,  as 
a  capital  stock,  to  be  divided  into  one  hundred  shares  of  the  value 
and  price  of  $1232  each.  That  each  person  shall  be  entitled  to.-so 
many  shares  thereof,  as  shall  be  subscribed  for  by  him  after  his  signa- 
ture to  this  indenture.  And  it  is  further  intended  and  agreed,  that  all 
such  real  estate  described  in  said  deed  [namely,  a  deed  of  certain 
woodland  in  Maine],  and  such  as  may  be  hereafter  purchased  by  said 
company,  shall  be  vested  in  trustees,  to  hold  upon  the  trusts  herein 
contained,  and  manage  and  improve  the  same  for  the  benefit  of  said 


32  TAPPAN    V.  BAILEY.  [CHAP.  II. 

parties  of  the  second  part,  their  heirs,  executors,  administrators  and 
assigns,  as  and  in  the  nature  of  personal  estate,  and  in  proportion  to 
the  number  of  shares  owned  and  held  by  each,  respectively. 

That  the  several  persons,  parties  to  this  indenture,  of  the  first 
part,  with  their  associates  and  successors,  shall  be  and  continue  an 
association  and  joint  stock  company  of  proprietors,  under  the  name 
and  style  of  the  Kennebec  Lumber  Company,  from  the  day  of  the 
date  hereof  until  the  dissolution  thereof  in  manner  hereinafter  pro- 
vided, and  will  each  be  subject  to  observe  and  well  and  truly  per- 
form the  terms,  articles  and  regulations,  hereinafter  contained,  etc. 

Art.  15.  At  the  annual  meeting  of  the  proprietors,  they  shall  elect 
by  ballot  from  their  number  a  president  and  five  directors.  The 
president  shall  be,  ex  officio,  member  of  the  board  of  directors,  etc. 

Art.  16.  The  president  shall  preside,  etc.,  and  exercise  general 
supervision  over  all  the  concerns  of  the  company,  and  the  conduct  of 
its  officers. 

Art.  20.  The  directors  shall  have  the  general  management  and 
superintendence  of  the  business  and  affairs  of  the  company,  subject 
to  the  votes,  orders  and  control  of  the  proprietors  in  their  meetings, 
and  shall  do  all  things  necessary  and  proper  to  carry  the  same  fully 
into  effect. 

Art.  21.  The  directors  may  employ  all  such  agents  as  shall  be 
needed  to  transact  the  business  of  the  company  in  the  best  manner, 
and  shall  determine  the  reasonable  compensation  to  be  allowed  to 
the  trustees  and  other  officers  and  agents. 

Art.  26.  The  directors  shall  have  the  control,  management  and 
administration  of  all  the  affairs,  and  prudential  and  pecuniary  con- 
cerns of  the  company,  in  all  cases  not  otherwise  provided  for  in  and 
by  this  indenture. 

Art.  35.  The  books  of  records  of  the  company  shall  be  open  at  all 
times  to  the  inspection  of  any  proprietor,  trustee  or  officer,  and  shall 
be  admissible  evidence  of  all  facts  contained  therein,  in  all  suits  and 
questions  between  the  persons  who  may  become  parties  to  this  in- 
denture, and  those  claiming  under  them. 

The  plaintiff  also  introduced  evidence  tending  to  prove  the  agency 
of  Wilder. 

Shaw,  C.  J.  Upon  the  general  question,  the  court  are  of  opinion, 
that  the  articles  constitute  the  signers  a  joint  stock  company,  unin- 
corporated, and  thereby  made  them  partners.  Looking  at  the  general 
purposes  expressed  in  the  articles,  and  the  name  assumed  by  the  com- 
pany, indicating  that  they  were  not  a  mere  land  company,  to  pur- 
chase lands,  in  the  expectation  of  a  profit  on  the  resale;  and  consider- 
ing the  manner  in  which  they  immediately  went  into  operation,  there 
is  sufficient  evidence  to  show,  that  the  object  of  this  partnership  was, 
that  of  felling  and  getting  out  lumber  from  the  tract  of  land  men- 
tioned in  the  articles,  and  other  tracts  of  land  in  Maine,  contem- 


CHAP.  II.]  PHILLIPS    V.  BLATCHFORD.  33 

plated  to  be  bought ;  preparing  and  getting  such  lumber  to  market ; 
and  selling  it  for  the  mutual  profit  and  benefit  of  the  shareholders. 
And  it  is  a  well-known  rule  of  law,  that  an  agreement  to  carry  on 
business  by  two  or  more  jointly,  and  to  share  the  profits,  makes  them 
responsible  for  all  losses,  and  binds  them  by  all  contracts  made  by 
any  of  the  partners  or  their  agents,  which  are  necessarily  incident  to 
carrying  on  the  contemplated  business. 

The  court  was  of  opinion  that  the  plaintiff  had  proved  the  agency 
of  Wilder.  •  D^j^^^^y^i^  defaulted. 

Note.  —  King  v.  Dodd,  9  East,  516.  The  defendant  pubHshed  and 
circulated  a  "Prospectus  for  the  London  Paper  Manufacturing  Com- 
pany." It  was  proposed  to  raise  by  subscription  £50,000  by  trans- 
ferable shares  paj^able  by  installments,  the  whole  to  be  under  a  deed 
of  trust  or  enrolment  in  chancery  "by  wliich  no  party  (it  was  said) 
could  be  accountable  for  more  than  the  sum  subscribed  under  the 
regulations  therein  stipulated."  Lord  Ellenborough  said  (p.  527) : 
"There  is  besides  in  this  prospectus  a  prominent  feature  of  mischief; 
for  it  therein  appears  to  be  held  out  that  no  person  is  to  be  account- 
able beyond  the  amount  of  the  share  for  which  he  shall  subscribe, 
the  conditions  of  which  are  to  be  included  in  a  deed  of  trust  to  be 
enrolled.  But  this  is  a  mischievous  delusion,  calculated  to  ensnare 
the  unwary  pubUc.  As  to  the  subscribers  themselves,  indeed,  they 
may  stipulate  with  each  other  for  this  contracted  responsibility;  but 
as  to  the  rest  of  the  world  it  is  clear  that  each  partner  is  hable  to  the 
whole  amount  of  the  debts  contracted  by  the  partnership." 


PHILLIPS  r.   BLATCHFORD. 

137  Mass.  510.     1884. 

Bill  in  equitj^  filed  November  9,  1881,  against  the  sur\'iving  exec- 
utor of  the  will  of  Marshall  S.  Scudder,  for  contribution.  The  bill,  as 
amended,  alleged  the  following  facts:  — 

On  or  about  June  1,  1874,  certain  persons  entered  into  a  copart- 
nei-ship  styled  the  Ryder  Reciprocal  Grate  Association,  under  a 
declaration  of  trust,  by  the  terms  of  which  no  member,  as  such,  was 
to  have  any  control  over  the  business  of  the  association,  which  was 
to  be  entirely  under  the  control  of  a  board  of  managers,  of  whom  the 
trustee  was  to  be  a  member,  and  the  other  members  were  to  be 
elected  by  the  shareholders.  The  stock  was  to  be  divided  into  fifteen 
hundred  shares,  and  each  holder  of  a  share  was  entitled  to  a  certi- 
ficate, which  might  be  transferred  by  an  assignment  in  writing.  The 
following  provision  was  made  in  case  of  the  death  of  a  member: 
"The  decease  of  a  member  of  the  association  shall  not  work  a  dis- 
solution of  it,  nor  shall  it  entitle  his  legal  representatives  to  an  ac- 


34  PHILLIPS    V.  BLATCHFORD.  [CHAP.  II. 

count,  or  to  take  any  action  in  the  courts  or  otherwise,  against  the 
association  or  the  trustee,  for  such;  but  they  shall  simply  succeed  to 
the  right  of  the  deceased  to  the  certificate  and  the  shares  it  repre- 
sents, subject  to  this  declaration  of  trust." 

The  defendant's  testator  became  the  owner  of  one  hundred  and 
twenty-five  shares  in  the  association,  on  or  about  June  1,  1874,  and 
was  such  owner  at  the  time  of  his  death,  on  August  28,  1875.  On 
October  11,  1875,  the  defendant  and  John  P.  Putnam,  since  de- 
ceased, were  appointed  executors  of  his  will. 

The  association  in  the  prosecution  of  its  business  became  indebted 
to  the  Taunton  Iron  Works  Company.  This  indebtedness  was  in- 
curred partly  before  and  partly  after  the  death  of  Scudder.  On  June 
18,  1878,  the  Taunton  Iron  Works  Company  brought  an  action 
against  the  plaintiff  and  other  members  of  the  association,  to  recover 
the  debt.  On  November  12,  1880,  the  plaintiff  and  Sylvanus  N. 
Staples  each  paid  one  half  of  the  amount  of  said  claim,  which 
amounted  in  the  whole  to  the  sum  of  S6934.78.  The  association  also 
became  indebted  in  the  sum  of  $1625.27  to  the  firm  of  Staples  and 
Phillips,  which  firm  was  composed  of  the  plaintiff  and  Sylvanus  N. 
Staples,  and  on  February  28,  1879,  said  indebtedness  was  paid  by  the 
plaintiff  by  the  account  being  charged  to  profit  and  loss  on  the  books 
of  the  firm. 

The  number  of  shares  in  the  association  held  by  solvent  persons 
in  Massachusetts  was  one  hundred  and  eighty-nine;  and  on  No- 
vember 12,  1880,  the  plaintiff  presented  a  petition  to  the  Probate 
Court,  setting  forth  the  payment  by  the  plaintiff  of  the  claim  of  the 
Taunton  Iron  Works  Company,  and  the  liability  of  Scudder  to  the 
plaintiff  growing  out  of  such  payment;  and  the  Probate  Court,  on 
December  20,  1880,  ordered  the  executors  of  the  will  of  said  Scudder 
to  retain  in  their  hands  the  sum  of  $4000  until  the  rendering  of  final 
judgment  in  any  suit  at  law  or  in  equity  commenced  within  one  year 
after  payment  of  the  claim. 

The  prayer  of  the  bill  was  that  the  defendant  be  ordered  to  pay 
\M  of  the  claims  paid  by  the  plaintiff,  and  for  further  relief. 

Holmes,  J.  It  is  admitted  that  the  partnership  was  formed  under 
a  declaration  of  trust,  by  which  it  was  provided,  among  other  things, 
as  follows:  "The  decease  of  a  member  of  the  association  shall  not 
work  a  dissolution  of  it,  nor  shall  it  entitle  his  legal  representatives 
to  an  account,  or  to  take  any  action  in  the  courts  or  otherwise, 
against  the  association  or  the  trustee,  for  such;  but  they  shall  simply 
succeed  to  the  right  of  the  deceased  to  the  certificate  and  the  shares 
it  represents,  subject  to  this  declaration  of  trust." 

The  main  question  is  whether  this  provision  is  broad  enough  to 
make  the  estate  of  a  shareholder  liable  to  contribute  to  the  other 
partners  for  debts  incurred  after  his  decease,  and  before  the  executor 
has  done  any  act  by  which  he  becomes  a  partner  in  the  testator's 


CHAP.   II.]  PHILLIPS    V.  BLATCHFORD.  35 

place.  In  the  opinion  of  the  majority  of  the  court,  the  provision  has 
that  effect.  It  may  be  conceded  that,  without  some  act  on  his  part, 
the  executor  would  not  become  a  partner;  and,  for  the  purposes  of 
this  case,  it  may  also  be  conceded  that  the  estate  in  the  executor's 
hands  would  not  be  liable  to  creditors  for  such  a  debt,  unless  the 
executor  was  personally  bound.  There  might  be  some  difficulty  in 
showing  how  such  a  new  contract  could  be  made  with  a  dead  man, 
and  it  might  be  said  that  our  law  does  not  recognize  an  estate  as  a 
universitas  able  to  contract,  or  know  any  way  of  binding  an  executor 
otherwise  than  personally  by  a  contract  made  after  the  testator's 
death.  See  Labouchere  v.  Tupper,  11  Moore  P.C.  198;  Owen  v. 
Delamere,  L.R.  15  Eq.  134. 

But  a  man  may  contract  with  his  copartners  to  indemnify  them  for 
a  certain  proportion  of  liabilities  incurred  after  his  death;  and,  if  such 
liabilities  are  incurred,  his  executor  will  be  bound  de  bonis  testatoris 
in  the  same. way  that  he  is  by  any  other  contract  of  his  testator,  and 
without  introducing  any  anomalous  principle  whatever.  Turquand 
V.  Kirby,  L.R.  4  Eq.  123,  134.  See  Havimond  v.  Granger,  128  Mass. 
272;  Bacon  v.  Pomeroy,  104  Mass.  577,  582. 

Ordinarily,  when  a  partner  contracts  that  his  share  in  the  profits 
shall  continue  to  a  certain  time,  he  contracts  by  implication  that  his 
liability  for  losses  shall  have  the  same  duration.  We  see  no  reason 
why  this  principle  should  not  apply  when  the  time  extends  beyond 
the  partner's  life.  And  when,  as  here,  a  company  is  purposely  made 
as  nearly  a  corporation  as  possible,  and  it  is  obviously  intended  that 
the  death  of  a  shareholder  shall  not  affect  either  the  company  or  the 
rights  incident  to  the  share,  we  think  that  the  liabilities  go  with  the 
rights,  and  that  the  effect  of  the  testator's  contract  was  that  he  would 
share  losses  until  his  estate  was  relieved  of  his  shares  in  the  stock. 
In  re  Agriculturist  Cattle  Ins.  Co.,  L.R.  5  Ch.  725. 

When  a  partner  merely  reserves  an  option  to  his  executor  to  take 
his  place  in  the  firm,  and  perhaps  even  when  he  covenants  that  his 
executor  shall  take  his  place,  but  does  no  more,  the  interest  of  his 
estate  in  the  profits  after  his  death,  and  therefore  its  liability  for 
losses,  are  dependent  upon  the  executor's  personal  participation  in 
the  business;  so  that,  if  the  executor  declines,  the  firm  will  be  dis- 
solved by  the  death,  and  an  account  must  be  taken,  although  the 
surviving  partner  may  be  entitled  to  damages.  See  Downs  v.  Collins, 
6  Hare,  418. 

But  the  present  contrivance  goes  farther,  and,  as  we  have  said, 
is  intended  to  imitate  a  corporation  so  far  as  to  stipulate  that  prof- 
its and  losses  shall  follow  the  certificate,  and  that  the  certificate 
shall  remain  part  of  the  estate  of  the  deceased,  whether  the  execu- 
tor makes  himself  a  member  of  the  company  or  not. 

Note.  —  See  Hossack  v.  Ottawa  Ass'n,  244  111.  274. 


36  WILLIAMS   V.  MILTON.  [CHAP.  II. 

WILLIAMS  V.  MILTON. 

215  Mass.  1.     1913. 

Four  petitions  to  the  Superior  Court  under  St.  1909,  c.  490,  Part 
I,  §  76,  by  the  trustees  of  the  Boston  Personal  Property  Trust,  in  the 
first  three  cases  appeahng  from  refusals  of  the  assessors  respectively 
of  the  town  of  Milton,  the  city  of  Waltham,  and  the  town  of  Bi'ookline 
to  abate  taxes  assessed  on  April  1,  1911,  on  personal  property  held 
by  the  petitioners  as  such  trustees  alleged  to  be  apportionablc  under 
St.  1909,  c.  490,  Part  I,  §  23,  cl.  5,  to  beneficiaries  or  trustees  whose 
places  of  residence  were  respectively  in  Milton,  Waltham,  and 
Brookline,  and  in  the  fourth  case  appealing  from  a  refusal  of  the  as- 
sessors of  the  city  of  Boston  to  abate  taxes  upon  the  full  amount  of 
the  personal  property  held  by  the  petitioners  as  such  trustees  which 
were  assessed  to  the  petitioners  on  the  same  date  under  St.  1909, 
c.  490,  Part  I,  §  27,  on  the  ground  that  such  property  was  the  per- 
sonal property  of  a  partnership  carried  on  in  Boston. 

The  petitions  were  heard  together  by  Quinn,  J.,  upon  an  agreed 
statement  of  facts.  In  the  cases  against  the  town  of  Milton,  the  city 
of  Waltham,  and  the  town  of  Brookline  the  judge  found  that  the 
petitioners  were  entitled  to  the  abatements  respectively  claimed  in 
those  cases  and  ordered  that  judgments  should  be  entered  accord- 
ingly, and  in  the  case  against  the  city  of  Boston  he  found  that  the 
petitioners  were  entitled  to  no  abatement  and  ordered  that  judgment 
should  be  entered  for  the  respondent.  At  the  request  of  the  parties 
he  reported  the  cases  for  determination  by  this  court. 

The  indenture  of  trust  creating  the  Boston  Personal  Property 
Trust  was  dated  January  10,  1893.  Among  other  provisions  bearing 
upon  the  character  of  the  trust  were  the  following :  — 

"Second.  That  the  said  Trustees  shall  hold  all  the  funds  and  prop- 
erty (hereinafter  called  the  Trust  Fund),  now  or  hereafter  held  by 
or  paid  to,  or  transferred  or  conveyed  to  them  or  their  successors  as 
Trustees  hereunder  in  trust  for  the  purposes,  with  the  powers  and 
subject  to  the  limitations  hereinafter  declared,  for  the  benefit  of  the 
cestuis  que  trustent,  and  it  is  hereby  expressly  declared  that  a  trust, 
and  not  a  partnership,  is  hereby  created;  that  neither  the  Trustees 
nor  the  cestuis  que  trustent  shall  ever  be  personally  liable  hereunder 
as  partners  or  otherwise,  but  that  for  all  debts  the  Trustees  shall  be 
liable  as  such  to  the  extent  of  the  Trust  Fund  only.  In  all  contracts 
or  instruments  creating  liability,  it  shall  be  express^  stipulated  that 
the  cestuis  qu^  trustent  shall  not  be  liable." 

"Fourth,  (a)  The  Trustees  shall  have  as  full  power  and  discre- 
tion, as  if  absolute  owners,  to  invest  and  reinvest  the  Trust  Fund 
(including  any  surplus  and  also  income)  in  personal  property,  in- 
cluding bonds  and  notes  or  obligations  secured  upon  real  estate,  and 


CHAP.  II.]  WILLIAMS    V.  MILTON.  37 

the  decision  of  the  Trustees  as  to  what  is  personal  property  shall  be 
final.  They  shall  have  the  hke  power  of  investment  in  the  purchase 
and  improvement  of  real  estate  in  the  cities  of  the  United  States  of 
America,  for  the  purpose  of  leasing  the  same  upon  long  terms,  or 
ground  rents  so-called ;  and  all  real  estate  so  purchased  shall  be  con- 
veyed to  them  in  joint  tenancy  as  Trustees  hereunder." 

"  (e)  The  Trustees  shall  also  have  power  at  any  time  to  borrow 
money,  and  to  pledge,  as  collateral  security  for  such  loan,  any  per- 
sonal property  belonging  to  the  Trust  Fund,  provided,  however, 
that  no  loan  shall  be  contracted  for,  so  that  the  aggregate  amount  of 
such  loans  outstanding  shall  at  such  time  exceed,  in  the  judgment  of 
the  Trustees,  twenty-five  per  cent  of  the  total  amount  of  the  per- 
sonal property  of  the  Trust  Fund." 

"Seventh.  The  Trustees  shall  declare  dividends  from  the  net  in- 
come of  the  Trust  Fund  among  the  cestuis  que  trustent  quarterly,  or 
oftener,  if  convenient  to  the  Trustees,  and  their  decision  as  to  amount 
of  dividends,  and  as  to  using  therefor  any  portion  of  the  Surplus 
Fund,  shall  be  final.  They  may  set  aside  from  time  to  time  such  por- 
tion of  the  net  income  as  shall  not  be  required  for  dividends  for  a 
Surplus  Fund." 

"Ninth.  The  Trustees  shall  render  an  account  annually  or  oftener, 
if  convenient  to  them,  and  shall,  upon  request,  deliver  or  mail  a  copy 
to  each  cestui  que  trust." 

"Tenth.  Any  Trustee  may  resign  his  trust  by  a  written  instru- 
ment signed  and  sealed  by  him,  and  acknowledged  in  the  manner 
prescribed  for  the  acknowledgment  of  deeds,  and  such  instrument 
may  be  recorded  in  the  Registry  of  Deeds  for  the  County  of  Suffolk, 
or  deposited  with  such  Depositary  as  the  Trustees  shall  from  time 
to  time  select. 

"Any  vacancy  occurring  from  any  cause  at  any  time  in  the  num- 
ber of  said  Trustees  shall  be  filled  by  the  remaining  Trustees.  ..." 

"Fourteenth.  The  Trustees  shall  issue  a  certificate,  in  such  form 
as  they  shall  deem  best,  to  each  person  who  shall  pay  them  the  sum 
of  one  thousand  dollars  or  multiple  thereof,  for  an  interest  in  the 
Trust  Fund.  But  no  certificate  shall  be  issued  for  any  less  sum  than 
one  thousand  dollars,  at  par  value.  ..." 

"Fifteenth.  The  interests  represented  by  the  certificates  may  be 
transferred  on  the  books  of  the  Trustees  by  the  person  named  therein, 
or  his  legal  representative,  upon  the  surrender  of  the  certificate,  and 
a  new  certificate  shall  be  issued  to  the  transferee,  who  shall  thereupon 
become  a  cestui  que  trust.  But  no  such  interest  shall  be  sold  until  the 
holder  thereof  (including  assignees  in  insolvency  or  bankruptcy,  or 
for  benefit  of  creditors,  and  holders  by  process  of  law  or  otherwise, 
except  as  hereinafter  stated)  shall  have  first  in  writing  offered  it  for 
sale  to  the  Trustees,  who  shall,  as  such  Trustees,  have  the  option 
for  ten  days  after  the  receipt  of  such  offer  of  buying  the  same  at  not 


38  WILLIAMS    V.  MILTON.  [cHAP.  II. 

more  than  the  last  preceding  appraisal  made  by  them,  such  appraisal 
to  be  made  annually  or  oftener  as  they  shall  deem  best.  Interests  so 
purchased  by  the  Trustees  may  be  held  as  part  of  the  Trust  Fund, 
or  sold  by  them  at  their  discretion. 

''Devises  by  will,  distribution  of  the  estates  of  deceased  persons 
according  to  law,  and  distribution  of  trust  funds  among  those  en- 
titled thereto  upon  the  termination  of  trusts,  shall  not  be  deemed 
sales  for  the  purposes  hereof." 

"Twentieth.  The  Trustees  may,  with  the  consent  of  three-fourths 
in  interest  of  the  cestuis  que  trustent,  alter  or  add  to  this  Declaration, 
or  terminate  this  Trust,  and  if  it  seems  to  them  judicious  so  to  do, 
they  may,  with  hke  consent,  convey  the  Trust  Fund  to  new  or  other 
Trustees,  or  to  a  corporation,  being  first  duly  indemnified  for  any 
outstanding  obligation  or  liability.  ..." 

LoRiNG,  J.  These  are  four  petitions  for  the  abatement  of  taxes 
assessed  upon  the  plaintiffs  as  trustees  of  the  Boston  Personal  Prop- 
erty Trust.  The  Boston  taxes  were  assessed  on  the  theory  that  the 
property  held  by  the  plaintiffs  under  that  trust  was  pai'tnership 
property  to  be  assessed  under  St.  1909,  c.  490,  Part  I,  §  27,  in  Boston 
where  the  partnership  (if  there  was  a  partnei-ship)  had  its  place  of 
business.  The  other  taxes  were  assessed  upon  the  theory  that  the 
property  held  by  the  plaintiffs  under  that  trust  was  held  by  them  as 
trust  property  the  income  of  which  was  payable  to  another  person 
and  was  to  be  assessed  under  St.  1909,  c.  490,  Part  I,  §  23,  cl.  5. 

It  has  been  contended  in  effect  if  not  in  terms  that,  whatever  may 
be  its  true  character,  the  trust  for  the  purposes  of  taxation  was  a 
partnership.  Doubtless  the  legislature  might  provide  that  a  trust 
which  was  not  a  partnership  should  be  treated  as  a  partnership  for  the 
purposes  of  taxation.  But  it  has  not  done  so.  What  the  legislature 
has  done  is  to  provide  (1)  that  "personal  property  held  in  trust  by 
an  executor,  administrator  or  trustee,  the  income  of  which  is  payable 
to  another  person,  shall  be  assessed  to  the  executor,  administrator  or 
trustee  in  the  city  or  town  in  which  such  other  person  resides,  if  within 
the  Commonwealth,"  and  if  he  resides  out  of  the  Commonwealth,  in 
the  place  where  the  trustee  resides;  St.  1909,  c.  490,  Part  I,  §  23;  and 
(2)  that  "Partners,  whether  residing  in  the  same  or  in  different  cities 
or  towns,  may  be  jointly  taxed  under  their  firm  nanje,  in  the  place 
where  their  business  is  carried  on,  for  all  the  personal  property  em- 
ployed in  such  business,  except  ships  or  vessels."  St.  1909,  c.  490, 
Part  I,  §  27.  That  is  to  say,  the  legislature  has  provided  that  the 
right  to  tax  property  as  trust  or  as  partnership  property  depends  upon 
the  real  character  of  the  property  taxed.  Under  these  enactments 
of  the  legislature  there  is  no  room  for  holding  that  property  which  is 
in  reality  not  partnership  property  can  be  taxed  as  partnership  prop- 
erty. The  right  to  tax  property  as  trust  or  as  partnership  property 
depends  upon  what  the  character  of  the  property  taxed  really  is. 


CHAP.  II.]  WILLIAMS    V.  MILTON.  39 

We  proceed  to  a  discussion  of  the  principles  on  which  the  ques- 
tion of  the  true  character  of  the  Boston  Personal  Property  Trust 
depends. 

Where  persons  associate  themselves  together  to  carry  on  business 
for  their  mutual  profit,  they  are  none  the  less  partners  because  (1) 
their  shares  in  the  partnership  are  represented  by  certificates  which 
are  transferable  and  transmissible,  and  because  (2)  as  a  matter  of 
convenience  (if  not  of  necessity  in  case  of  transferable  and  trans- 
missible certificates)  the  legal  title  to  the  partnership  property  is 
taken  in  the  name  of  a  third  person.  The  person  in  whose  name  the 
partnership  property  stands  in  such  a  case  is  perhaps  in  a  sense  a 
trustee.  But  speaking  with  accuracy  he  is  an  agent  who  for  the 
principal's  convenience  holds  the  legal  title  to  the  principal's  property. 

Several  instances  of  such  partnerships  are  to  be  found  in  our  re- 
ports. In  Hoadley  v.  County  Commissioners,  105  Mass.  519,  one 
Gordon  McKay  executed  a  declaration  of  trust  by  which  he  de- 
clared that  he  held  his  patents  for  sewing  the  soles  of  boots  and  shoes 
to  the  vamps,  his  factory  where  machines  were  manufactured  under 
these  patents  and  the  whole  business  theretofore  carried  on  by  liim, 
in  trust  for  such  persons  as  should  buy  certificates  which  were  to  be 
issued  under  that  declaration  of  trust  to  the  amount  of  fifty  thou- 
sand in  number,  the  proceeds  to  be  used  in  carrying  on  the  factory 
and  business  assigned  to  and  held  by  the  trustee.  The  certificate 
holders  were  to  be  known  as  the  McKay  Sewing  Machine  Associa- 
tion and  the  business  was  to  be  conducted  by  an  executive  committee 
to  be  chosen  by  them.  This  was  held  to  create  a  partnership,  and 
for  that  reason  the  shares  were  held  not  to  be  taxable  to  the  holders 
of  them.  For  a  subsequent  case  involving  the  same  association,  where 
the  same  conclusion  was  reached,  see  Gleason  v.  McKay,  134  Mass. 
419.  In  Whitman  v.  Porter,  107  Mass.  522,  certain  subscribers  as- 
sociated themselves  together  to  buy  a  ferry  boat  to  be  run  between 
Agawam  and  Springfield;  the  boat  was  to  be  conveyed  to  one  of  the 
subscribers  in  "trust"  and  the  entire  business  was  to  be  conducted 
by  the  trustees  and  their  officers  to  be  annually  elected  by  the  sub- 
scribers. The  stock  was  assignable.  These  stockholders  were  held  to 
be  partners.  In  Phillips  v.  Blatchford,  137  Mass.  510,  the  money  to 
carry  on  the  business  of  manufacturing  and  selling  grates  was  raised 
by  the  sale  of  transferable  certificates  issued  under  a  somewhat  simi- 
lar declaration  of  trust  which  provided  that  the  business  should  be 
carried  on  by  a  board  of  managers  of  whom  the  trustee  was  to  be  one, 
and  the  other  members  were  to  be  elected  by  the  shareholders.  This 
also  was  held  to  be  a  partnership.  In  Richer  v.  American  Loan  & 
Trust  Co.,  140  Mass.  346,  the  doctrine  of  these  cases  was  extended 
to  a  case  where  the  purpose  of  the  association  was  to  buy  cars  to  be 
leased  to  a  specified  railroad.  The  persons  providing  the  purchase 
money  were  to  have  transferable  certificates,  which  certificates  by 


40  WILLIAMS    V.  MILTON.  [CHAP.  II. 

the  terms  of  the  lease  to  the  raih-oad  were  to  be  paid  in  ten  annual 
instalments  with  six  per  cent  interest  until  paid.  The  certificate 
holders  were  declared  in  the  declaration  of  trust  to  be  an  association, 
and  all  the  business  was  to  be  transacted  by  a  board  of  managers  to 
be  elected  by  them.  The  property  of  the  association  was  to  be  held 
by  the  American  Loan  and  Trust  Company  as  trustee.  This  also  was 
held  to  be  a  partnership.  Williains  v.  Boston,  208  Mass.  497,  was  a 
similar  case.  The  trust  agreement  in  that  case  provided  that  the 
trust  was  established  "for  the  purchase,  development,  and  disposi- 
tion of"  the  former  site  of  the  Museum  of  Fine  Arts  in  Boston.  The 
property  was  to  be  held  by  trustees,  but  the  shareholders  had  a  right 
to  remove  the  trustees,  and  meetings  of  the  shareholders  were  to  be 
held  at  which  the  shareholders  might  authorize  or  instruct  the 
trustees  in  any  manner  and  alter  or  amend  the  declaration  of  trust, 
or  direct  the  trustees  to  end  the  trust,  sell  the  property  and  distribute 
the  proceeds.  The  original  papers  in  the  case  show  these  to  have  been 
the  facts  of  the  case  although  they  are  not  stated  in  the  report  of  that 
decision.  The  property  of  this  association  was  held  to  be  taxable  as 
partnership  property. 

In  Mmjo  V.  Moritz,  151  Mass.  481,  on  the  other  hand,  it  was  held 
that  certificate  holders  under  the  declaration  of  trust  there  in  ques- 
tion were  not  partnei"S.  In  that  case  an  inventor  transferred  his  in- 
vention to  trustees  to  whom  by  the  terms  of  the  trust  indenture  the 
patent  was  to  be  issued  when  it  was  issued.  The  trust  indenture 
provided  for  the  issue  of  scrip  to  those  who  should  furnish  to  the 
trustees  the  money  necessary  for  the  more  advantageous  disposition 
of  the  invention.  The  trust,  on  which  the  trustees  were  to  hold  the 
invention  and  the  money  produced  by  the  issue  of  scrip,  was  to  hold, 
manage  and  dispose  of  the  invention  or  any  part  thereof  or  interest 
therein  upon  such  terms  as  to  them  (the  trustees)  or  a  majority  of 
them  should  seem  best,  the  net  proceeds  to  be  paid  one  half  to  the 
inventor  and  the  other  half  to  the  holders  of  the  scrip  or  certificates. 
The  scrip,  called  in  the  trust  indenture  scrip  or  certificates,  was  trans- 
ferable. Vacancies  in  the  office  of  trustee  were  to  be  filled  by  the  re- 
maining trustees.  It  was  held  that  the  scrip-holders  were  not  part- 
ners, and  in  that  respect  the  case  was  "unlike  Gleason  v.  McKay, 
134  Mass.  419,  and  Phillips  v.  Blatchford,  137  Mass.  510." 

The  difference  between  Hoadley  v.  County  Commissioners,  105 
Mass.  519  (involving  the  same  indenture  as  that  in  Gleason  v.  Mc- 
Kay, 134  Mass.  419),  Whitman  v.  Porter,  107  Mass.  522,  Phillips 
V.  Blatchford,  137  Mass.  510,  Richer  v.  American  Loan  &  Trust  Co., 
140  Mass.  346,  and  Williams  v.  Boston,  208  Mass.  497,  on  the  one 
hand,  and  Mayo  v.  Moritz,  151  Mass.  481,  on  the  other  hand,  hes  in 
the  fact  that  in  the  former  cases  the  certificate  holders  are  associated 
together  by  the  terms  of  the  "trust"  and  are  the  principals  whose 
instructions  are  to  be  obeyed  by  their  agent  who  for  their  convenience 


CHAP.  II.]  WILLIAMS    V.  MILTON.  41 

holds  the  legal  title  to  their  property.  The  property  is  their  property. 
They  are  the  masters.  While  in  Maijo  v.  Moritz  on  the  other  hand 
there  is  no  association  between  the  certificate  holders.  The  property 
is  the  property  of  the  trustees  and  the  trustees  are  the  masters.  All 
that  the  certificate  holders  in  Mayo  v.  Moritz  had  was  a  right  to  have 
the  property  managed  by  the  trustees  for  their  benefit.  They  had  no 
right  to  manage  it  themselves  nor  to  instruct  the  trustees  how  to 
manage  it  for  them.  As  was  said  by  C.  Allen,  J.,  in  Mayo  v.  Moritz, 
151  Mass.  481,  484:  "The  scrip-holders  are  cestuis  que  trust,  and  are 
entitled  to  their  share  of  the  avails  of  the  property  when  the  same  is 
sold,"  and  that  is  all  to  which  they  were  entitled.  In  Mayo  v.  Moritz 
the  scrip-holders  had  a  common  interest  in  the  trust  fund  in  the 
same  sense  that  the  members  of  a  class  of  hfe  tenants  and  the  mem- 
bers of  a  class  of  remaindermen  (among  whom  the  income  of  a  trust 
fund  and  the  corpus  are  to  be  distributed  respectively)  have  a  com- 
mon interest.  But  in  Mayo  v.  Moritz  there  was  no  association  among 
the  certificate  holders  just  as  there  is  no  association  although  a  com- 
mon interest  among  the  life  tenants  or  the  remaindermen  in  an 
ordinary  trust.  For  a  decision  in  this  Commonwealth  somewhat  hke 
Mayo  V.  Moritz,  uhi  supra,  see  Hussey  v.  Arnold,  185  Mass.  202. 
See  also  in  this  connection  Makin  v.  Savings  Institution  at  Portland, 
23  Maine,  350;  Burt  v.  Lathrop,  52  Mich.  106. 

There  is  a  case  in  England  {Smith  v.  Anderson,  15  Ch.D.  247)  in 
which  the  distinction  between  cases  like  Hoadley  v.  County  Com- 
missioners and  Mayo  v.  Moritz,  was  pointed  out  and  established,  and 
that  case  is  now  the  established  law  in  England.  In  Smith  v.  Ander- 
son (decided  by  the  Court  of  Appeals  in  1880),  the  trust  deed  pro- 
vided for  the  purchase  by  trustees  of  shares  in  the  capital  stock  of 
eleven  different  submarine  telegraph  companies.  The  money  was  to 
be  furnished  by  subscribers  to  whom  transferable  certificates  were 
to  be  issued.  The  income  derived  from  the  submarine  shares  and  the 
proceeds  of  any  sales  of  them  were  to  be  applied  by  the  trustees  (1) 
in  paying  six  per  cent  interest  on  the  trust  certificates  issued  under 
the  trust;  (2)  in  redeeming  these  trust  certificates  at  £120;  and  finally, 
when  (3)  all  the  certificates  had  been  redeemed,  the  surplus,  if  any, 
was  to  be  divided  among  the  former  certificate  holders.  It  was  held 
that  this  was  a  trust  and  not  a  company  association  or  partnership 
which  had  to  be  registered  under  companies  act  of  1862  (St.  25  &  26 
Vict.  c.  89),  §  4.  That  act  provided  that  "No  company,  association 
or  partnership  .  .  .  shall  be  formed  ...  for  the  purpose  of  carrying 
on  any  other  business  [that  is  to  say,  any  business  other  than  bank- 
ing] that  has  for  its  object  the  acquisition  of  gain  by  the  company, 
association,  or  partnership,  or  by  the  individual  members  thereof, 
unless  it  is  registered."  This  conclusion  was  reached  on  the  ground 
that  there  is  a  difference  between  a  partnership  where  money  raised 
by  the  issue  of  transferable  certificates  is  to  be  held  by  so-called 


42  WILLIAMS    V.  MILTON.  [CHAP.  II. 

trustees  who  are  really  managing  agents,  and  a  trust  where  money 
raised  by  the  issue  of  transferable  certificates  is  to  be  held  by  trustees 
properly  so  called,  and  that  the  distinction  between  the  two  is  that 
which  we  have  just  stated  in  detail. 

The  decision  in  Smith  v.  Anderson  is  the  law  of  England  to-day, 
although  by  reason  of  some  special  facts  in  that  case  and  the  way 
in  which  the  question  arose  doubts  as  to  the  conclusion  reached  in 
that  case  have  been  thrown  out  by  two  or  three  individual  judges. 
For  the  subsequent  cases  see  Crowther  v.  Thorley,  32  W.  R.  330;  In 
re  Siddall,  29  Ch.D.  1 ;  In  re  Jones,  [1898]  2  Ch.  83,  91 .  For  two  cases 
where  the  distinction  between  managing  agents  who  hold  the  legal 
title  and  trustees  properly  so  called  is  reaffirmed,  see  In  re  Thomas, 
14  Q.B.D.  379,  383;  In  re  Faure  Electric  Accumulator  Co.,  40  Ch.D. 
141,  151,  152. 

This  brings  us  to  the  question  of  the  character  of  the  Boston  Per- 
sonal Property  Trust.  It  is  plain  that  it  is  a  trust  and  not  a  part- 
nership. By  the  terms  of  the  indenture  of  trust  the  property  con- 
tributed by  the  certificate  holders,  or  that  bought  with  money 
contributed  by  them  (the  original  trust  property  could  be  acquired 
in  both  ways  by  the  terms  of  the  indenture  of  trust),  was  to  be  held 
by  the  trustees  in  trust  to  pay  the  income  to  the  holders  of  the  cer- 
tificates, and  on  the  termination  of  the  trust  to  divide  the  trust  fund 
or  the  proceeds  thereof  among  them.  The  certificate  holders  are 
throughout  called  "cestuis  que  trustent."  The  certificate  holders,  or 
"cestuis  que  trustent,"  are  ^n  no  way  associated  together,  nor  is  there 
any  provision  in  the  indenture  of  trust  for  any  meeting  to  be  held  by 
them.  The  only  act  which  (under  the  trust  indenture)  they  can  do  is 
to  consent  to  an  alteration  or  amendment  of  the  trust  created  by  the 
indenture  or  to  a  termination  of  it  before  the  time  fixed  in  the  deed. 
But  they  cannot  force  the  trustees  to  make  such  alteration,  amend- 
ment or  termination.  It  is  for  the  trustees  to  decide  whether  they 
will  do  any  one  of  these  things.  All  that  the  certificate  holders  or 
"cestuis  que  trustent"  can  do  is  to  give  or  withhold  their  consent  to 
the  trustees  taking  such  action.  And  the  giving  or  withholding  of 
consent  by  the  cestuis  que  trust  is  not  to  be  had  in  a  meeting,  but  is 
to  be  given  by  them  individually.  As  we  have  said,  no  meeting  of  the 
cestuis  que  trust  for  that  or  any  other  purpose  is  provided  for  in  the 
trust  indenture.  The  trustees  of  the  Boston  Personal  Property  Trust 
have  a  right  to  sell  the  trust  securities  and  reinvest  the  proceeds,  and 
also  a  limited  power  to  borrow  on  the  security  of  the  trust  property. 
The  certificate  holders,  or  "cestuis  que  trustent,"  as  they  are  called  in 
the  trust  deed,  have  a  common  interest  in  precisely  the  same  sense 
that,  the  members  of  a  class  of  life  tenants  (among  whom  the  income 
of  a  trust  fund  is  to  be  distributed)  have  a  common  interest,  but  they 
are  not  socii,  and  it  is  the  trustees,  not  the  certificate  holders,  wh ) 
are  the  masters  of  the  trust  property.  The  sole  right  of  the  cestuis  que 


CHAP.  II.]  WILLIAMS    V.  MILTON.  43 

trust  is  to  have  the  property  administered  in  their  interest  by  the 
trustees,  who  are  the  masters,  to  receive  income  while  the  trust  lasts, 
and  their  share  of  the  corpus  when  the  trust  comes  to  an  end. 

It  has  been  urged  by  the  learned  counsel  for  the  city  of  Boston 
that  these  certificate  holders  or  "cestuis  que  trusteni"  are  in  effect 
carrying  on  the  business  of  buying  and  selling  securities  through  the 
trustees  as  managing  agents  or  directors,  and  he  refers  to  two  facts 
which  (he  argues)  bear  him  out  in  that  contention,  namely,  (1)  that 
the  trustees  on  April  1,  1911,  had  on  hand  undivided  income  to  the 
amount  of  Sol, 516.93,  and  a  "surplus  capital"  amounting  to  $488,- 
566.35.  B}^  the  terms  of  the  trust  the  trustees  are  authorized  to  set 
aside  from  time  to  time  such  portion  of  the  net  income  as  shall  not 
be  required  for  dmdends  for  a  "Surplus  Fund,"  which  surplus  fund 
may  be  subsequently  used  by  them  in  their  discretion  in  payment  of 
dividends.  It  appears  that  the  face  value  of  the  outstanding  certi- 
ficates is  $2,090,500.  The  surplus  fund  of  undivided  income  there- 
fore amounts  to  about  two  and  a  half  per  cent  of  the  corpus  of  the 
fund.  The  surplus  capital  of  $488,566.35  is  about  twenty-three  and 
one  half  per  cent  of  the  face  value  of  the  outstanding  certificates. 
That  is  not  an  extraordinary  increase  in  the  value  of  the  corpus  of 
the  trust  fund  during  a  period  of  eighteen  years.  But  this  contention 
brings  out  a  fact  in  addition  to  those  already  referred  to,  which  shows 
that  the  Boston  Personal  Property  Trust  is  not  a  partnership,  but 
a  trust  and  nothing  but  a  trust.  When  persons  engage  as  partners  in 
buying  and  selling  stocks,  bonds  and  other  securities  for  their  mutual 
profit,  the  gains  made  by  purchases  and  sales  are  profits  of  the  part- 
nership, divisible  as  such  among  those  entitled  to  the  profits  of  the 
partnership.  In  case  of  a  trust  on  the  other  hand,  any  gain  made  by  a 
change  of  investments  is  an  accretion  belonging  to  the  corpus  of  the 
trust  fund  and  belongs  to  those  who  own  the  corpus  of  the  fund. 
Such  gains  become  part  of  the  corpus  as  much  as  the  original  money 
contribution  to  the  trust  fund.  On  them  the  certificate  holders,  or 
'^  cestuis  que  trustent,"  are  entitled  to  income  while  the  trust  lasts,  and 
to  their  share  of  them  (because  they  are  included  in  the  corpus  of 
the  trust  fund)  when  the  trust  ends  and  there  is  a  distribution  of  the 
corpus  among  the  cestuis  que  trust.  That  is  the  way  in  which  the 
trustees  of  the  Boston  Personal  Property  Trust  have  dealt  with  gains 
made  by  changes  of  investment  of  the  securities  of  that  trust.  That 
is  to  say,  the  trustees  have  treated  gains  from  sales  of  securities  not 
as  profits  of  a  partnership  organized  to  buy  and  sell  stocks  for  a  profit, 
but  as  gains  on  a  change  made  in  the  investments  of  a  trust  fund. 

It  was  largely  with  respect  to  the  gains  made  by  sales  of  the  securi- 
ties of  the  trust  that  the  special  circumstances  in  Smith  v.  Anderson 
raised  a  doubt  as  to  that  being  a  trust  for  investment  and  not  a 
"business  that  has  for  its  object  the  acquisition  of  gain."  It  was  pro- 
vided in  the  trust  deed  in  Smith  v.  Anderson  that  the  submarine 


44  WILLIAMS    V.  MILTON.  [CHAP.  II. 

telegraph  shares  should  not  be  sold  unless  they  brought  a  premium 
of  thirty  per  cent,  and  that  the  proceeds  of  such  sales  should  be  used 
in  the  same  way  that  the  annual  income  derived  from  the  submarine 
telegraph  shares  should  be  used,  namely,  in  paying  interest  on  the 
trust  certificates  and  in  retiring  those  certificates  at  £120  a  share. 
They  were  issued  originally  at  £90  per  share.  In  that  regpect  the 
trust  in  question  in  Sr7iith  v.  Anderson  was  quite  different  from  the 
Boston  Personal  Property  Trust.  There  is  nothing  in  the  trust  deed 
of  the  Boston  Personal  Property  Trust  which  is  in  any  way  different 
fi'om  a  trust  under  a  will  except  that  there  are  no  limitations  over 
and  the  interests  of  the  cestuis  que  trust  are  represented  by  transfer- 
able and  transmissible  certificates. 

Up  to  this  time  we  have  not  alluded  to  the  declaration  in  the  in- 
denture of  trust  here  in  question  that  it  was  the  intention  of  the 
parties  to  it  to  create  a  trust  and  not  a  partnership.  It  is  what  the 
parties  did  in  making  the  trust  indenture  that  is  decisive.  If  there 
had  been  doubt  as  to  what  they  ditl,  what  they  intended  to  do  would 
have  been  a  matter  entitled  to  some  consideration  in  determining 
what  they  did. 

It  was  stated  in  a  passing  remark  made  by  this  court  in  Williams 
V.  Johnson,  208  Mass.  544,  552,  that  in  the  trust  before  the  court 
in  that  case  the  certificate  holders  were  partners  within  the  meaning 
of  that  word  in  St.  1909,  c.  490,  Part  I,  §27.  While  that  trust  pro- 
vided for  meetings  of  the  shareholders  and  in  that  respect  for  some 
association  of  and  among  them,  an  examination  of  the  original  papers 
shows  that  it  was  a  trust  and  not  a  partnership.  This  remark  was  in 
no  way  essential  to  the  decision  in  Williams  v.  Johnson. 

In  the  Boston  Personal  Property  Trust  the  property  is  the  prop- 
erty of  the  trustees,  to  be  managed  for  the  benefit  of  the  certificate 
holders,  but  to  be  managed  by  the  trustees  and  not  by  the  certificate 
holders.  There  is  no  association  of  or  among  the  certificate  holders. 
The  rights  of  the  certificate  holders  are  limited  to  each  receiving  his 
share  of  the  income  of  the  trust  investments  during  the  continuance 
of  the  trust  and  his  share  of  the  corpus  of  the  trust  when  the  trust 
comes  to  an  end.  It  is  in  every  respect  an  investment  trust  and  noth- 
ing more. 

It  follows  (1)  that  the  property  held  by  the  plaintiffs  as  trustees 
of  the  Boston  Personal  Property  Trust  was  not  taxable  as  partner- 
ship property,  and  that  in  the  petition  brought  by  them  against  the 
city  of  Boston  they  are  entitled  to  an  abatement;  and  (2)  that  their 
property  was  taxable  as  property  held  in  trust  the  income  of  which 
was  payable  to  another,  and  the  taxes  assessed  by  the  assessoi-s  of 
the  city  of  Waltham  and  by  the  assessors  of  the  Inhabitants  of  ]\Iil- 
ton  and  of  Brookline  were  properly  assessed ;  and  that  the  petitions 
against  those  municipahties  should  be  dismissed.  It  is 

So  ordered. 


CHAP.  II.]  BANK    OF    TOPEKA    V.  EATON.  45 

BANK  OF  TOPEKA  v.  EATON. 

100  Fed.  Rep.  8.     1900. 

On  demurrer  to  declaration. 

Putnam,  Circuit  Judge.  This  is  the  same  case  which  has  already 
been  before  us  on  a  plea  in  abatement,  as  to  which  we  passed  down 
an  opinion  and  an  interlocutory  judgment  on  June  29,  1899.  95  Fed. 
355.  It  now  comes  before  us  on  demurrer.  The  declaration  is  based 
on  a  note,  as  follows :  — 
"$10,000.  Topeka,  Kansas,  October  24,  1890. 

"Sixty  days  after  date  the  trustee  of  the  Topeka  Land  and  De- 
velopment Company,  as  such  trustee  under  declaration  of  trust 
dated  May  23,  1887,  and  not  otherwise,  promise  to  pay  to  the  order 
of  J.  R.  Mulvane,  president,  ten  thousand  dollars,  at  Bank  of  Topeka, 
Topeka,  Kansas,  with  interest  at  ten  per  cent,  per  annum  after  ma- 
turity until  paid;  also  cost  of  collecting,  including  attorney's  fees, 
if  suit  be  instituted  on  this  note.  Value  received.  Appraisement 
waived.  F.  R.  Cordley,  as  Trustee  as  Aforesaid." 

The  defendants  are  certificate  holders  in  a  joint-stock  association, 
the  main  purpose  of  which  is  dealing  in  lands  in  Kansas.  The  prop- 
erty of  the  association  was  vested  in  three  trustees,  the  survivor  of 
whom  gave  the  note  in  suit.  The  articles  of  association  referred  to 
in  the  note  are  made  a  part  of  the  plaintiff's  declaration,  and  con- 
tain the*"  following  provisions :  — 

"Said  trustees  shall  have  full  power  and  authority,  subject  to  the 
instructions  of  the  shareholders,  as  hereinafter  provided:  (1)  To  pay 
all  taxes  and  assessments  of  every  kind  legally  assessed  upon  said 
property,  and  the  necessary  expenses  of  the  trust,  and  for  that  pur- 
pose to  borrow  money;  and  any  debt  for  money  so  borrowed  shall 
be  and  remain,  until  paid,  a  lien  upon  all  funds  and  moneys  belong- 
ing to  this  trust  then  or  thereafter  in  the  hands  of  the  trustees,  in 
preference  to  the  claim  of  any  shareholders  as  such  upon  such  funds 
and  moneys.  ... 

"The  trustees  shall  have  no  power  to  bind  the  shareholders  per- 
sonally, and  in  every  written  contract  or  undertaking  they  shall 
enter  into  relating  to  this  trust,  or  the  property,  or  any  part  thereof, 
belonging  thereto,  reference  shall  be  made  to  this  declaration  of 
trust,  and  the  person,  firm,  or  corporation  so  contracting  with  the 
trustees  shall  look  only  to  the  funds  and  property  of  the  trust  for 
payment  under  such  contract  or  undertaking,  or  for  the  payment 
of  any  debt,  damage,  judgment,  or  decree,  or  of  any  money  that  may 
become  due  or  payable  in  any  way  by  reason  of  the  failure  on  the 
part  of  the  said  trustees  to  perform  such  contract  or  undertaking,  in 
whole  or  in  part ;  and  neither  the  trustees  nor  the  shareholders,  pres- 
ent or  future,  in  the  company,  shall  be  personally  liable  therefor, 


46  ,  BANK    OF    TOPEKA    V.  EATON.  [cHAP.  II. 

or  for  any  debt  incurred,  or  engagement  or  contract  made,  by  said 
trustees." 

There  is  nothing  further  found  in  the  articles  of  association  or  in 
the  record  with  reference  to  the  incurring  of  liabihties  by  the  trustees 
in  behalf  of  the  association.  The  declaration,  in  addition  to  setting 
out  the  articles  of  association,  states  merely  the  facts  that  the  note 
was  given,  that  the  money  was  advanced  therefor,  and  that  the 
Bank  of  Topeka  received  with  the  note  certain  securities  as  collateral 
for  the  payment  thereof.  There  is  nothing  in  the  declaration  showing 
for  what  purpose  the  money  was  obtained,  or  to  what  it  was  applied. 
While,  therefore,  it  is  not  impossible  that  the  trustees  might  have 
incurred  indebtedness  under  such  circumstances  that  the  law  would 
impose  a  personal  liability  on  the  shareholders,  yet,  under  the  allega- 
tions found  in  the  declaration,  there  are  no  such  circumstances;  and 
the  plaintiff's  case  rests  entirely  upon  the  authority  expressly  given 
the  trustees  to  borrow  money  for  the  purposes  oi  the  trust.  It  not 
only  follows  that  it  was  the  duty  of  the  plaintiff  to  ascertain  for  itself 
what  powers  the  trustees  had  in  the  premises,  but  the  specific  terms 
of  the  note,  in  that  it  contains  the  words,  "as  such  trustee  under 
declaration  of  trust  dated  May  23,  1887,  and  not  otherwise,"  obli- 
gated it,  by  its  implied  agreement  in  accepting  the  note,  to  abide  by 
the  terms  of  the  articles  of  association.  This  expression  in  the  note 
is  so  positive  as  to  leave  no  occasion  for  explanation  in  support  of 
this  proposition,  or  opportunity  for  obviating  its  effect  by  sugges- 
tions made  in  argument  or  drawn  from  decisions  on  supposed  anal- 
ogous cases.  Whether  or  not  the  plaintiff  examined  the  articles  of 
association,  or  knew  their  contents,  is  of  no  consequence,  because 
this  express  provision  required  it  to  do  so,  or  take  the  hazard  of  not 
doing  it. 

Therefore  the  only  question  is  whether  or  not  this  implied  stipula- 
tion of  the  plaintiff,  limiting  its  remedy  to  the  general  assets  of  the 
association  and  the  property  specially  pledged  to  it,  is  contrary  to 
the  rules  of  law.  Of  course,  a  stipulation  in  an  instrument  which 
fundamentally  violates  its  essential  nature  must  sometimes  be  re- 
jected by  the  courts.  For  instance,  if  any  individual  or  partnership 
should  stipulate  in  his  or  its  pecuniary  obligations  that  he  or  it  should 
not  be  personally  liable  thereon,  without  at  the  same  time  mort- 
gaging or  pledging  property,  or  giving  some  other  specific  lien  for 
security,  it  might  be  difficult  for  the  law  to  regard  the  stipulation, 
because,  in  that  event,  as  there  would  be  no  lien  which  the  law  could 
enforce,  the  holder  of  the  obligation  would  be  left  without  remedy, 
unless  he  could  proceed  b}'  judgment  against  the  obligor;  and  the 
result,  if  sustained,  would  be  an  obligation  which  in  law  is  no  obliga- 
tion. The  present  case,  however,  assimilates  itself  to  the  large  class 
of  cases  where,  certain  property  being  pledged  in  some  form  for  the 
security  of  a  debt,  the  parties  have  been  at  liberty  to  stipulate  that 


CHAP.  II.]  BANK  OF  TOPEKA  V.   EATON.  47 

the  owner  of  the  debt  should  look  only  to  the  property  thus  pledged. 
In  the  present  case,  not  only  did  the  Bank  of  Topeka  have  specific 
assets  given  it  for  its  security,  but  the  entire  property  of  the  asso- 
ciation was  held  in  trust,  and  therefore  subject  to  administration 
by  the  chancery  courts,  which  could  apply  it  equitably  and  pro- 
portionally to  the  discharge  of  obligations  incurred  by  the  trustee, 
as  contemplated  by  the  express  direction  of  the  articles  of  associa- 
tion that  the  debtors  of  the  trust  should  look  for  payment  solely  to 
its  property.  Under  these  circumstances  there  is  no  reason  why  we 
should  not  give  full  effect  to  the  agreement  of  the  Bank  of  Topeka, 
arising  from  its  acceptance  of  the  note,  that  it  would  be  bound  by 
the  declaration  of  trust,  including  the  provisions  in  the  articles  ex- 
empting the  shareholders  from  personal  liability  for  the  engagements 
of  the  trustee. 

There  are  some  other  questions  of  importance  in  the  case,  but  our 
conclusions  render  it  unnecessary  to  consider  them. 

Demurrer  sustained;  declaration  adjudged  insufficient;  judgment 
for  defendants,  with  costs. 

Note.  —  A  trustee  is  liable  personally  for  his  acts  as  trustee,  ex- 
cept where  he  contracts,  and  stipulates  in  the  contract  against  per- 
sonal liability.  Roger  Williams  Bank  v.  Groton  Mfg.  Co.,  16  R.I. 
504,  and  cases  there  cited. 

If  a  trustee  has  incurred  liability  while  properly  acting  as  trustee 
he  is  entitled  to  indemnification  from  the  trust  property.  This  is  an 
asset  which  trust  credit  ore  may  reach.  In  re  Raijhould,  [1900]  1  Ch. 
199. 

If  the  trust  property  is  insufficient  for  such  indemnification,  is  he 
entitled,  in  the  absence  of  any  agreement  on  the  matter,  to  indemni- 
fication from  the  beneficiaries  personally?  This  question  was  an- 
swered in  the  affirmative  by  Hardoon  v.  BeliUos,  [1901]  A.C.  118, 
where  the  beneficiaries  were  sui  juris  and  absolutely  entitled  to  the 
beneficial  interest  in  the  property  in  question.  It  is  submitted  that 
the  principle  of  this  case  is  sound,  at  least  when  applied  to  benefi- 
ciaries who  are  sui  juris,  and  absolutely  entitled  to  shares  in  the 
beneficial  interest  of  a  fund  given  to  the  trustees  by  the  beneficiaries, 
or  their  assignore,  and  which  is  being  employed  in  business  by  the 
trustees  for  their  benefit.  This  right  of  indemnification  i^an  asset 
of  the  trustee  which  trust  creditors  may  reach.  See  Poland  v.  Beal, 
192  Mass.  559. 

It  is  to  be  noted  that  in  Cox  v.  Hickman,  8  H.L.C.  268,  and  in 
Wells-Stone  Co.  v.  Grover,  7  N.D.  460,  creditors  of  an  embarrassed 
debtor,  who  consented  to  the  transfer  of  his  business  to  a  trustee  and 
the  further  prosecution  of  the  business  by  him,  were  held  not  liable 
at  law  as  partners  for  the  debts  incurred  by  the  trustee. 

Whether  an  agreement  between  the  trustee  and  the  beneficiaries 


48  ELIOT    V.  FREEMAN.  [CHAP.     II. 

that  the  trustee  should  have  no  right  of  indemnification  against  the 
beneficiaries  personally  would  be  vaUd  as  against  a  stranger  having 
a  valid  claim  in  tort  against  the  trustee,  qucsre. 


ELIOT  V.   FREEMAN. 

220  U.S.  178.    1911. 

Mr.  Justice  Day  delivered  the  opinion  of  the  court. 

These  cases  jd resent  facts  differing  from  those  involved  in  the  con- 
sideration of  the  corporation  tax  cases  just  decided.  Flint  v.  Stone 
Tracy  Co.,  220  U.S.  107. 

In  No.  448  the  question  is  raised  as  to  the  right  to  lay  a  tax  under 
this  statute  upon  a  certain  trust  formed  for  the  purpose  of  purchas- 
ing, improving,  holding  and  selhng  lands  and  buildings  in  Boston., 
known  as  The  Gushing  Real  Estate  Trust.  By  the  terms  of  the  trust 
the  property  was  conveyed  to  certain  trustees,  who  executed  a  trust 
agreement  whereby  the  management  of  the  property  was  vested  in 
the  trustees,  who  had  absolute  control  and  authority  over  the  same, 
with  right  to  sell  for  cash  or  credit,  at  public  or  private  sale,  and  with 
full  power  to  manage  the  property  as  they  deemed  best  for  the  in- 
terest of  the  sharcholdei-s.  The  shareholders  are  to  be  paid  divi- 
dends from  time  to  time  from  the  net  income  or  net  proceeds  of  the 
property,  and  twenty  years  after  the  termination  of  lives  in  being  the 
property  to  be  sold  and  the  proceeds  of  the  sale  to  be  divided  among 
the  parties  interested.  The  trustees  were  to  issue  4,800  shares  to  the 
owners  of  the  property  at  $100  each,  the  ownere  to  receive  a  number 
of  shares  equal  to  the  value  of  the  interest  conveyed  to  the  trustees. 
The  shares  were  transferable  on  the  books  of  the  trustees,  and  on 
surrender  of  the  certificate  and  the  transfer  thereof  in  writing  a  new 
certificate  is  to  issue  to  the  transferee.  No  shareholder  had  any  legal 
title  or  interest  in  the  propert}''  and  no  right  to  call  for  the  partition 
thereof  during  the  continuance  of  the  trust.  The  legal  representa- 
tives of  a  shareholder  are  to  succeed  to  the  interest  of  a  shareholder, 
the  interest  passing  by  operation  of  law.  Provision  is  made  for  the 
termination  of  the  trust  by  an  instrument  or  instruments  in  writing, 
signed  by  not  less  than  three  fourths  of  the  value  of  stock  held  by 
shareholders.  Meetings  of  the  shareholders  are  held  at  their  discre- 
tion, or  whenever  requested  in  writing  by  five  shareholders,  or  by 
shareholders  owning  not  less  than  one  tenth  of  the  shares  in  value. 

The  trust  has  a  building,  leasing  it  to  a  single  tenant.  It  also 
maintains  and  operates  an  office  building  with  elevator  ser\dce, 
janitor  service,  etc. 

Case  No.  496  involves  what  is  known  as  a  Department  Store  Trust. 
It  was  created  by  deed  and  formed  for  the  purpose  of  purchasing  and 


CHAP.  II.]  ELIOT    V.  FREEMAN.  49 

holding  certain  parcels  of  land  in  the  city  of  Boston,  and  erecting  a 
building  thereon  suitable  for  a  department  store.  The  land  and  build- 
ings are  leased  to  one  tenant  for  a  period  of  thirty  years.  The  trust 
had  transferable  certificates  issued  to  shareholders  at  the  par  value 
of  SlOO  each.  The  trustees  conduct  the  affairs  of  the  trust,  manage 
the  property,  and  pay  dividends  when  declared.  The  shareholders 
meet  annually,  and  a  majority  of  them  have  the  power  to  elect  and 
depose  trustees  and  to  alter  and  amend  the  terms  of  the  trust  agree- 
ment. This  trust  also  continues  for  certain  lives  in  being  and  for 
twenty  years  thereafter.  Each  of  ihe  trusts  involved  in  these  cases 
is  in  receipt  of  a  net  income  exceeding  $5000. 

Under  the  terms  of  the  Corporation  Tax  Law,  corporations  and 
joint  stock  associations  must  be  such  as  are  "now  or  hereafter  or- 
ganized under  the  laws  of  the  United  States  or  of  any  State  or  Ter- 
ritory of  the  United  States  or  under  the  acts  of  Congress  apphcable 
to  Alaska  or  the  District  of  Columbia." 

The  pertinent  question  in  this  cormection  is:  Are  these  trusts  or- 
ganized under  the  laws  of  the  State?  As  we  have  construed  the  Cor- 
poration Tax  Law  in  the  previous  cases,  Flint  v.  Stone  Tracy  Co., 
supra,  the  tax  is  imposed  upon  doing  business  in  a  corporate  or 
quasi-corporate  capacity,  that  is,  with  the  faciUty  or  advantage  of 
corporate  organization. 

It  was  the  purpose  of  the  act  to  treat  corporations  and  joint  stock 
companies,  similarly  organized,  in  the  same  way,  and  assess  them 
upon  the  facility  in  doing  business  which  is  substantially  the  same 
in  both  forms  of  organization.  Joint  stock  organizations  are  not 
infrequently  organized  under  the  statute  laws  of  a  State,  deriving 
therefrom,  in  a  large  measure,  the  characteristics  of  a  corporation. 

The  language  of  the  act  "...  now  or  hereafter  organized  under  the 
laws  of  the  United  States,"  etc.,  imports  an  organization  deriving 
power  from  statutory  enactment.  The  statute  does  not  say  under 
the  law  of  the  United  States,  or  a  State,  or  lawful  in  the  United 
States  or  in  any  State,  but  is  made  applicable  to  such  as  are  organ- 
ized under  the  laws  of  the  United  States,  etc.  The  description  of  the 
corporation  or  joint  stock  association  as  one  organized  under  the  laws 
of  a  State  at  once  suggests  that  they  are  such  as  are  the  creation  of 
statutory  law,  from  which  they  derive  their  powers  and  are  quaUfied 
to  carry  on  their  operations. 

A  trust  of  the  character  of  those  here  involved  can  hardly  be  said 
to  be  organized,  within  the  ordinary  meaning  of  that  term;  it  cer- 
tainly is  not  organized  under  statutory  laws  as  corporations  are. 
The  difference  between  joint  stock  associations  at  common  law  and 
those  organized  under  statutes  is  well  recognized  (Cook  on  Corpora- 
tions, §505) :  —  ' 

"There  is  an  essential  difference  between  a  joint  stock  company 
as  it  exists  at  common  law  and  a  joint  stock  company  having  exten- 


50  ELIOT    V.  FREEMAN.  [ciIAP.  II. 

sive  statutory  powers  conferred  upon  it  by  the  State  within  which  it 
is  organized.  The  latter  kind  of  joint  stock  company  is  found  in  Eng- 
land and  in  the  State  of  New  York.  To  such  an  extent  have  these 
statutory  powers  been  conferred  on  joint  stock  companies  that  the 
only  substantial  difference  between  them  and  corporations  is  that 
the  members  are  not  exempt  from  liability  as  partners  for  the  debts 
of  the  company." 

The  two  cases  now  under  consideration  embrace  trusts  which  do 
not  derive  any  benefit  from  and  are  not  organized  under  the  statu- 
tory laws  of  Massachusetts.  Joint  stock  companies  of  the  statu- 
tory character  are  not  known  to  the  laws  of  that  Commonwealth. 
Richer  v.  American  L.  &  T.  Co.,  140  Massachusetts,  346.  These 
trusts  do  not  have  perpetual  succession,  but  end  with  lives  in  being 
and  twenty  years  thereafter. 

Entertaining  the  view  that  it  was  the  intention  of  Congress  to 
embrace  within  the  corporation  tax  statute  only  such  corporations 
and  joint  stock  associations  as  are  organized  under  some  statute,  or 
derive  from  that  source  some  quality  or  benefit  not  existing  at  the 
common  law,  we  are  of  opinion  that  the  real  estate  trusts  involved  in 
these  two  cases  are  not  within  the  terms  of  the  act.  In  that  view  the 
decrees  in  both  cases  will  be  reversed  and  the  same  remanded  to  the 
Circuit  Court  of  the  United  States  for  the  District  of  Massachusetts 
with  directions  to  overrule  the  demurrers  and  for  further  proceed- 
ings consistent  with  this  opinion. 

Reversed. 


CHAP.  II.]      LIVERPOOL    INSURANCE    CO.  V.  MASSACHUSETTS.  51 

B.  Where  there  is  some  Legislative  Enactment. 


LIVERPOOL  INSURANCE  CO.   v.   MASSACHUSETTS. 

10  WaU.  (U.S.)  566.     1870. 

Error  to  the  Supreme  Judicial  Court  of  Massachusetts;  the  case 
being  tliis :  — 

A  statute  of  the  State  just  named  imposes  upon  "each  fire,  ma- 
rine, and  fire  and  marine  insurance  company,  incorporated  or  as- 
sociated under  the  laws  of  any  government  or  State  other  than  one 
of  the  United  States,  a  tax  of  4  per  cent,  upon  all  premiums  charged 
or  received  on  contracts  made  in  this  commonwealth  for  insurance  of 
property."  The  same  statute  imposes  a  tax  of  but  2  per  cent,  upon 
such  premiums  when  the  company  is  incorporated  under  the  laws 
of  any  one  of  the  United  States  other  than  Massachusetts;  upon 
which  premiums,  where  the  company  is  incorporated  by  itself,  it 
imposes  but  1  per  cent. ;  while  no  tax  is  imposed  by  the  laws  of  the 
State  upon  the  business  of  insurances  transacted  by  any  natural 
persons  citizens  of  the  same. 

The  company  had  been  originally  formed,  in  May,  1836,  in  Liver- 
pool, by  a  "deed  of  settlement." 

This  instrument,  as  far  as  it  could  be  done  without  the  aid  of 
Parliament,  established  a  company  under  the  name  of  "The  Liver- 
pool Life  and  Fire  Insurance  Company,"  with  a  capital  of  £2,000,- 
000  sterling,  which  was  divided  into  100,000  shares  of  £20  each, 
and  declared  its  purpose  to  be  making  insurance  on  life  and  against 
fire.  These  shares  could  be  sold  and  transferred,  and  executors  and 
administrators  represented  them  in  the  company  on  the  death  of 
the  owner.  If,  by  the  laws  of  the  association,  a  share  became  for- 
feited, the  owner  was  released  from  all  further  liability  to  the  com- 
pany. The  business  of  the  company  was  to  be  conducted  by  a  board 
of  directors  exclusivehj,  and  they  could  make  by-laws  and  change  and 
modify  them.  There  was  a  covenant  that  suits  might  be  brought  by 
or  against  the  company  in  the  names  of  one  or  more  directors,  which 
should  bind  the  stockholders,  and  that  no  stockholder  would  plead 
in  abatement  the  nonjoinder  of  the  others;  and  it  was  further  cove- 
nanted that  a  judgment  so  obtained  against  a  director  might  be 
made  out  of  the  property  of  any  of  the  stockholders.  Numerous 
other  provisions  were  found  in  the  original  articles,  which  consisted 
of  over  a  hundred  sections,  but  only  those  are  referred  to  here  which 
bear  on  the  question  which  the  court  had  before  it.  There  were  also 
three  subsequent  deeds  of  settlement,  and  three  acts  of  Parliament 
were  passed  to  give  efficiency  to  the  purposes  of  the  association. 


52  LIVERPOOL    INSUIL'VNCE    CO.  V.  MASSACHUSETTS,       [cHAP.  II. 

The  first  of  these  acts  provided  that  the  association  might  sue  and 
be  sued  in  the  name  of  the  chairman  or  deputy  chairman  of  the 
board  of  directors;  that  the  stockholders  might  sue  the  company  as 
plaintiffs,  or  be  sued  by  it  as  defendants.  It  regulated  the  manner  in 
which  the  shareholders  might  he  made  individually  liable  for  the  debts 
of  the  associatio)i;  and  it  declared  that  the  act  should  not  be  construed 
to  incorporate  the  company  or  relieve  its  members  from  their  individual 
liability,  except  as  pro\dded  in  the  act.^ 

The  second  act  of  Parliament  changed  the  name  of  the  company 
to  that  which  it  now  bears,  and  authorized  it  to  make  contracts  by 
the  new  name,  and  it  also  contained  a  provision  that  the  act  should 
not  make  the  company  a  corporation;  and  there  was  a  third  act  which 
authorized  amalgamation  with  another  company,  and  which  again 
provides  against  its  being  construed  into  an  act  of  incorporation  or  a 
limited  liability  partnership. 

The  Supreme  Judicial  Court  of  Massachusetts  gave  a  decree 
against  the  company,  and  enjoined  it  from  the  further  prosecution 
of  its  business  till  the  taxes  founc^  to  be  due  were  paid. 

Mr.  Justice  Miller  dehvered  the  opinion  of  the  court. 

The  institution  now  known  as  the  Liverpool  and  London  Life  and 
Fire  Insurance  Company,  doing  an  immense  business  in  England 
and  in  this  country,  was  first  organized  at  Liverpool  by  what  is  there 
called  a  deed  of  settlement,  and  would  here  be  called  articles  of  as- 
sociation. 

It  vrill  be  seen  by  reference  to  the  powers  of  the  association,  as 
organized  under  the  deed  of  settlement,  legalized  and  enlarged  by  the 
acts  of  Parliament,  that  it  possesses  many,  if  not  all,  the  attributes 
generally  found  in  corporations  for  pecuniarj'  profit  which  are  deemed 
essential  to  their  corporate  character. 

^  Local  &  Personal  Acts,  6  &  7  William  IV,  cxrx.  This  act  recited  that  whereas 
several  persons  had  formed  themselves  into  a  company  or  partnership  by  the  name, 
etc.,  and  whereas  difficulties  might  arise  in  recovering  the  debts  due  to  the  company, 
etc.,  "since  by  law  all  the  members  for  the  time  being  of  the  said  company  must  be 
named  in  every  action  or  suit";  and  it  was  enacted  that  all  proceedings  at  law  or  in 
equity  "to  be  commenced,  instituted,  or  carried  on  by  or  on  behalf  of  the  said  com- 
panj%  or  wherein  the  said  company  is  or  shall  be  concerned  or  interested,  against  any 
person  or  persons,  body  or  bodies  politic  or  corporate,  whether  such  person  or  persons, 
body  or  bodies  politic  or  corporate,  is  or  are  or  shall  then  be  a  member  or  members, 
proprietor  or  proprietors  of  or  in  the  said  company,  or  not,  shall  and  lawfully  may  be 
commenced,  instituted,  presented,  and  prosecuted  or  carried  on  in  the  name  of  the 
person  who  shall  be  the  chairman  of  the  said  company  ...  as  the  nominal  plaintiff  or 
petitioner  for  and  on  behalf  of  the  said  company;  and  all  actions,  suits,  and  proceed- 
ings in  law  or  in  equity  to  be  commenced  or  instituted  against  the  said  company  by 
any  person  or  persons,  body  or  bodies  politic  or  corporate,  whether  such  person  or 
persons,  body  or  bodies  politic  or  corporate,  is  or  are  or  shall  then  be  a  member  or 
members,  proprietor  or  proprietors  of  or  in  the  said  company,  or  not,  shall  be  com- 
menced, instituted,  and  prosecuted  against  the  said  chairman.  ..."  And  it  was 
further  pro^■^ded  that  every  judgment  against  the  chairman  should  "have  the  like 
effect  and  operation  upon  and  against  the  property  and  funds  of  the  said  company, 
and  upon  and  against  the  persons  and  property  of  every  proprietor  thereof,  as  if  all 
the  proprietors  of  such  company  were  parties  before  the  court  to  and  in  such  action, 
suit  or  proceeding.'' 


CHAP.  II.]       LIVERPOOL    INSURANCE    CO.  V.  MASSACHUSETTS.  53 

1.  It  has  a  distinctive  and  artificial  name  by  which  it  can  make 
contracts. 

2.  It  has  a  statutory  provision  by  which  it  can  sue  and  be  sued  in 
the  name  of  one  of  its  officers  as  the  representative  of  the  whole  body, 
which  is  bound  by  the  judgment  rendered  in  such  suit. 

3.  It  has  provision  for  perpetual  succession  by  the  transfer  and 
transmission  of  the  shares  of  its  capital  stock,  whereby  new  members 
are  introduced  in  place  of  those  who  die  or  sell  out. 

4.  Its  existence  as  an  entity  apart  from  the  shareholders  is  recog- 
nized by  the  act  of  Parliament  which  enables  it  to  sue  its  shareholders 
and  be  sued  by  them. 

The  subject  of  the  powers,  duties,  rights,  and  HabiUties  of  corpora- 
tions, their  essential  nature  and  character,  and  their  relation  to  the 
business  transactions  of  the  communitj^,  have  undergone  a  change  in 
this  country  within  the  last  half  century,  the  importance  of  which 
can  hardly  be  overestimated. 

They  have  entered  so  extensively  into  the  business  of  the  country, 
the  most  important  part  of  which  is  carried  on  bj''  them,  as  banking 
companies,  railroad  companies,  express  companies,  telegraph  com- 
panies, insurance  companies,  etc.,  and  the  demand  for  the  use  of 
corporate  powers  in  combining  the  capital  and  the  energy  required 
to  conduct  these  large  operations  is  so  imperative,  that  both  by 
statute,  and  by  the  tendency  of  the  courts  to  meet  the  requirements 
of  these  pubUc  necessities,  the  law  of  corporations  has  been  so  modi- 
fied, hberalized,  and  enlarged,  as  to  constitute  a  branch  of  jurispru- 
dence with  a  code  of  its  own,  due  mainly  to  veiy  recent  times.  To 
attempt,  therefore,  to  define  a  corporation,  or  hmit  its  powers  by  the 
rules  which  prevailed  when  they  were  rarely  created  for  any  other 
than  municipal  purposes,  and  generally  by  royal  charter,  is  impos- 
sible in  this  country  and  at  this  time. 

Most  of  the  States  of  the  Union  have  general  laws  by  which  per- 
sons associating  themselves  together,  as  the  shareholdei-s  in  this 
company  have  done,  become  a  corporation. 

The  banking  business  of  the  States  of  the  Union  is  now  conducted 
chiefly  by  corporations  organized  under  a  general  law  of  Congress, 
and  it  is  believed  that  in  all  the  States  the  articles  of  association  of 
this  company  would,  if  adopted  with  the  usual  formalities,  constitute 
it  a  corporation  under  their  general  laws,  or  it  would  become  so  by 
such  legislative  ratification  as  is  given  by  the  acts  of  Parliament  we 
have  mentioned. 

To  this  view  it  is  objected  that  the  association  is  nothing  but  a 
partnership,  because  its  members  are  liable  individually  for  the 
debts  of  the  company.  But  however  the  law  on  this  subject  may  be 
held  in  England,  it  is  quite  certain  that  the  principle  of  personal 
liability  of  the  shareholders  attaches  to  a  veiy  large  proportion  of 
the  corporations  of  this  country,  and  it  is  a  principle  which  has  warm 


54  LIVERPOOL   INSURANCE    CO.  V.  MASSACHUSETTS.       [CHAP.  II. 

advocates  for  its  universal  application  when  the  organization  is  for 
pecuniary  gain. 

So  also  it  is  said  that  the  fact  that  there  is  no  provision  either  in 
the  deed  of  settlement  or  the  act  of  Parliament  for  the  company  suing 
or  being  sued  in  its  artificial  name  forbids  the  corporate  idea.  But 
we  see  no  real  distinction  in  this  respect  between  an  act  of  Parliament, 
which  authorized  suits  in  the  name  of  the  Liverpool  and  London 
Fire  and  Life  Insurance  Company,  and  that  which  authorized  suit 
against  that  company  in  the  name  of  its  principal  officer.  If  it  can 
contract  in  the  artificial  name  and  sue  and  be  sued  in  the  name  of  its 
officers  on  those  contracts,  it  is  in  effect  the  same,  for  process  would 
have  to  be  served  on  some  such  officer  even  if  the  suit  were  in  the 
artificial  name. 

It  is  also  urged  that  the  several  acts  of  Parliament  we  have  men- 
tioned expressly  declare  that  they  shall  not  be  held  to  constitute  the 
body  a  corporation. 

But  whatever  may  be  the  effect  of  such  a  declaration  in  the  courts 
of  that  country,  it  cannot  alter  the  essential  nature  of  a  corporation 
or  prevent  the  courts  of  another  jurisdiction  from  inquiring  into  its 
true  character,  whenever  that  may  come  in  issue.  It  appears  to  have 
been  the  poUcy  of  the  English  law  to  attach  certain  consequences  to 
incorporated  bodies,  which  rendered  it  desirable  that  such  associa- 
tions as  these  should  not  become  technically  corporations.  Among 
these,  it  would  seem  from  the  provisions  of  these  acts,  is  the  exemp- 
tion from  individual  hability  of  the  shareholder  for  the  contracts  of 
the  corporation.  Such  local  policy  can  have  no  place  here  in  deter- 
mining whether  an  association,  whose  powers  are  ascertained  and 
its  privileges  conferred  by  law,  is  an  incorporated  body. 

The  question  before  us  is  whether  an  association,  such  as  the  one 
we  are  considering,  in  attempting  to  carry  on  its  business  in  a  man- 
ner which  requires  corporate  powers  under  legislative  sanction,  can 
claim,  in  a  jurisdiction  foreign  to  the  one  which  gave  those  powers, 
that  it  is  only  a  partnership  of  indi\'iduals. 

We  have  no  hesitation  in  holding  that,  as  the  law  of  corporations 
is  understood  in  this  country,  the  association  is  a  corporation,  and 
that  the  law  of  Massachusetts,  which  only  permits  it  to  exercise  its 
corporate  function  in  that  State  on  the  condition  of  payment  of  a 
specific  tax,  is  no  violation  of  the  Federal  Constitution  or  of  any 
treaty  protected  by  said  Constitution. 

Mr.  Justice  Bradley  :  — 

Whilst  I  agree  in  the  result  which  the  court  has  reached,  I  differ 
from  it  on  the  question  whether  the  company  is  a  corporation.  I 
think  it  is  one  of  those  special  partnerships  which  are  called  joint- 
stock  companies,  well  known  in  England  for  nearly  a  century,  and 
cannot  maintain  an  action  or  be  sued  as  a  corporation  in  this  coun- 
try without  legislative  aid.  But  as  it  is  a  company  associated  under 


CHAP.  II.]  THOMAS    V.  DAKIN.  55 

the  laws  of  a  foreign  country,  it  comes  within  the  scope  of  the  Mas- 
sachusetts statute,  and  cannot  claim  exemption  from  its  operation 
for  the  causes  alleged  in  that  behalf. 

Judgment  affirmed. 


THOMAS  V.   DAKIN. 

22  Wendell  (N.Y.)  9.     1839. 

By  Chief  Justice  Nelson.  This  is  an  action  brought  by  the 
plaintiff,  as  president  of  the  Bank  of  Central  New  York,  an  associa- 
tion formed  under  what  is  familiarly  known  as  the  General  Banldng 
Law,  passed  April  18,  1838,  to  recover  several  demands  due  the  in- 
stitution. 

The  defendant  has  demurred  to  the  declaration,  and  urges  the 
unconstitutionality  of  the  law  by  way  of  defence;  and  it  is  insisted, 
in  his  behalf:  1.  That  the  associations  formed  under  this  law  are 
corporations;  and  2.  That  a  general  law  authorizing  the  creation  of 
these  bodies,  is  inconsistent  with  the  ninth  section  of  the  seventh 
article  of  the  constitution.  On  the  part  of  the  plaintiffs,  it  is  urged  in 
reply:  1.  That  the  associations  are  not  corporations;  2.  That  if  they 
be,  the  act  authorizing  them  may  be  passed  by  a  majority  bill;  and 
3.  If  within  the  ninth  section,  still  the  law  may  be  passed  by  two- 
thirds  of  the  members  elected. 

Ai'e  these  associations  corporations?  In  order  to  determine  this 
question,  we  must  first  ascertain  the  properties  essential  to  constitute 
a  corporate  body,  and  compare  them  with  those  conferred  upon  the 
associations;  for  if  they  exist  in  common,  or  substantially  correspond, 
the  answer  will  be  in  the  affirmative.  A  corporate  body  is  known  to 
the  law  by  the  powers  and  faculties  bestowed  upon  it,  expressly  or 
impliedly,  by  the  charter;  the  use  of  the  term  corporation  in  its  crea- 
tion is  of  itself  unimportant,  except  as  it  will  imply  the  possession  of 
these.  They  may  be  expressly  conferred,  and  then  they  denote  this 
legal  being  as  unerringly  as  if  created  in  general  terms.  It  has  been 
well  said  by  learned  expounders,  that  a  corporation  aggregate  is  an 
artificial  body  of  men,  composed  of  divers  individuals,  the  ligaments 
of  which  body  are  the  franchises  and  liberties  bestowed  upon  it,  which 
bind  and  unite  all  into  one,  and  in  which  consists  the  whole  frame 
and  essence  of  the  corporation.  The  ''franchises  and  liberties,"  or,  in 
more  modern  language,  and  as  more  strictly  applicable  to  private 
corporations,  the  powers  and  faculties,  which  are  usually  specified  as 
creating  corporate  existence,  are:  1.  The  capacity  of  perpetual  suc- 
cession; 2.  The  power  to  sue  and  be  sued,  and  to  grant  and  receive 
in  its  corporate  name;  3.  To  purchase  and  hold  real  and  personal 
estate;  4.  To  have  a  common  seal;  and  5.  To  make  by-laws.  These 
indicia  were  given  by  judges  and  elementary  writers  at  a  very  early 


56  THOMAS    V.  DAKIN.  [CHAP.  II. 

day:  since  which  time  the  institutions  have  greatly  multiplied,  their 
practical  operation  and  use  have  been  thoroughly  tested,  and  their 
peculiar  and  essential  properties  much  better  understood.  Any  one 
comprehending  the  scope  and  puipose  of  them,  at  this  day,  will  not 
fail  to  perceive  that  some  of  the  powers  above  specified  are  of  trifling 
importance,  while  others  are  wholly  unessential.  For  instance,  the 
power  to  purchase  and  hold  real  estate  is  no  otherwise  essential  than 
to  afford  a  place  of  business;  and  the  right  to  use  a  common  seal,  or  to 
make  by-laws,  may  be  dispensed  with  altogether.  For  as  to  the  one, 
it  is  now  well  settled  that  corporations  may  contract  by  resolution, 
or  through  agents,  without  seal ;  and  as  to  the  other,  the  power  is  un- 
necessary, in  all  cases  where  the  charter  sufficiently  provides  for  the 
government  of  the  body.  The  distinguishing  feature,  far  above  all 
others,  is  the  capacity  conferred,  by  which  a  perpetual  succession  of 
different  persons  shall  be  regarded  in  the  law  as  one  and  the  same  body, 
and  may  at  all  times  act  in  fulfdlment  of  the  objects  of  the  association  as 
a  single  individual.  In  this  way,  a  legal  existence,  a  body  corporate, 
an  artificial  being,  is  constituted;  the  creation  of  which  enables  any 
number  of  persons  to  be  concerned  in  accomplishing  a  particular 
object,  as  one  man.  While  the  aggregate  means  and  influence  of  all 
are  wielded  in  effecting  it,  the  operation  is  conducted  with  the  sim- 
plicity and  individuality  of  a  natural  person.  In  this  consists  the 
essence  and  great  value  of  these  institutions.  Hence  it  is  apparent 
that  the  only  properties  that  can  be  regarded  strictly  as  essential, 
are  those  which  are  indispensable  to  mould  the  different  persons  into 
tliis  artificial  being,  and  thereby  enable  it  to  act  in  the  way  above 
stated.  When  once  constituted,  this  legal  being  created,  the  powers 
and  faculties  that  may  be  conferred  are  various  —  limited  or  en- 
larged, at  the  discretion  of  the  legislature,  and  will  depend  upon  the 
nature  and  object  of  the  institution,  which  is  as  competent  as  a  nat- 
ural person  to  receive  and  enjoy  them.  We  may,  in  short,  conclude 
by  saying,  with  the  most  approved  authorities  at  this  day,  that  the 
essence  of  a  corporation  consists  in  a  capacity:  1.  To  have  perpetual 
succession  under  a  special  name,  and  in  an  artificial  form;  2.  To  take 
and  grant  property,  contract  obligations,  sue  and  be  sued  by  its 
corporate  name  as  an  individual ;  and  3.  To  receive  and  enjoy  in  com- 
mon, grants  of  privileges  and  immunities. 

We  will  now  endeavor  to  ascertain  with  exactness  the  powers  and 
attributes  conferred  upon  these  associations  by  virtue  of  the  statute. 
The  first  fourteen  sections  (1  to  14)  prescribe  the  duties  of  the  comp- 
troller in  furnishing  notes  for  circulation,  taking  the  required  securi- 
ties, etc.  The  15th  provides,  that  any  number  of  persons  may  asso- 
ciate to  establish  offices  of  discount,  deposit  and  circulation.  The 
16th,  that  they  shall  make  and  file  a  certificate,  specifying:  1.  The 
name  to  be  used  in  the  business;  2.  The  place  where  the  business 
shall  be  carried  on;  ^  The  amount  of  capital  stock,  and  number  of 


CHAP.  II.]  THOMAS    V.  DAKIN.  57 

shares  into  which  divided;  4.  The  names  of  the  shareholders;  5.  The 
duration  of  the  association.  The  18th  confers  upon  the  persons  thus 
associating,  the  most  ample  powers  for  carrying  on  banking  opera- 
tions, together  with  the  right  "to  exercise  such  incidental  powers  as 
shall  be  necessary  to  carry  on  such  business" ;  also  to  choose  a  presi- 
dent, vice  president,  cashier,  and  such  other  officers  and  agents  as 
may  be  necessary.  By  the  21st  and  22d  sections,  contracts,  notes, 
bills,  etc.,  shall  be  signed  by  the  president  and  cashier;  and  all  suits, 
actions,  etc.,  are  to  be  brought  in  the  name  of,  and  also  against  the 
president  for  the  time  being;  and  not  to  abate  by  his  death,  resigna- 
tion or  removal,  but  to  be  continued  in  the  name  of  the  successor. 
24th  section:  The  association  may  purchase  and  hold  real  estate, 
etc.,  the  conveyance  to  be  made  to  the  president,  or  such  other  officer 
as  shall  be  designated,  who  may  sell, and  convey  the  same  free  from 
any  claim  against  shareholders.  19th  section:  The  shares  of  capital 
stock  to  be  deemed  personal  property,  transferable  on  the  books  of 
the  association;  and  every  person  becoming  a  shareholder  by  such 
transfer,  shall  succeed  to  all  the  rights  and  liabilities  of  the  prior 
holder.  23d  section :  No  shareholder  to  be  personally  liable ;  and  the 
association  is  not  to  be  dissolved  by  the  death  or  insanity  of  any 
shareholder. 

1.  Upon  a  perusal  of  these  provisions,  it  will  appear  that  the  as- 
sociation acquires  the  power  to  raise  and  hold  for  common  use  any 
given  amount  of  capital  stock  for  banking  purposes,  which,  when  sub- 
scribed, is  made  personal  property,  and  the  several  shares  transfer- 
able the  same  and  with  like  effect  as  in  case  of  corporate  stock;  to  as- 
sume a  common  name  under  which  to  manage  all  the  affairs  of  the 
association;  to  choose  all  officers  and  agents  that  may  be  necessary 
for  the  purpose,  and  remove  and  appoint  them  at  pleasure.  It  will 
hence  be  seen,  that  although  the  association  may  be  composed  of  a 
number  of  different  persons,  holding  an  interest  in  the  capital  stock, 
its  operations  are  so  arranged  that  they  do  not  appear  in  conducting 
its  affairs;  all  are  so  bound  together,  so  moulded  into  one,  as  to  con- 
stitute but  a  single  body,  represented  by  a  common  name,  or  names 
(the  knot  of  the  combination),  and  in  which  all  the  business  of  the 
institution  is  conducted  by  common  agents.  In  this  way  it  purchases 
and  holds  real  and  personal  property,  contracts  obligations,  dis- 
counts bills,  notes  and  other  evidences  of  debt,  receives  deposits, 
buys  gold  and  silver  bullion,  bills  of  exchange,  etc.,  loans  money, 
sues  and  is  sued,  etc.  It  is  true,  some  portion  of  the  business  is  con- 
ducted in  the  assumed  name,  and  some  in  the  name  of  the  president 
for  the  time  being;  but  this  in  no  manner  changes  the  character  of 
the  body.  A  corporation  may  have  more  thar>  one  name;  it  may 
have  one  in  which  to  contract,  grant,  etc.,  and  another  in  which  to 
sue  and  be  sued;  so  it  may  be  known  by  two  different  names,  and 
may  sue  and  be  sued  in  either;  and  the  name  of  the  president,  his 


58  THOMAS    V.  DAKIN.  [CHAP.  II. 

official  name,  or  any  other,  will  answer  every  purpose.  2  Bacon's 
Abr.  5.  2  Salk.  451.  2  id.  237.  Ld.  Raym.  153,  680.  The  only  ma- 
terial circumstance  is,  a  name,  or  names,  of  some  kind,  in  which  all 
the  affairs  of  the  company  may  be  conducted.  So  much,  and  no  more, 
is  essential  to  give  simplicity  and  effect  to  the  operation.  An  artificial 
being  is  thus  plainly  created,  capable  of  receiving  all  the  ample  pow- 
ers and  privileges  conferred  upon  the  associations,  and  of  managing 
their  diversified  concerns  in  an  individual  capacity.  All  business  is 
to  be  conducted  in  a  common  or  proper  name. 

2.  This  artificial  being  possesses  the  powers  of  perpetual  succes- 
sion. Neither  sale  of  shares,  or  death  of  shareholders  affect  it ;  if  one 
should  sell  his  interest,  or  die,  the  purchaser  or  representative,  by 
operation  of  law,  imipediately  takes  his  place.  §  19.  Nor  can  the 
insanity  of  a  member  work  a  dissolution.  Id.  Officers  and  agents  for 
conducting  the  business  of  the  association  are  secured.  In  case  of 
vacancy,  by  death  or  otherwise,  the  place  may  at  once  be  filled. 
§  18.  For  the  entire  duration,  therefore,  of  the  association,  and  which 
may  be  without  limit,  §  IG,  suh.  5,  the  whole  body  of  shareholders, 
though  perpetually  shifting,  constitute  the  same  uniform,  artificial 
being  which  is  to  be  engaged  through  the  instrumentality  of  officers 
and  agents  in  conducting  the  business  of  the  concern,  and  no  mem- 
ber is  personally  liable.  §  23.  Then,  as  to  the  powers  conferred,  with- 
out again  specially  recurring  to  them,  it  will  be  seen  at  once  that  the 
associations  possess  all  that  are  deemed  essential,  according  to  the 
most  approved  authorities,  to  constitute  a  corporate  body.  They 
have  a  capacity:  1.  To  have  perpetual  succession  under  a  common 
name,  and  in  an  artificial  form;  2.  To  take  and  gi-ant  property,  con- 
tract obligations,  to  sue  and  be  sued  by  its  corporate  name,  in  the 
same  manner  as  an  individual;  3.  To  receive  grants  of  privileges  and 
immunities,  and  to  enjoy  them  in  common.  All  these  are  expressly 
granted,  and  many  more,  besides  the  general  sweeping  clause,  "to 
exercise  such  incidental  powers  as  shall  he  necessary  to  carry  '07i  such 
business^^  (meaning  the  business  of  banking),  under  which  even  the 
seal  and  right  to  make  by-laws  are  clearly  embraced,  if  essential  in 
conducting  the  affairs  of  the  institution. 

[A  majority  of  the  court  w^as  of  opinion  that,  on  the  record,  it 
must  be  taken  that  the  general  banldng  law,  although  providing  for 
the  creation  of  corporations,  had  been  passed  in  conformity  with 
the  provisions  of  the  constitution,  and  judgment  was  given  for  the 
plaintiff.] 


CHAP.  II.]  PEOPLE  V.  COLEMAN.  59 

PEOPLE  V.  COLEMAN. 

) 

133  N.Y.  279.     1892. 

Appeal  from  order  of  the  General  Term  of  the  Supreme  Court,  in 
the  first  judicial  department,  made  February  13, 1891,  which  affirmed 
a  judgment  in  favor  of  plaintiff,  entered  upon  a  decision  of  the  court 
on  trial  at  Special  Term,  vacating  an  assessment. 

This  was  a  proceeding  by  certiorari  to  review  the  action  of  the  com- 
missioners of  taxes  and  assessments  of  the  city  of  New  York,  in  im- 
posing an  assessment  upon  the  capital  stock  of  the  National  Express 
Company,  a  joint-stock  company,  of  which  the  relator  is  treasurer, 
for  the  year  1888. 

Finch,  J.  The  relator  was  taxed  upon  its  capital  on  the  ground 
that  it  had  become  a  corporation  within  the  meaning  of  the  provi- 
sion of  the  Revised  Statutes  which  enacts  that  "all  monied  or  stock 
corporations  deriving  an  income  or  profit  from  their  capital  or  other- 
wise, shall  be  liable  to  taxation  on  their  capital  in  the  manner  here- 
inafter prescribed."  (1  R.S.  title  4,  chap.  13,  part  1.)  The  company 
was  formed  as  a  joint-stock  company  or  association  in  1853  by  a 
written  agreement  of  eight  individuals  with  each  other,  the  whole 
force  and  effect  of  which,  in  constituting  and  creating  the  organiza- 
tion, rested  upon  the  common-law  rights  of  the  individuals  and  their 
power  to  contract  with  each  other.  The  relation  they  assumed  was 
wholly  the  product  of  their  mutual  agreement  and  dependent  in  no 
respect  upon  the  grant  or  authority  of  the  state.  It  was  entered  into 
under  no  statutory  license  or  permission,  neither  accepting  nor 
designed  to  accept  any  franchise  from  the  sovereign,  but  founded 
wholly  upon  the  individual  rights  of  the  associates  to  join  their 
capital  and  enterprise  in  a  relation  similar  to  that  of  a  partnership. 
A  few  years  earlier  the  legislature  had  explicitly  recognized  the  exist- 
ence and  validity  of  such  organizations,  founded  upon  contract  and 
evolved  from  the  common-law  rights  of  the  citizens.  (Laws  of  1849, 
chap.  258.)  That  act  provided  that  any  joint-stock  company  or  as- 
sociation, which  consisted  of  seven  or  more  members,  might  sue  or 
be  sued  in  the  name  of  its  president  or  treasurer,  and  with  the  same 
force  and  effect,  so  far  as  the  joint  property  and  rights  were  concerned, 
as  if  the  suit  should  be  prosecuted  in  the  names  of  the  associates. 
But  the  act  explicitly  disclaimed  any  purpose  of  converting  the  joint- 
stock  associations  recognized  as  existing,  into  corporations  by  a  sec- 
tion prohibiting  any  such  construction.  (§  5.)  In  1851  the  act  was 
amended  in  its  form  and  application,  but  in  no  respect  material  to 
the  present  inquiry.  There  is  no  doubt,  therefore,  that  when  the 
company  was  formed  and  went  into  operation  the  law  recognized  a 
distinction  and  substantial  difference  between  joint-stock  companies 
and  corporations  and  never  confused  one  with  the  other,  and  that 


60  PEOPLE    V.  COLEMAN.  (CIL\P.  II. 

the  existing  statute  which  taxed  the  capital  of  corporations  had  no 
reference  to  or  operation  upon  joint-stock  companies  or  a.ssociations. 

But  two  thinfj;s  have  since  occurretl.  The  legislature,  while  steadily 
preserving  the  distinction  of  names,  has  with  etjual  jici-sistence  con- 
fused the  things  by  obhtcrating  substantial  and  characteristic  marks 
of  difference,  until  it  is  now  claimed  that  the  joint-stock  associations 
have  grown  into  and  become  corporations  by  force  of  the  continued 
bestowal  upon  them  of  corporate  attributes.  It  is  said,  and  very 
probably  correctly  said,  that  the  legislature  may  create  a  corpora- 
tion, without  explicitly  declaring  it  to  be  such,  by  the  bestowal  of  a 
corporate  franchise  or  corporate  attributes,  and  the  cases  of  banking 
associations  are  referred  to  as  instances  of  actual  occurrence.  (Thomas 
V.  Dakin,  22  Wend.  9;  Bank  of  Watertown  v.  Watertmcn,  25  id.  080; 
People  v.  Niagara,  4  Hill,  20.)  It  is  added  that  such  result  may  hap- 
pen even  without  the  legislative  intent,  and  because  the  gift  of  cor- 
porate powers  and  attributes  is  tantamount  to  a  corporate  creation. 
It  is  then  asserted  that  a  series  of  statutes,  beginning  with  the  act 
of  1849,  has  ended  in  the  gift  to  joint-stock  associations  of  every 
essential  attribute  possessed  by  and  characteristic  of  corporations 
(Laws  of  1853,  chap.  153,  Laws  of  1854,  chap.  245,  Laws  of  1807, 
chap.  289);  that  the  lines  of  distinction  between  the  two,  however 
far  apart  in  the  beginning,  have  steadily  converged  until  they  have 
melted  into  each  other  and  become  identical;  that  eveiy  distinguish- 
ing mark  and  characteristic  has  been  obliterated,  and  no  reason  re- 
mains why  joint-stock  associations  should  not  be  in  all  respects 
treated  and  regarded  as  corporations. 

Some  of  this  contention  is  true.  The  case  of  People  ex  rel.  Piatt  v. 
Wemple,  117  N.Y.  130,  shows  very  forcil:)ly  how  almost  the  full 
measure  of  corporate  attributes  has,  by  legislative  enactment,  been 
bestowed  upon  joint-stock  associations,  until  the  difference,  if  there 
be  one,  is  obscure,  elusive  and  difficult  to  see  and  describe.  And  yet 
the  truth  remains  that  all  along  the  line  of  legislation  the  distinctive 
names  have  been  retained  as  indicative  and  representative  of  a  dif- 
ference in  the  organizations  themselves.  As  recently  as  the  acts  of 
1880  and  1881,  which  formed  the  subject  of  consideration  in  the 
Wemple  case,  the  legislature,  dealing  with  the  subject  of  taxation 
and  desiring  to  tax  business  and  franchises,  imposed  the  Uability 
upon  "every  corporation,  joint-stock  company  or  association  what- 
ever now  or  hereafter  incorporated  or  organized  under  any  law  of  this 
state."  It  is  significant  that  the  words  "or  organized"  were  in- 
serted by  amendment,  and  evidently  for  the  understood  reason  that 
joint-stock  companies  could  not  properly  be  said  to  be  "incorjio- 
rated,"  but  might  be  correctly  described  as  "organized"  under  the 
laws  of  the  state.  This  persistent  distinction  in  the  language  of  the 
statutes  I  should  not  be  inclined  to  disregard  or  treat  as  of  no  practi- 
cal consequence,  when  seeking  to  arrive  at  the  true  intent  and  proper 


CHAP.  II.]  PEOPLE  V.   COLEMAN.  61 

construction  of  the  statute,  even  if  I  were  unable  to  discover  any 
practical  or  substantial  difference  between  the  two  classes  of  organi- 
zations upon  which  it  could  rest,  or  out  of  which  it  grew,  for  the 
distinction  so  sedulously  and  persistently  observed  would  strongly 
indicate  the  legislative  intent,  and  so  the  correct  construction. 

But  I  think  there  was  an  original  and  inherent  difference  between 
the  corporate  and  joint-stock  companies  known  to  our  law  which 
legislation  has  somewhat  obscured,  but  has  not  destroyed,  and  that 
difference  is  the  one  pointed  out  by  the  learned  counsel  for  the  re- 
spondent, and  which  impresses  me  as  logical  and  well  supported  by 
authority.  It  is  that  the  creation  of  the  corporation  merges  in  the 
artificial  body  and  drowns  in  it  the  individual  rights  and  liabilities 
of  the  members,  while  the  organization  of  a  joint-stock  company 
leaves  the  individual  rights  and  liabilities  unimpaired  and  in  full 
force.  The  idea  was  expressed  in  Supervisors  of  Niagara  v.  People, 
7  Hill,  512,  and  in  Gifford  v.  Livingston,  2  Den.  380,  by  the  state- 
ment that  the  corporators  lost  their  individuality  and  merged  their 
individual  characters  into  one  artificial  existence;  and  upon  these 
authorities  a  corporation  is  defined  on  behalf  of  the  respondents  to 
be  "an  artificial  person  created  by  the  sovereign  from  natural  per- 
sons and  in  which  artificial  person  the  natural  persons  of  which  it  is 
composed  become  merged  and  non-existent."  I  am  conscious  that 
legal  definitions  invite  and  provoke  criticism,  because  the  instances 
are  rare  in  which  they  prove  to  be  perfectly  accurate;  and  yet  this 
one  offered  to  us  may  be  accepted  if  it  successfully  bears  some  suf- 
ficient test.  In  putting  it  on  trial  we  may  take  the  nature  of  the 
individual  liability  of  the  corporators  on  the  one  hand  and  of  the 
associates  on  the  other,  for  the  debts  contracted  by  their  respective 
organizations,  as  a  sufficient  test  of  the  difference  between  them,  and 
contrast  their  nature  and  character. 

It  is  an  essential  and  inherent  characteristic  of  a  corporation  that 
it  alone  is  primarily  liable  for  its  debts,  because  it  alone  contracts 
them,  except  as  that  natural  and  necessary  consequence  of  its  crea- 
tion is  modified  in  the  act  of  its  creation  by  some  explicit  command 
of  the  statute  which  either  imposes  an  express  liability  upon  the 
corporators  in  the  nature  of  a  penalty,  or  affirmatively  retains  and 
preserves  what  would  have  been  the  common-law  hability  of  the 
members  from  the  destruction  involved  in  the  corporate  creation. 
In  other  words,  the  individual  liability  of  the  members,  as  it  would 
have  existed  at  common  law,  is  lost  by  their  creation  into  a  corpora- 
tion, and  exists  thereafter  only  by  force  of  the  statute,  upon  some 
new  and  modifying  conditions,  to  some  partial  or  changed  extent, 
and  so  far  preventing,  by  the  intervention  of  an  express  command, 
the  total  destruction  of  individual  liabilities  which  otherwise  would 
flow  from  the  inherent  effect  of  the  corporate  creation.  The  penalties 
sometimes  imposed  are  of  course  new  statutory  liabilities  which  never 


62  PEOPLE    V.  COLEMAN.  [CHAP.   II. 

at  common  law  rested  upon  the  individual  members.  The  retained 
liability  occasionally  established  is  in  the  nature  and  a  parcel  of  such 
original  liability,  as  we  had  occasion  to  show  in  Rogers  v.  Decker, 
131  N.Y.  490,  but  is  retained  by  force  of  the  express  command  f)f  the 
statute  and  in  that  manner  saved  from  the  destruction  which  other- 
wise would  follow  the  simple  creation  of  the  corporation.  Ordinarily, 
these  individual  liabilities  exist  upon  other  than  common-law  con- 
ditions, and  make  the  corporators  rather  sureties  or  guarantors  of 
the  corporation  than  original  delators,  since  in  general  their  liability 
arises  after  the  usual  remedies  against  the  corporation  have  been  ex- 
hausted. But  where  that  is  not  so,  the  invariable  truth  is  that  the 
creation  of  the  corporation  necessarily  destroys  the  common-law 
liability  of  the  individual  members  for  its  debts,  and  requires  at  the 
hands  of  the  creating  power  an  affirmative  imposition  of  new  per- 
sonal liabilities  or  a  specific  retention  of  old  ones  from  the  destruc- 
tion which  would  otherwise  follow.  Exactly  the  opposite  is  true  of 
joint-stock  companies.  Their  formation  destroys  no  part  or  portion 
of  their  common-law  liability  for  the  debts  contracted.  Those  debts 
are  their  debts  for  which  they  must  answer.  Permission  to  sue  their 
president  or  treasurer  is  only  a  convenient  mode  of  enforcing  that 
liability,  but  in  no  manner  creates  or  saves  it.  The  statute  of  1853 
did  interfere  with  it.  That  act  required  in  the  first  instance  a  suit 
against  the  president  or  treasurer,  and  so  a  preliminary  exhaustion 
of  the  joint  property.  But  that  act  was  modal,  and  determined  the 
procedure.  It  suspended  the  common-law  right,  but  recognized  its 
existence.  We  so  held  in  Witherhead  v.  Allen,  4  Abb.  Ct.  App.  Dec. 
628,  and  at  the  same  time  said  that  the  associations  were  not  cor- 
porations but  mere  partnership  concerns.  Even  that  mode  of  pro- 
cedure has  been  modified  by  the  Code  (§§  1922,  1923),  so  that  the 
creditor  at  his  option  may  sue  the  associates  without  bringing  his 
action  against  the  president  or  treasurer.  These  last  and  quite  recent 
enactments  show  that  the  legislative  intent  is  still  to  preserve  and 
not  destroy  the  original  difference  between  the  two  classes  of  or- 
ganizations; to  maintain  in  full  force  the  common-law  liability  of 
associates  and  not  to  substitute  for  it  that  of  corporators;  and,  pre- 
serving in  continued  operation  that  normal  and  distinctive  difference, 
to  evince  a  plain  purpose  not  to  merge  the  two  organizations  in  one 
or  destroy  the  boundaries  which  separate  them.  That  intent,  once 
clearly  ascertained,  determines  the  construction  to  be  adopted,  and 
may  be  the  only  reliable  test  in  view  of  the  power  of  the  state  to 
clothe  one  organization  with  all  the  attributes  of  the  other.  The  drift 
of  legislation  has  been  to  lessen  and  obscure  the  original  and  char- 
acteristic difference.  On  the  one  hand  corporations  have  been  created 
with  positive  pro\dsions  retaining  more  or  less  the  individual  lia- 
bility of  the  members,  and  on  the  other  the  joint-stock  companies 
have  been  clothed  with  most  of  the  corporate  attributes,  but  enough 


CHAP.  II.]  HIBBS    V.  BROWN.  63 

of  the  original  difference  remains  to  show  that  our  legislation  not 
only  carefully  preserves  the  distinction  of  names,  but  sufficient,  also, 
of  the  original  difference  of  character  and  quality  to  disclose  a  clear 
intent  not  to  merge  the  two. 

We  may  thus  see  upon  what  the  legislative  intent  to  preserve  them 
as  separate  and  distinct  is  founded  and 'what  distinguishing  char- 
acteristics remain.  The  formation  of  the  one  involves  the  merging 
and  destruction  of  the  common-law  liability  of  the  members  for  the 
debts,  and  requires  the  substitution  of  a  new  or  retention  of  the  old 
liability  by  an  affirmative  enactment  which  avoids  the  inherent  effect 
of  the  corporate  creation;  in  the  other,  the  common-law  liability  re- 
mains unchanged  and  unimpaired  and  needing  no  statutory  inter- 
vention to  preserve  or  restore  it;  the  debt  of  the  corporation  is  its 
debt  and  not  that  of  its  members,  the  debt  of  the  joint-stock  com- 
pany is  the  debt  of  the  associates  however  enforced ;  the  creation  of 
the  corporation  merges  and  drowns  the  liability  of  its  corporators, 
the  creation  of  the  stock  company  leaves  unharmed  and  unchanged 
the  liability  of  the  associates;  the  one  derives  its  existence  from  the 
contract  of  individuals,  the  other  from  the  sovereignty  of  the  state. 
The  two  are  alike  but  not  the  same.  More  or  less,  they  crowd  upon 
and  overlap  each  other,  but  without  losing  their  identity,  and  so, 
while  we  cannot  say  that  the  joint-stock  company  is  a  corporation, 
we  can  say  as  we  did  say  in  Van  Aernam  v.  Bleistein  (102  N.Y.  360), 
that  a  joint-stock  company  is  a  partnership  with  some  of  the  powers 
of  a  corporation.  Beyond  that  we  do  not  think  it  is  our  duty  to  go. 

The  order  should  be  affirmed,  with  costs.  All  concur. 

Order  affirmed. 


HIBBS  V.   BRO^VN. 

190  N.Y.  167.     1907. 

The  appellant  owned  a  certain  bond,  with  coupons  attached,  of  the 
Adams  Express  Company,  which  was  stolen  from  him  and  sold  to 
the  respondents.  The  respondents  claimed  that  they  were  protected, 
because  they  were  bona  fide  purchasers  of  negotiable  instruments. 
The  appellant  denied  that  the  bond  was  negotiable. 

The  Adams  Express  Company*  was  an  unincorporated  voluntary 
association  or  joint-stock  association  organized  under  the  laws  of 
New  York  for  the  purpose  of  carrying  on  an  express  business,  and 
having  a  president  and  other  officers,  and  issuing  certificates  of 
stock  which  represented  and  whereby  were  transferred  the  rights  of 
the  respective  shareholders. 

The  bond  was  issued  by  the  express  company  in  and  under  its 
association  name,  and  was  one  of  an  issue  of  twelve  millions  of  dol- 
lars, secured  by  a  certain  trust  indenture  conveying  and  pledging 


64  HIBBS    V.  BROWN,  [CIIAP.   II. 

for  its  payment  a  large  amount  of  securities  and  property.  The  bond 
provided  that  "no  present  or  future  shareholder,  officer,  manager 
or  trustee  of  the  Express  Company  shall  be  personally  liable  as 
partner  or  otherwise  in  respect  to  this  bond  or  the  coupons  pertain- 
ing thereto,  but  the  same  shall  be  payable  solely  out  of  the  assets 
assigned  and  transferred  to  the  said  Trust  Company  [the  trustee  for 
the  bondholders]  or  out  of  other  assets  of  the  Express  Company." 

HiscocK,  J.  The  Negotiable  Instruments  Law  (L.  1897,  ch.  612), 
section  20,  provides  that  "An  instrument  to  be  negotialjle  must  con- 
form to  the  following  requirements :  .  .  . 

"2.  Must  contain  an  unconditional  promise  or  order  to  pay  a  sum 
certain  in  money." 

Section  22  of  the  same  statute  describes  an  unconditional  promise 
to  pay  as  follows:  "An  unqualified  order  or  promise  to  pay  is  un- 
conditional within  the  meaning  of  this  act,  though  coupled  witii: 

"1.  An  indication  of  a  particular  fund  out  of  which  reimburse- 
ment is  to  be  made,  or  a  particular  account  to  be  indebted  with  the 
amount,  or 

"2.  A  statement  of  the  transaction  which  gives  rise  to  the  in- 
strument. 

"But  an  order  or  promise  to  pay  out  of  a  particular  fund  is  not 
unconditional." 

It  is  not  claimed  that  payment  of  these  bonds  is  limited  to  the 
property  pledged  as  security  therefor  with  the  trustee,  l)ut  it  is  ad- 
mitted that  they  may  be  collected  from  any  and  all  of  the  general 
assets  and  property  of  the  express  company.  The  only  respect  in 
which  they  are  claimed  to  come  in  conflict  with  the  prohibition 
against  a  negotiable  instrument  being  payable  "out  of  a  particular 
fund,"  is  because  of  the  provision  that  they  may  not  be  collected 
from  the  individual  property  of  the  members  of  the  association.  This 
subtraction,  it  is  said,  makes  the  remaining  property  from  which  they 
be  collected  a  "particular  fund." 

The  decisions  which  I  have  quoted  state  the  rule  that  a  negotiable 
instrument  may  not  be  made  payable  out  of  a  particular  fund  as  the 
equivalent  of  the  one  that  it  must  be  "  drawn  on  the  general  credit  of 
the  drawer,"  and  so  if  we  fairly  can  say  that,  notwithstanding  the 
exemption,  the  maker  of  the  bonds  did  pledge  its  general  credit,  then 
it  will  follow  that  there  has  not  heen  that  limitation  of  promise  of 
payment  to  a  particular  fund  which  is  prohibited  by  the  statute. 

Was  the  general  credit  of  the  obligor  pledged? 

The  Adams  Express  Company  was  the  maker  of  the  bonds.  They 
were  issued  by  it  in  its  artificial,  corporate-appearing  name,  under 
its  common  seal,  by  its  authorized  executive  officers  and  for  its 
benefit.  They  expressed  the  general  promise  and  obligation  of  the 
company  which  thus  issued  them,  and  were  a  claim  against  it  upon 
which,  as  we  shall  see  hereafter,  judgment  might  be  obtained  or  a 


CHAP.  II.]  HIBBS    V.  BROWN.  65 

receiver  be  appointed  of  it,  and  satisfaction  obtained  out  of  any  or 
all  of  its  joint,  business,  well-understood  assets  and  property,  and 
which  we  know  aggi-egated  many  millions  of  dollars.  Payment  was 
not  Hmited  to  the  pledged  securities  or  to  any  other  part  or  parcel  of 
the  property  of  the  association  which  made  the  bonds,  but  was  a 
charge  against  the  whole  thereof.  Thus  far,  therefore,  they  were 
entirely  similar  to  the  familiar  bonds  issued  by  an  ordinary  corpora- 
tion which  are  general  claims  against  it,  and  which  are  concededly 
negotiable.  But  here  it  is  that  we  come  against  the  contention  that 
this  view  of  the  character  of  the  bonds  however  practical  and  desir- 
able cannot  prevail;  that  the  exemption  of  the  personal  liability  of 
the  individual  members  of  the  association  after  all  works  a  limita- 
tion upon  the  pledging  of  the  general  credit  of  the  company  which 
issued  the  bonds,  and  turns  all  of  its  assets,  from  wliich  their  pay- 
ment may  be  enforced,  into  a  special,  limited  fund. 

As  the  foundation  for  this  contention  much  care  has  been  devoted 
to  pointing  out  the  difference  between  a  joint-stock  association  and 
a  corporation,  and  to  emphasizing  the  fact  that  the  former  is  in 
effect  a  partnership,  and  that  the  individual  liability  of  its  members  is 
just  as  essential  a  characteristic  as  it  is  in  the  case  of  a  partnership, 
and  that,  therefore,  it  may  not  be  ehminated  without  materially 
affecting  the  contract  of  the  association. 

Of  course  there  can  be  no  doubt  that  a  joint-stock  association 
differs  from  a  corporation,  or  that  in  its  original  conception  and 
ultimate  analysis  it  is  like  a  partnership  in  respect  to  the  indi\ddual 
liability  of  its  members.  But,  upon  the  other  hand,  so  many  of  the 
attributes  and  characteristics  of  a  corporation  have  been  impressed 
upon  the  modern  joint-stock  association  that  in  my  opinion,  for  the 
purposes  of  the  question  now  before  us,  we  are  amply  justified  in 
regarding  simply  the  joint,  quasi  corporate,  entity,  and  in  sa>-ing 
that  an  obligation  issued  in  its  name  upon  its  general  credit,  and 
binding  all  of  its  assets,  complies  with  the  requirements  for  a  negoti- 
able instrument,  even  though  the  practically  unimportant  individ- 
ual liability  of  members  is  excluded. 

We  may  briefly  refer  to  some  of  these  characteristics  which,  as  I 
think,  have  led  both  courts  and  laymen  to  regard  joint-stock  asso- 
ciations largely  as  corporate  creations,  and  in  ordinary  business 
dealings  quite  to  ignore  the  feature  of  individual  membership  and 
liabilitj^,  even  though  it  does  exist.  They  are,  hke  corporations,  or- 
ganized under  and  regulated  by  statutes  (Laws  1894,  chapter  235). 
They  have,  and  transact  business  under,  an  artificial  name.  Their 
capital  and  ownership  is  represented  by  shares  of  stock  transferable 
at  will,  and  their  existence  is  not  dissolved  or  affected  by  the  death 
of  or  transfer  of  interest  by  members.  They  have  regular  officers  in 
whose  names  actions  may  be  commenced  in  behalf  of  and  against  the 
association,  and  upon  a  judgment  rendered  in  the  latter  case,  execu- 


66  HIBBS    V.  BROWN.  [CHAP.   II. 

tion  may  be  issued  only  against  property  belonging  to  the  association 
or  to  all  of  its  members  jointly.  Formerly  action  could  not  be 
brought  against  the  individual  membei-s  of  the  association  until  after 
judgment  and  execution  unsatisfied  against  the  association.  Now, 
although  an  action  may  be  brought  in  the  first  instance  against  the 
members,  still  if  the  claimant  elects  to  bring  suit  against  the  associa- 
tion he  must  then  as  formerly  proceed  to  judgment  and  execution 
unsatisfied  before  instituting  other  suit  against  the  members.  And, 
as  illustrating  the  complete  and  separate  existence  of  the  association 
as  between  it  and  the  individual  members,  suit  may  be  brought  by 
it  against  such  members.   (Code,  §§  1919-1924.) 

Now,  while  it  is  true  that  these  statutes  conferring  upon  joint- 
stock  associations  the  attributes  of  corporations,  and  the  opinions 
discussing  the  similitude  of  the  former  to  the  latter  do  not  destroy 
the  element  of  individual  liabilit}^,  they  do  irresistibly  force  upon  us 
appreciation  of  the  fact  that  a  great  association  like  the  Adams  Ex- 
press Company  is  very  unlike  an  ordinary  copartnership  and  that 
it  has  assumed  for  ordinary,  practical  purposes  in  its  business  and 
contractual  relations  the  features  and  characteristics  of  a  corporate 
creation,  whereby  the  joint  aggregate  entity  has  been  made  prom- 
inent, and  the  individual  units  composing  it  have  been  overshadowed 
and  obscured.  Amongst  other  things,  as  we  have  seen,  this  organ- 
ization in  its  aggregate  capacity  and  under  its  artificial  name  which 
bears  no  relation  to  the  identity  of  its  members,  may  not  only  hold 
property,  transact  business  and  make  contracts,  but,  what  is  espe- 
cially pertinent  in  this  controversy,  those  contracts  may  be  enforced 
by  proceedings  against  it  which  are  entirely  independent  of  any  lia- 
bility of  individual  members.  In  short,  I  do  not  think  that  we  should 
transgress  any  proper  limits,  if  we  assumed  that  the  public  in  dealing 
with  the  present  bonds  did  so  solely  upon  the  faith  and  credit  of  the 
association,  the  entity  which  issued  them,  and  without  knowledge  or 
thought  of  the  individuals  who  composed  it  or  their  financial  re- 
sponsibility. 

Under  such  circumstances  we  ought  not  to  sacrifice  substance  to 
form  and  destroy  the  negotiable  character  of  the  bonds  because  of 
the  exemption  of  individual  liability  unless  we  are  compelled  to, 
either  by  some  controlling  principle  or  authority,  and,  as  I  believe, 
there  is  neither  which  commands  such  a  course. 

The  rule  defining  the  requisites  of  negotiable  instruments  though 
now  embodied  in  a  statute  is  subject  to  a  reasonable  interpretation 
and  construction.  While  we  may  not  disregard  the  requirement  that 
such  an  instrument  must  not  be  limited  for  payment  to  a  particular 
fund,  we  may  say  what  facts  satisfy  this  requirement.  We  cannot,  of 
course,  override  the  terms  of  a  statute  when  finally  interpreted.  But 
we  can  refrain  from  giving  to  those  provisions  too  literal  or  impracti- 
cal an  interpretation  which  will  work  unexpected  and  undesirable 


CHAP.  II.]  HIBBS    V.  BROWN.  67 

results.  We  must  accept  the  full  test  laid  down  at  the  commence- 
ment, that  these  bonds  must  not  be  made  payable  out  of  a  partic- 
ular fund  or  be  issued  otherwise  than  upon  the  general  credit  of  the 
maker.  But  upon  the  proofs  presented  in  my  judgment  we  are  not 
compelled  to  say  that  they  are  not  general  charges  against  the 
obligor  which  issued  them  as  fairly  and  practically  created,  regulated 
and  regarded,  or  that  being  a  claim  against  all  of  its  assets  they  are 
payable  out  of  a  particular  fund.  I  think  that  the  authorities  which 
have  been  cited  to  sustain  the  contention  that  they  are  vulnerable 
in  these  respects,  not  only  do  not  do  so,  but  that  a  careful  considera- 
tion of  them  and  of  other  authorities  in  the  hght  of  the  facts  under 
consideration  in  each  case,  discloses  that  none  of  them  has  held  an 
instrument  to  be  payable  out  of  a  particular  fund  and  hence  non- 
negotiable  upon  anj^  such  proofs  as  appear  here.  In  every  case  it  will 
be  seen  that  the  instrument  which  was  condemned  was  simply  an 
order  upon  or  assignment  of  some  specific,  limited  fund  or  interest 
and  carried  no  general  liability  of  the  drawer  which  made  it  a  charge 
against  his  general  credit  and  all  of  his  assets.  Under  such  circum- 
stances it  was  held  to  be  an  assignment  p7'o  tanto  and,  of  course,  as 
an  assignment  it  was  not  negotiable. 

O'Brien,  J.  The  only  question  in  this  case  is  whether  the  coupons 
which  are  the  subject-matter  of  the  action  are  upon  their  face  nego- 
tiable instruments.  I  think  they  are,  and  my  reasons  for  this  con- 
clusion stated  as  briefly  as  may  be  are  these :  It  is  admitted  that  the 
coupons  are  a  part  of  and  impressed  with  the  same  legal  character 
as  the  bonds  themselves  from  which  they  were  detached.  If  the 
bonds  are  negotiable,  so  are  the  coupons.  I  do  not  understand  that  it 
is  seriously  claimed  that  the  fact  that  a  fund  was  set  apart  and  con- 
veyed to  a  trustee  to  assure  the  pajnnent  of  the  bonds  as  they  fell  due 
affected  the  legal  character  of  these  obligations  as  negotiable  instru- 
ments so  long  as  the  holders  were  not  confined  or  limited  to  that  fund 
for  payment.  It  is,  I  assume,  a  very  common  practice  in  the  modern 
business  world  to  set  aside  a  fund  or  to  provide  for  the  creation  of  a 
sinking  fund  for  the  ultimate  payment  or  redemption  of  bonds,  but 
it  was  never  supposed  that  this  fact  would  affect  their  negotiable 
character.  The  very  purpose  of  such  financial  arrangements  is  to 
give  greater  assurance  of  payment  to  those  who  purchase  the  bonds 
in  the  market  by  adding  to  their  value  and  credit.  The  fund  is  a 
protection  to  the  holders  of  the  bonds  and  in  some  cases  to  others 
who  may  become  liable  for  their  pajnnent  in  whole  or  in  part.  In  this 
case  not  only  the  fund  set  apart,  but  all  the  other  assets  of  the  com- 
pany as  well,  were  pledged  for  the  payment  of  the  bonds,  and,  hence, 
the  fund  only  added  to  their  credit  and  financial  value  without  affect- 
ing in  the  least  their  negotiable  character. 

The  only  question  in  the  case  as  to  which  there  is  any  serious  dis- 
pute is,  as  I  conceive,  whether  the  clause  on  the  face  of  the  bojid^s 


68  HIBBS   V.  BROWN.  [CHAP.  II. 

which  provides  that  "no  present  or  future  shareholder,  officer,  man- 
ager or  trustee  of  the  Express  Company  shall  be  personally  liable 
as  partner  or  otherwise  in  respect  of  these  bonds  or  the  coupons 
appertaining  thereto"  deprives  them  of  the  character  of  negotiable 
paper.  The  contention  of  the  plaintiff  is  that  this  clause  destroys  the 
negotiable  quahty  of  the  bonds  though  payable  to  the  bearer  or 
liolder.  This  clause  contains  also  the  statement  that  the  bonds  "shall 
be  paid  solely  out  of  the  assets  assigned  and  transferred  to  the  said 
trust  company  or  out  of  the  other  assets  of  the  Express  Company." 
So  that  all  the  property  of  the  company  issuing  the  bonds  was  and 
is  available  to  the  holders  as  the  source  of  payment  and  satisfaction 
thereof.  I  do  not  think  that  the  obligations  of  a  joint-stock  company 
payable  to  bearer  are  rendered  non-ncgotiablc  from  the  fact  that  the 
paper  upon  its  face  contains  a  clause  which  exempts  the  shareholders 
and  officers  from  liability  so  long  as  the  general  assets  of  the  com- 
pany are  pledged  for  payment.  But  this  is  the  disputed  question  in 
the  case,  and  the  contrary  view  is  supported  by  an  argument  which 
rests  mainly,  if  not  entirely,  upon  the  proposition  that  joint-stock 
associations  are  partnerships,  and  that  the  obligations  in  question 
are  the  obligations  of  the  individual  shareholders,  and  that  they  are 
liable  upon  them,  jointly  and  severally,  the  same  as  partners.  Stat- 
ing the  argument  in  another  way  it  comes  to  this:  The  bonds  in  this 
case  are  the  bonds  of  a  partnership,  made  in  the  name  of  the  firm,  and 
though  containing  a  promise  to  pay  the  bearer  or  holder  a  specified 
sum  of  money  in  the  future,  upon  a  day  certain,  yet  the  promise  is 
coupled  with  a  condition  that  none  of  the  partners  shall  ever  be  held 
liable.  If  the  premises  upon  which  the  argument  is  based  are  cor- 
rect, it  would,  I  admit,  be  difficult  to  resist  the  conclusion,  unless, 
indeed,  it  could  be  held  that  the  conditions  might  be  rejected  as 
utterly  inconsistent  with  and  repugnant  to  the  promise  and,  there- 
fore, void.  Adopting  the  theory  that  the  bonds  are  the  obligations  of 
the  shareholders  as  partners,  the  repugnancy  is  ciuite  obvious.  But 
I  do  not  think  that  the  bonds  in  question  are  in  any  proper  or  legal 
sense  partnership  obligations  made  by  the  shareholders  as  partners. 
Primarily  the  promise  to  pay  the  bearer  or  holder  is  not  the  promise 
of  the  shareholders,  but  of  the  legal  entity  represented  by  the  express 
companj''  as  such. 

A  joint-stock  company,  whatever  else  may  be  said  about  it,  is  cer- 
tainly for  most,  if  not  all  practical  purposes,  a  legal  entity,  capable 
in  law  of  acting  and  assuming  legal  obligations  quite  independent  of 
the  shareholders.  The  idea  that  these  companies  occupy  some  un- 
defined and  undefinable  ground  midway  between  a  partnersliip  and 
a  corporation  has  practically  faded  away  and  cannot  be  applied  to 
the  question  with  which  we  are  now  concerned.  It  is  not  very  im- 
portant to  inquire  what  they  were  in  their  origin,  but  rather  what 
they  are  now,  or  at  least  were  when  the  bonds  in  question  were  issued 


CHAP.  II.]  HIBB3    V.  BROWN.  69 

and  sold  to  the  public.  It  seems  to  be  conceded  or  assumed  that  if 
the  express  company,  at  the  time  of  issuing  the  bonds,  had  been  in- 
corporated by  filing  the  usual  certificate  for  that  purpose,  the  clause 
exempting  the  shareholders  from  hability  would  not  affect  their 
negotiable  character.  It  remains  only  to  consider  what  sound  distinc- 
tion, if  any,  can  be  made  between  the  twelve  millions  of  bonds  issued 
by  the  express  company  and  the  other  untold  millions  of  other  bonds 
issued  by  corporations.  They  are  all  negotiable  in  form,  that  is  to  say, 
payable  to  order  or  bearer,  as  the  case  may  be.  Assuming  that  the 
shareholders  of  a  corporation  are  or  may  be  hable  for  the  corporate 
debts,  and  that  the  clause  referred  to  would  not  affect  the  negotiable 
quahty  of  its  paper,  what  reason  is  there  for  holding  that  the  clause 
destroys  the  negotiable  quality  of  the  bonds  in  question?  The  prop- 
osition that  in  the  one  case  the  bonds  import  a  promise  to  pay  by  a 
corporate  body  and  in  the  other  the  promise  of  indi\"iduals  as  part- 
ners or  as  a  partnership  firm,  does  not  seem  to  me  to  be  reasonable 
or  tenable.  The  argument  in  support  of  that  theory  would  seem  to 
be  somewhat  strained.  The  general  rules  of  law  that  govern  part- 
nerships have  very  little  appHcation  to  joint-stock  companies,  at 
least  so  far  as  concerns  the  question  now  under  consideration.  The 
principle  of  agency  which  enables  one  partner  to  bind  all  liis  asso- 
ciates as  well  as  the  fu-m  has  no  application  to  such  companies.  The 
death  of  one  or  more  of  the  members  of  the  company  does  not  work  a 
dissolution.  The  doctrine  of  survivorship,  so  important  as  between 
partners,  does  not  exist  as  to  such  companies,  and  so  it  would  be 
difficult  to  state  a  single  general  rule  of  partnership  law  that  in  its 
full  extent  could  be  applied  to  such  companies.  On  the  other  hand, 
there  are  very  few  of  the  legal  principles  that  apply  to  corporations 
that  do  not  apply  in  some  form  to  these  companies.  They  are  taxed 
and  perpetuated  through  the  shares  of  stock  as  corporations  are. 
They  are  entitled  to  assume  an  artificial  name,  to  sue  and  are  subject 
to  be  sued.  They  may  use  a  common  seal  and  through  the  shares  of 
stock  they  have  perpetual  life  even  in  a  larger  sense  than  corpora- 
tions have.  Their  general  powers  and  duties  to  the  pubhc  are  prac- 
tically the  same  and  regulated  in  the  same  way  as  corporations.  I 
need  not  pursue  the  comparison  any  further,  nor  enlarge  upon  it, 
since  the  learned  opinion  of  my  associate,  Judge  Hiscock,  who  has 
referred  to  the  various  judicial  views  on  the  subject,  pro  and  con, 
fully  covers  that  feature  of  the  case. 

It  is  very  true  that  the  shareholders  of  such  companies  are  Kable 
ultimately  for  the  company's  obligations,  but  that  does  not  make 
such  companies  partnerships  in  the  sense  that  their  obligations  are 
the  contracts  or  promises  of  the  shareholders.  The  shareholders  of 
corporations  are  or  may  be  liable  in  the  same  way,  but  such  liability 
is  not,  of  course,  that  of  partners.  The  statutes  of  this  state  pre- 
scribing the  method  of  procedure  in  suits  by  and  against  joint-stock 


70  HIBBS    V.  BROWN.  [CHAP.   II. 

companies  (Code  Civ.  Proc.  §§  1919  to  1924)  do  not  qualify  what 
has  been  stated  concerning  the  legal  nature  of  such  companies.  They 
embody  the  distinct  idea  that  the  liabihty  of  the  shareholdei-s  is  not 
primary,  but  secondary,  the  same  as  in  case  of  corporations ;  and  even 
if  these  statutes  had  never  been  enacted  it  is  quite  likely  that  the 
Adams  Express  Company  could,  in  that  artificial  name,  sue  and  be 
sued  in  the  same  manner  as  a  corporation,  since  the  State  Constitu- 
tion (Art.  8,  §  3),  while  enacting  that  corporations  have  the  right  to 
sue  and  are  subject  to  be  sued  the  same  as  natural  persons,  defines 
joint-stock  companies  having  any  of  the  powers  and  privileges  not 
possessed  by  individuals  or  partnerships  as  corporations  within  the 
meaning  of  that  section.  The  main  purpose  of  these  provisions  of  the 
Code  would  seem  to  be  the  enactment  of  a  mode  of  procedure  which 
would  enable  creditors  of  the  company,  or  parties  having  a  cause  of 
action  against  it,  to  exhaust  all  legal  remedies  against  the  company 
as  a  legal  entity  before  resorting  to  the  personal  liability  of  the  share- 
holders analogous  to  similar  rules  applicalile  to  corporations.  It  is, 
I  think,  very  difficult  to  avoid  the  conclusion  that  these  companies 
at  this  day  and  in  this  state  possess  substantially  and  practically  all 
the  attributes  of  corporations,  and  still  more  difficult  to  assign  any 
sound  reason  for  any  distinction  to  be  made  between  the  negotiable 
character  of  the  bonds  of  each  when  made  payable  to  bearer.  These 
companies  are  for  all  practical  purposes  quasi  corporations,  and  it 
seems  to  me  are  clearly  such  so  far  as  concerns  the  negotiable  char- 
acter of  its  commercial  paper  or  promise  to  pay  a  specific  sum  of 
money  to  bearer  upon  a  day  certain. 

If  the  bonds  in  their  present  form  had  been  stolen  from  the  Adams 
Express  Company  by  one  of  its  clerks  or  employees,  or  even  a 
stranger,  and  they  had  been  put  in  circulation  and  passed  from  hand 
to  hand  to  the  possession  of  an  innocent  holder  who  had  purchased 
them  in  the  market  in  good  faith  and  for  value,  and  the  company  had 
brought  suit  against  him  to  recover  the  stolen  property,  as  the  plain- 
tiff in  this  case  has,  we  would  then  have  the  same  question  before 
us  that  we  have  now.  It  may  be  safely  asserted  that  under  such  cir- 
cumstances the  company  would  and  ought  to  fail  in  the  action,  and 
that  it  would  not  be  permitted  to  impeach  the  holder's  title  to  the 
paper  by  the  fact  that  upon  its  face  there  was  a  condition  discharg- 
ing the  shareholders  from  liability,  and,  hence,  were  not  negotiable 
instruments.  When  the  important  powers  and  functions  which  these 
companies  possess  and  exercise  in  the  business  and  commercial 
world  are  considered,  the  close  analogy  between  corporations  and 
joint-stock  companies  is  made  still  more  e\adent.  They  are  not  only 
common  carriers  of  property  with  world-wide  connections  and  rami- 
fications, but  deal  in  money  credits  and  exchanges  in  practically  the 
same  way  as  banks.  They  purchase  and  deliver  goods  upon  the  order 
of  local  customers  in  all  parts  of  the  country  and  even  in  foreign 


CHAP.  II.]  HIBBS    V.  BROWN.  71 

countries.  They  have  issued  milKons  of  securities  in  the  form  of  bonds 
payable  to  bearer  that  have  been  sold  to  the  public.  It  seems  to  me 
that  it  would  be  at  least  unwise  to  discredit  these  securities  by  hold- 
ing that  in  consequence  of  the  exemption  clause  as  to  the  share- 
holders' liability  the  bonds  are  mere  contracts  to  pay  without  the 
quality  of  negotiability.  Such  a  result,  I  think,  would  not  be  sanc- 
tioned by  sound  policy  or  sound  law  and  would  be  contrary  to  the 
intention  of  every  one  connected  with  the  transaction  either  as  maker 
or  buyer,  since  it  cannot  be  supposed  that  a  business  man  of  any 
sense  would  have  offered  to  sell  in  the  market,  and  much  less  to  buy, 
a  partnership  obligation  payable  to  bearer  with  a  condition  clause 
upon  its  face  releasing  all  the  partners  from  any  obligation  to  pay  it. 

So  far  as  concerns  the  question  involved  in  this  appeal,  the  bonds, 
I  think,  are  not  the  bonds  of  the  several  members  of  the  company  as 
partners,  but  of  a  legal  entity  as  such,  with  an  artificial  name  anal- 
ogous to  a  corporation,  and  they  possess  all  the  quahties  of  corpo- 
rate bonds  payable  to  bearer.  It  is  quite  obvious  that  in  respect  to 
the  negotiable  quality  of  the  bonds  they  must  be  considered  and 
treated  in  law  either  as  partnership  or  as  corporate  obligations.  There 
is  no  middle  ground  upon  which  to  rest.  The  argument  that  the 
promise  to  pay  is  that  of  a  partnership  does  not  seem  to  me  to  be 
supported  by  any  conclusive  reasons,  and  if  adopted  might  destroy 
a  large  class  of  securities  held  by  innocent  investors.  The  general 
rule,  which  I  fully  recognize,  no  doubt  is  that  in  order  to  give  to  com- 
mercial paper,  whether  in  the  form  of  bonds  or  promissory  notes,  the 
quality  of  negotiability,  and  the  legal  rights  which  appertain  to  such 
instruments,  the  promise  to  pay  must  be  unconditional  and  all  the 
assets  of  the  promisor  or  maker  must  be  pledged  to  make  good  the 
promise  according  to  its  terms.  The  bonds  in  question,  in  my  opin- 
ion, comply  with  that  rule,  unless  it  can  be  held  that  the  liability  of 
the  shareholders  of  the  company  can  be  called  assets  within  the 
meaning  of  the  rule  and  I  think  it  cannot.  The  assets  of  the  express 
company,  the  maker  of  the  bonds  in  question,  consisted  of  its  actual, 
tangible  property  over  which  it  had  full  power  of  disposition,  do- 
minion and  control,  and  not  the  liability  which  the  law  imposes  upon 
shareholders  for  the  company  debts  in  certain  cases  and  upon  certain 
contingencies.  There  is  no  reason  that  I  can  perceive  for  denying  to 
a  bona  fide  holder  of  one  of  these  bonds  any  means  of  defending  his 
title  when  attacked  that  the  law  gives  to  a  like  holder  of  the  negotia- 
ble paper  of  an  individual  or  corporation. 

Werner,  J.  Although  I  concur  in  the  result  of  the  decision  about 
to  be  made,  I  cannot  yield  assent  to  the  reasoning  upon  which  it  h 
based.  The  vital  question  in  this  case  is  whether  the  bonds  from 
which  the  coupons  in  suit  were  clipped  are  negotiable  instruments  or 
not,  and  that  depends  upon  several  considerations  which  I  will  briefly 
discuss. 


72  HIBBS   V.  BROWN.  [CHAP.  II. 

Thesebonclsarepartof  an  issue  of  $12,000,000  made  by  the  Adams 
Express  Company,  which  is  a  joint-stock  association,  each  of  whoso 
shareholders  is,  by  the  terms  of  its  articles  of  association  and  the 
general  law,  individually  liable  for  the  debts  of  the  company  incurred 
in  the  transaction  of  its  business.  The  bonds  are  made  in  the  name 
of  the  company,  are  payable  to  bearer,  and  contain  many  if  not  all 
the  stipulations  and  conditions  that  are  usually  found  in  corporate 
bonds  such  as  are  now  concededly  in  the  category  of  negotiable  in- 
struments. (Mercer  County  v.  Hacket,  1  Wall.  83,  and  cases  there 
cited.)  These  bonds  also  contain  another  clause  that  is  not  to  be 
found  in  corporate  bonds.  They  recite  that,  "No  present  or  future 
shareholder,  officer,  manager  or  trustee  of  the  express  company  shall 
be  personally  liable  as  partner  or  otherwise  in  respect  of  this  bond  or 
the  coupons  appertaining  thereto,  but  the  same  shall  be  payable 
solely  out  of  the  assets  assigned  and  transferred  to  the  said  trust 
company  (the  trustee  named  in  the  trust  deed),  or  out  of  the  other 
assets  of  the  express  company."  As  this  clause  is  in  direct  conflict 
with  the  general  provisions  of  the  law  and  the  express  company's 
articles  of  association  respecting  the  individual  liability  of  the  share- 
holders of  the  company,  the  real  question  in  the  case  is  whether  the 
particular  clause  is  a  valid  and  essential  part  of  the  bonds,  or  whether 
it  can  be  eliminated  as  repugnant  to  the  general  tenor  and  purpose 
of  the  instruments  in  which  it  is  found.  If  the  clause  is  valid  there 
can  scarcely  be  any  logical  escape  from  the  conclusion  that  the  bonds 
are  rendered  non-negotiable.  If,  however,  the  particular  clause  can 
be  discarded  as  void,  that  will  eliminate  the  only  difference  of  sub- 
stance between  these  bonds  and  other  bonds  which,  by  common  con- 
sent, are  classed  as  negotiable  instruments. 

The  reason  why  the  last  quoted  clause  of  the  bonds,  if  valid,  is 
inconsistent  with  their  negotiability  is  that  they  are  the  obligations 
of  a  joint-stock  association  as  distinguished  from  a  corporation,  and 
the  stipulation  absolving  the  shareholders  of  the  company  from  in- 
dividual liability  is  a  distinct  limitation  upon  the  credit  which  is 
pledged  in  the  making  of  the  instrument.  One  of  the  cardinal  quali- 
ties of  a  negotiable  instrument  is  that  it  must  pledge  the  general 
credit  of  the  maker.  This  was  one  of  the  universally  recognized  rules 
of  the  law  merchant  as  declared  in  the  English  decisions.  (Dawkes 
V.  De  Lorane,  3  Wils.  207;  7?i  re  Boyse,  L.R.  [33  Ch.  Div.]  612;  5anfc 
of  England  v.  Vagliano,  L.R.  [App.  Cas.  1891]  107-145;  M'Lean  v. 
Clydesdale  Co.,  L.R.  [9  App.  Cas.]  95);  and  in  the  decisions  of  this 
state.  (Munger  v.  Shannon,  61  N.Y.  251 ;  Brill  v.  Tuttle,  81  N.Y. 
454;  Schmittler  v.  Simon,  101  N.Y.  554.)  That  rule  as  now  tersely 
stated  in  our  Negotiable  Instruments  Law  may  be  paraphrased  as 
follows:  "An  instrument  to  be  negotiable  .  .  .  must  contain  an  un- 
conditional promise  or  order  to  pay  a  sum  certain  in  money"  (Subd. 
2,  sec.  20),  "but  an  order  or  promise  to  pay  out  of  a  particular  fund 


CHAP.  II.]  HIBBS    V.  BROWN.  73 

is  not  unconditional."  (Subd.  2,  sec.  22.)  The  cases  referred  to,  as 
well  as  the  statute,  make  it  entirely  clear  that  the  mere  indication  of 
a  particular  fund  from  which  the  maker  of  an  instrument  may  reim- 
burse himself,  or  a  mere  reference  to  a  specified  account  which  is  to 
be  debited  with  the  amount  called  for  by  the  instrument,  does  not 
affect  its  unconditionality,  and  it  is  only  where  the  order  or  promise 
is  to  pay  out  of  a  particular  fund  that  it  is  considered  conditional  in 
such  sense  as  to  destroy  the  negotiability  of  the  instrument. 

The  bonds  of  tliis  issue  are  payable  solely  out  of  the  assets  assigned 
and  transferred  to  the  trustee  or  out  of  the  other  assets  of  the  express 
company.  If  the  express  company  were  a  corporation  this  would 
clearly  be  an  unconditional  promise  for  it  would  be  a  general  pledge 
of  the  credit  of  the  maker;  a  tender  of  all  it  had  to  give  in  satisfaction 
of  the  debt.  But  the  company  is  concededly  not  a  corporation, 
although  our  statutes  have  invested  it  with  certain  corporate  attri- 
butes. It  is  unnecessary  to  enumerate  these  since  it  cannot  be  dis- 
puted that  in  respect  of  the  individual  liability  of  the  shareholders  of 
a  joint-stock  company  for  the  company  debts,  the  common-law  rule 
still  obtains.  Each  shareholder  is  liable  precisely  as  though  he  were 
a  member  of  an  unlimited  partnership.  (Townsend  v.  Goeivey,  19 
Wend.  424;  Dennis  v.  Kennedy,  19  Barb.  517;  Wells  v.  Gates,  18  id. 
554;  Cross  v.  Jackson,  5  Hill,  478.)  Although,  as  we  have  stated, 
joint-stock  companies  have  been  granted  certain  privileges  and  im- 
munities peculiar  to  corporations,  this  most  distinctive  difference  be- 
tween these  corporate  and  non-corporate  creatures  of  the  law  has 
been  consistently  preserved  by  the  legislature  and  recognized  by  the 
courts.  (Code  Civ.  Pro.  sees.  1919-1924;  People  ex  ret.  Winchester  v. 
Coleman,  133  N.Y.  279;  Van  Aernam  v.  Bleistein,  102  N.Y.  360; 
Matter  of  Jones,  172  N.Y.  575.) 

From  what  has  been  said  it  must  follow  that  if  the  clause  in  the 
bonds  exempting  the  individual  shareholders  of  the  express  company 
from  liability  is  vahd,  the  bonds  are  non-negotiable,  because  they  are 
in  effect,  if  not  in  explicit  terms,  made  payable  out  of  a  particular 
fund,  so  that  the  promise  to  pay  is  not  unconditional.  The  clause 
under  discussion  is  the  only  substantial  thing  that  differentiates 
these  bonds  from  the  ordinary  corporate  bonds  which  are  issued  and 
held  bj^  the  millions  and  are  recognized  and  classed  as  negotiable 
instruments.  The  maker  of  the  bonds  is  an  association  having  a 
business  name,  which  it  used  in  making  them,  having  shares  of  capi- 
tal stock,  indefinite  succession,  and  a  number  of  other  characteristics 
which  the  lay  public  associates  exclusively  with  corporations.  These 
considerations  lend  great  force  to  the  suggestion  that  as  a  matter  of 
public  policy  the  exemption  clause  referred  to  should  be  treated  as 
nugatory,  so  that  the  bonds  may  be  invested  with  that  element  of 
negotiability  which  may  fairly  be  regarded  as  one  of  the  principal 
items  of  their  value,  and  one  of  the  most  important  inducements  to 


74  ANDREWS    BROS.  CO.  V.  YOUNGSTOWN    COKE    CO.       [CIIAP.   II. 

their  current  sale  and  purchase.  I  deem  it  unnecessary  to  go  quite 
SO  far  as  that  in  the  case  at  bar,  since  I  am  convinced  that  the  exemp- 
tion clause  is  so  repugnant  to  the  terms,  tenor  and  purpose  of  the 
bonds  that  it  not  only  may  but  must  be  taken  out  of  the  instruments 
in  order  to  preserve  their  negotiability,  and  even  their  validity.  It 
would  be  rather  difficult  to  explain  upon  what  theory  the  obligation 
of  these  bonds  could  be  enforced  in  an  action  at  law  if  the  exemp- 
tion clause  is  retained  as  part  of  the  bonds.  The  maker  cannot  be 
sued  in  its  business  name,  and  the  officers  which  represent  it  can  only 
be  sued  upon  obligations  for  which  an  action  could  be  maintained 
against  all  the  shareholders.  (Code  Civ.  Pro.  sec.  1919.)  We  are 
presented,  in  short,  with  the  legal  paradox  that  a  written  obligation, 
obviously  intended  to  be  negotiable,  cannot  be  enforced  in  a  court 
of  law.  This  is  an  anomalous  condition  so  utterly  at  variance  with 
the  manifest  purpose  of  the  association  in  issuing  these  bonds,  and  so 
palpably  destructive  of  the  legal  rights  of  the  holders  thereof,  that  we 
could  hardly  give  the  exemption  clause  the  effect  which  its  language 
imports  without  destroying  the  validity  of  the  bonds  themselves. 

Since  both  the  negotiability  and  the  validity  of  the  bonds  may  be 
secured  by  the  abrogation  of  the  exemption  clause,  and  since  there  is 
nothing  in  the  other  terms  of  the  instruments  to  prevent  this  mani- 
festly just  disposition  of  the  case,  I  conclude  tliis  branch  of  the  dis- 
cussion with  the  recommendation  that  the  exemption  clause  be  held 
void,  and  that  the  bonds  and  coupons  be  held  negotiable. 

Gray  and  Haight,  JJ.,  concurred  with  Hiscock,  J.;  Edward  T. 
Bartlett,  J.,  and  Cullen,  C.J.,  agreed  with  Werner,  J.,  that  the 
exemption  clause  must  be  held  void. 


ANDREWS  BROS.  CO.  v.   YOUNGSTOWN  COKE  CO. 

58  U.S.  Appeals,  444.     1898. 

This  was  an  action  by  the  Youngstown  Coke  Company,  limited, 
claiming  to  be  a  corporation  organized  under  the  law  of  Pennsyl- 
vania, against  the  Andrews  Brothers  Company. 

LuRTON,  Circuit  Judge.  The  first  and  principal  question  is  whether 
the  circuit  court  had  jurisdiction.  [In  the  amended  petition]  it  was 
averred  that  the  plaintiff  was  a  corporation  under  the  laws  of  Penn- 
sylvania, and  a  citizen  of  that  State. 

The  act  of  June  2, 1874,  as  amended  (Pepper  &  Lewis's  Digest  of 
the  Laws  of  Pennsylvania  [1894],  p.  3402),  under  which  the  defend- 
ant in  error  was  organized,  is  in  seventeen  sections.  The  first  pro- 
vides that  three  or  more  persons  desiring  to  organize  under  the  act 
may  do  so  by  preparing,  signing,  and  acknowledging  a  statement  in 
writing  which  shall  set  forth  the  amount  of  capital  subscribed  for  by 


CHAP,  II.]   ANDREWS  BROS.  CO.  V.   YOUNGSTOWN  COKE  CO.      75 

each;  the  total  amount  of  capital,  and  when  and  how  to  be  paid;  the 
character  of  the  business,  and  location  thereof;  the  name  of  the  asso- 
ciation, with  the  word  "limited"  added  thereto  as  a  part  of  it;  the 
duration  of  the  association,  which  shall  not  exceed  twenty  years,  and 
the  name  of  the  officers  selected  in  conformity  with  the  act.  The 
second  section  provides  that  the  members  of  the  association  shall  not 
be  Hable  for  the  debts  or  engagements  of  the  company  beyond  their 
unpaid  subscriptions  to  the  capital.  The  fourth  section  provides 
that  interests  in  such  association  shall  be  personal  estates,  and  may 
be  transferred,  given,  bequeathed,  distributed,  sold,  or  assigned  under 
such  rules  and  regulations  as  shall  be  adopted  from  time  to  time  "by 
a  vote  of  a  majority  of  the  members  in  numbei'  and  value  of  their  in- 
terests; and  in  the  absence  of  such  rules  and  regulations  the  transferee 
of  any  interest  in  any  such  association  shall  not  be  entitled  to  any 
participation  in  the  subsequent  business  of  such  association,  unless 
elected  to  membersliip  therein,  by  a  vote  of  a  majority  of  the  mem- 
bers in  number  and  value  of  their  interests.  And  any  change  of 
ownership,  whether  by  sale,  death,  banki'uptcy,  or  otherwise,  which 
occurs  in  the  absence  of  any  rules  and  regulations  of  such  associa- 
tions regulating  such  transfer,  and  which  is  not  followed  by  election 
to  membership  in  such  associations,  shall  entitle  the  owner  or  trans- 
feree only  to  the  value  of  the  interest  so  acquired  at  the  date  of  ac- 
quiring such  interest,  at  a  price  and  upon  terms  to  be  mutually 
agreed  upon,  and  in  default  of  such  agreement,  at  a  price  and  upon 
terms  to  be  fixed  b}^  an  appraiser  to  be  appointed  by  the  court  of 
common  pleas  of  the  proper  county,  on  the  petition  of  either  party, 
which  appraisement  shall  be  subject  to  the  approval  of  said  court." 
The  fifth  section  provides  for  a  board  of  managers,  who  shall  be  not 
less  than  three  or  more  than  five,  one  of  whom  shall  be  chairman,  one 
the  treasurer,  and  one  the  secretary.  This  section  also  provides  that 
"no  debt  shall  be  contracted  or  UabiHty  incurred  for  such  association, 
except  by  one  or  more  of  the  managers,  and  no  liability  greater  than 
five  hundred  dollars,  except  against  the  person  incurring  it,  shall  bind 
the  association,  unless  reduced  to  writing  and  signed  by  at  least  two 
managers."  The  sixth  and  seventh  sections  provide  for  distribution 
of  profits  through  dividends,  such  dividends  not  to  impair  capital, 
and  that  it  shall  be  unlawful  to  lend  its  credit,  name,  or  capital  to 
any  member,  or  to  any  other  person,  v/ithout  consent  of  a  majority 
in  number  and  value  of  members  in  writing.  The  eighth,  ninth,  and 
tenth  sections  provide  how  such  companies  may  be  dissolved,  and 
how  the  property  shall  be  distributed.  The  remaining  parts  of  the 
act  provide,  first,  that  the  association  may  sue  and  be  sued  in  its 
associate  name,  service  of  process  to  be  made  upon  one  of  its  officers, 
or  on  any  agent,  clerk,  or  manager  in  counties  where  it  may  main- 
tain an  office;  and,  second,  that  such  association  may  acquire,  hold, 
and  convey  real  estate  in  its  associated  name. 


76  ANDREWS   BROS.  CO.  V.  YOUNGSTOWN    COKE    CO.       [cHAP.  II. 

This  act  does  not  declare  these  associations  to  be  corporations,  nor 
are  they  styled  corporations.  They  are  called  "partnership  associa- 
tions." Neither  does  the  act  disclaim  a  purpose  to  create  corpora- 
tions, as  was  the  case  under  the  EngUsh  and  New  York  joint-stock 
acts  (6  &  7  Wm.  IV,  local  and  personal  acts,  c.  119;  10  &  11  Vict., 
local  and  personal  acts,  c.  268;  27  &  28  Vict.,  local  and  personal  acts, 
c.  116;  Laws  of  New  York  of  1849,  p.  389,  c.  258,  as  amended  by  the 
Laws  of  1853,  p.  283,  c.  153 ;  Laws  of  1854,  p.  558,  c.  245 ;  Laws  of  1867, 
p.576,  c.  289)  mentioned  and  construed  in  Liverpool  Insurance  Com- 
pany y:  Massachusetts,  10  Wall.  566,  and  The  People  ex  rcl.  TFin- 
chester  v.  Coleman,  133  N.Y.  279.  But  the  fact  of  corporation  or  no 
corporation  must  depend  upon  the  existence  or  nonexistence  of  those 
faculties  which  are  of  the  essence  of  corporate  existence.  We  need 
not  be  too  attentive  to  mere  names.  The  inquiry  must  go  deeper 
and  its  solution  be  reached  upon  principle. 

It  is  not  essential  to  the  idea  of  a  corporation  that  it  shall  have 
perpetual  existence,  for  limited  corporations  are  a  matter  of  most 
common  occurrence,  whether  organized  under  special  or  general  laws. 
Neither  is  it  essential  that  it  shall  have  capacity  to  sue  and  be  sued 
under  its  corporate  name,  for  it  may  be  authorized  only  to  sue  in  the 
name  of  one  of  its  officers,  as  was  the  case  under  the  New  York  bank- 
ing law.  Laws  of  1838,  p.  245,  c.  260.  That  it  shall  have  capacity  to 
sue  and  be  sued  under  some  name  standing  for  the  collective  body  is 
all  that  is  necessary.  Thomas  v.  Dakin,  22  Wend.  9;  Liverpool  Insur- 
ance Company  v.  Massachusetts,  10  Wall,  566.  In  the  last  analysis 
the  only  absolutely  essential  attribute  of  a  corporation  is  the  capacity 
to  exist  and  act  within  the  powers  granted,  as  a  legal  entity,  apart 
from  the  individual  or  individuals  who  constitute  its  members. 

But  these  associations  authorized  by  the  Pennsylvania  act  of  1874 
possess  every  attribute  deemed  essential  to  the  existence  of  a  corpora- 
tion under  any  authoritative  definition  of  a  corporation.  They  come 
into  being  only  by  the  creative  power  of  the  sovereign  will  as  ex- 
pressed in  the  statute  which  authorizes  their  organization.  That  act 
constitutes  at  once  the  authority  for  their  existence  and  the  measure 
of  their  powers.  When  organized,  they  constitute  a  new  artificial 
person,  endowed  with  the  power  of  suing  and  being  sued,  and  of  ac- 
quiring, holding,  and  conveying  property,  in  its  artificial  character. 
Created  by  comphance  with  the  constituting  law,  they  can  be  dis- 
solved only  in  the  way  pointed  out  by  that  law.  Individual  liability 
for  corporate  debts,  beyond  unpaid  subscription  to  the  capital  stock, 
does  not  exist.  Oak  Ridge  Coal  Company  v.  Rogers,  108  Penn.  St. 
147,  150;  Stevens  v.  Phila.  Ball-Cluh,  142  Penn.  St.  52,  61.  The 
members  do  not  act  as  individuals,  or  as  partners,  but  through  and 
in  the  name  of  the  collective  or  corporate  body.  Hill  v.  Stetler,  127 
Penn.  St.  145,  161,  162.  The  members  are  not  liable  indi\'idually 
for  the  torts  of  the  association,  unless  they  personally  participate. 


CHAP.  II.]   ANDREWS  BROS.  CO.  V.   YOUNGSTOWN  COKE  CO.      77 

Whitney  v.  Backus,  149  Penn.  St.  29.  In  all  these  respects  it  would 
be  difficult  to  distinguish  these  companies  from  the  ordinary  business 
corporations  authorized  under  general  acts  in  most,  if  not  all,  of  the 
States  of  the  Union.  In  other  respects  they  are  somewhat  peculiar, 
and  it  is  these  pecuhar  features  which  distinguish  them  from  the 
ordinary  business  corporations  provided  for  by  other  Pennsj'lvania 
legislation,  and  wliich  have  led  to  some  confusion  in  defining  their 
character.  Thus  the  managers  alone  may  create  a  debt,  and  no  ha- 
bility  in  excess  of  $500  is  vaHd  unless  the  contract  be  in  writing  and 
signed  by  two,  at  least,  of  the  managers.  This  is  a  mere  limitation 
upon  the  usual  powers  of  officers  L,nd  agents  to  bind  the  artificial 
body,  and  in  no  way  affects  the  corporate  character  of  that  body. 
But  the  most  marked  peculiarity  is  found  in  the  provisions  of  the 
fourth  section  of  the  constituting  act,  whereby  in  the  absence  of 
some  other  regulation,  adopted  by  the  members,  the  assignee  of  the 
interest  of  a  member  in  the  capital  stock,  by  operation  of  law  or 
otherwise,  does  not  become  a  member  until  elected.  In  default  of 
election  the  association  must  pay  the  value  of  the  interest  as  ascer- 
tained by  agreement,  or,  in  default  thereof,  by  an  appraiser,  pro- 
vided for  in  the  statute.  This  dilectus  'personarum  is  a  most  inviting 
inducement  to  the  formation  of  small  business  corporations  where 
the  personnel  of  the  members  is  a  matter  of  some  importance,  and  is 
the  only  feature  which  particularly  distinguishes  these  associations 
from  ordinary  corporations.  This  power  of  selection  is  similar  to  that 
belonging  to  ordinary  copartnerships.  A  member  may  sell  his  in- 
terest, but  such  sale  dissolves  the  partnei-ship.  If  the  remaining  mem- 
bers assent  to  the  admission  of  the  new  member  the  legal  result  is  a 
new  firm.  Under  this  provision  of  the  act  of  1874  the  sale  of  an  in- 
terest does  not  operate  as  a  dissolution,  but  requires  that  the  com- 
pany shall  buy  the  interest  unless  the  transferee  is  acceptable.  The 
principle  is  not  new  in  partnersliips  where  the  partners  give  a  prefer- 
ence to  the  firm  or  its  members  by  contract  in  event  of  sale  or  other 
devolution  of  title. 

But  does  the  existence  of  the  dilectus  'personarum  take  from  the 
body  possessing  it  the  character  of  a  corporation  if  it  possesses  those 
attributes  which  by  general  consent  distinguish  a  corporation  from  a 
mere  voluntary  association?  The  general  and  well-settled  rule  is  that, 
in  the  absence  of  statutory  authority,  a  corporation  may  not  make 
the  transfer  of  shares  dependent  upon  the  discretion  of  the  corpora- 
tion, its  officers  or  agents.  They  may  by  reasonable  rule  regulate  such 
transfer,  but  they  cannot  prohibit.  Morawetz  on  Private  Corpora- 
tions (2d  ed.),  §§  164,  165.  But  that  this  power  may  be  conferred  by 
the  charter  is  equally  well  settled.  Morawetz  on  Private  Corpora- 
tions (2d  ed.),  §§  164,  165,  and.  authorities  cited;  Lowell  on  Transfer 
of  Stocks,  §  31.  This  privilege  of  the  dilectus  personarum,  while  un- 
usual in  corporations  for  profit,  is  a  very  common  provision  in  the 


78       GREAT  SOUTHERN  FIRE   PROOF  HOTEL  CO.  V.  JONES.       [CHAP.  II. 

charters  of  companies  not  for  profits,  such  as  clubs,  boards  of  trade, 
fraternal  societies,  and  educational  and  charitable  associations. 

Joint-stock  companies  have  no  invariable  character.  Sometimes 
they  are  incorporated  and  sometimes  they  are  not.  The  test  is  the 
attributes  conferred  by  the  statute  under  which  they  are  organized. 


GREAT  SOUTHERN  FIRE  PROOF  HOTEL  CO.  v.   JONES. 

177  U.S.  449.     1899. 

Mr.  Justice  Harlan.  The  bill  in  this  suit,  commenced  in  the 
Circuit  Court  of  the  United  States  for  the  Southern  District  of  Ohio, 
Eastern  Division,  describes  the  plaintiffs  Benjamin  F.  Jones,  George 
M.  LaughHns,  Henry  A.  Laughlins,  Jr.,  and  Benjamin  F.  Jones,  Jr., 
as  "members  of  the  limited  partnership  association  doing  business 
under  the  firm  name  and  style  of  Jones  &  Laughlins,  Limited,  which 
said  association  is  a  limited  partnership  association,  organized  under 
an  act  of  the  General  Assembl}^  of  Pennsylvania,  approved  June 
23d  [2d],  1874,  entitled  'An  act  authorizing  the  formation  of  part- 
nership associations  in  which  the  capital  subscribed  shall  alone  be 
responsible  for  the  debts  of  the  association,  except  under  certain 
circumstances,'"  and  who  "have  their  office  and  principal  place  of 
business  in  the  city  of  Pittsburg,"  and  which  association  is  "a  citi- 
zen of  the  State  of  Pennsylvania."  Penn.  Laws,  1874,  p.  271. 

The  defendant  first  named  in  the  bill  is  the  Great  Southern  Fire 
Proof  Hotel  Company,  a  corporation  of  the  State  of  Ohio ;  and  some 
of  the  defendants  are  corporations  and  citizens  of  States  other  than 
the  State  of  Pennsylvania. 

The  bill  rests  the  jurisdiction  of  the  circuit  court  upon  the  ground 
of  the  diverse  citizenship  of  the  parties. 

We  are  of  opinion  that  the  plaintiff  as  a  limited  partnership  associa- 
tion was  not  entitled  to  invoke  the  jurisdiction  of  the  Circuit  Court. 
It  was  not  alleged  to  be,  nor  could  it  have  alleged  that  it  was,  a  cor- 
poration in  virtue  of  the  statute  of  Pennsylvania  under  which,  ac- 
cording to  the  averments  of  the  bill,  it  was  organized.  In  Lafayette 
Ins.  Co.  V.  French,  18  How.  404,  405,  which  was  an  action  brought 
by  citizens  of  Ohio  in  the  Circuit  Court  of  the  United  States  for  the 
District  of  Indiana,  the  declaration  described  the  defendant  as  the 
"Lafayette  Insurance  Company,  a  citizen  of  the  State  of  Indiana." 
This  court  said:  "This  averment  is  not  sufficient  to  show  jurisdiction. 
It  does  not  appear  from  it  that  the  Lafayette  Insurance  Company  is  a 
corporation;  or  if  it  be  such,  by  the  law  of  what  State  it  was  created. 
The  averment  that  the  company  is  a  citizen  of  the  State  of  Indiana 
can  have  no  sensible  meaning  attached  to  it.  This  court  does  not 
hold  that  either  a  voluntary  association  of  persons,  or  an  association 


CHAP.  II.]   GREAT  SOUTHERN  FIRE  PROOF  HOTEL  CO.  V.   JONES.   79 

into  a  body  politic,  created  by  law,  is  a  citizen  of  a  State  within  the 
meaning  of  the  Constitution.  And,  therefore,  if  the  defective  aver- 
ment in  the  declaration  had  not  been  otherwise  suppUed,  the  suit 
must  have  been  dismissed."  The  case  of  Chapman  v.  Barneij,  129 
U.S.  677,  682,  is  decisive  of  the  present  question.  That  was  an  action 
in  the  Circuit  Court  of  the  United  States  by  the  United  States  Ex- 
press Company.  This  court  said:  "On  looking  into  the  record  we 
find  no  satisfactory  showing  as  to  the  citizenship  of  the  plaintiff. 
The  allegation  of  the  amended  petition  is,  that  the  United  States 
Express  Company  is  a  joint-stock  company  organized  under  a  law 
of  the  State  of  New  York,  and  is  a  citizen  of  that  State.  But  the  ex- 
press company  cannot  be  a  citizen  of  New  York,  within  the  meaning 
of  the  statutes  regulating  jurisdiction,  unless  it  be  a  corporation. 
The  allegation  that  the  company  was  organized  under  the  laws  of 
New  York  is  not  an  allegation  that  it  is  a  corporation.  In  fact,  the 
allegation  is,  that  the  company  is  not  a  coiporation,  but  a  joint -stock 
company  —  that  is,  a  mere  partnership.  And  although  it  may  be 
authorized  by  the  laws  of  the  State  of  New  York  to  bring  suit  in  the 
name  of  its  president,  that  fact  cannot  give  the  company  power,  by 
that  name,  to  sue  in  a  Federal  court.  The  companj^  may  have  been 
organized  under  the  laws  of  the  State  of  New  York,  and  may  be 
doing  business  in  that  State,  and  yet  all  the  members  of  it  may  not 
be  citizens  of  that  State.  The  record  does  not  show  the  citizenship 
of  Barney  or  of  any  of  the  members  of  the  company.  They  are  not 
shown  to  be  citizens  of  some  State  other  than  Illinois.  Grace  v. 
American  Central  Ins.  Co.,  supra,  and  authorities  there  cited.  For 
these  reasons  we  are  of  opinion  that  the  record  does  not  show  a  case 
of  which  the  Circuit  Court  could  take  jurisdiction." 

It  has  been  suggested  that  the  plaintiffs  are  entitled  to  sue,  and 
may  be  sued,  by  their  association  name.  1  Brightly's  Purdon's  Di- 
gest, Pa.  (12th  ed.)  1088,  Title  Joint  Stock  Companies,  §  16.  But 
the  capacity  to  sue  and  be  sued  by  the  name  of  the  association  does 
not  make  the  plaintiffs  a  corporation  within  the  rule  that  a  suit  by  or 
against  a  corporation  in  its  corporate  name  in  a  court  of  the  United 
States  is  conclusively  presumed  to  be  one  by  or  against  citizens  of 
the  State  creating  the  corporation.  Louisville,  Cincinnati  &  Charles- 
ton Railroad  Co.  v.  Letson,  2  How.  497;  Ohio  &  Miss.  R.R.  Co.  v. 
Wheeler,  1  Black,  286;  Steamship  Co.  v.  Tugman,  106  U.S.  118,  120. 
The  rule  that  for  purposes  of  jurisdiction  and  within  the  meaning 
of  the  clause  of  the  Constitution  extending  the  judicial  powers  of  the 
United  States  to  controversies  between  citizens  of  different  States, 
a  corporation  was  to  be  deemed  a  citizen  of  the  State  creating  it,  has 
been  so  long  recognized  and  applied  that  it  is  not  now  to  be  ques- 
tioned. No  such  rule  however  has  been  apphed  to  partnership  asso- 
ciations although  such  associations  may  have  some  of  the  characteris- 
tics of  a  corporation.  WTien  the  question  relates  to  the  jurisdiction 


80      GREAT  SOUTHERN  FIRE  PROOF  HOTEL  CO.  V.  JONES.       [CHAP.  II. 

of  a  Circuit  Court  of  the  United  States  as  resting  on  the  diverse 
citizenship  of  the  parties  we  must  look  in  the  case  of  a  suit  by  or 
against  a  partnership  association  to  the  citizenship  of  the  several 
persons  composing  such  association. 

Nor  can  we  accede  to  the  suggestion  that  this  question  of  jurisdic- 
tion is  affected  by  the  clause  of  the  Constitution  of  Pennsylvania 
providing  that  the  term  "corporations,"  as  used  in  article  xvi  of  that 
instrument,  "shall  be  construed  to  include  all  joint-stock  companies 
or  associations  having  any  of  the  powers  or  privileges  of  coiporations 
not  possessed  by  individuals  or  partnerships."  Const.  Pa.  art.  xvi, 
§  13.  The  only  effect  of  that  clause  is  to  place  the  joint-stock  com- 
panies or  associations  referred  to  under  the  restrictions  unposed  by 
that  article  upon  corporations;  and  not  to  invest  them  with  all  the 
attributes  of  corporations. 

We  have  not  been  referred  to  any  case  in  the  Supreme  Court  of 
Pennsylvania  which  distinctly  places  limited  partnei*ship  associa- 
tions, created  under  the  statutes  of  that  State,  on  the  basis  of  cor- 
porations. "Such  an  association,"  that  court  said  in  Coal  Co.  v. 
Rogers,  108  Penn.  St.  147,  150,  "is  not  technically  a  corporation,  yet 
it  has  many  of  the  characteristics  of  one,"  and  "it  may  not  be 
improper  to  call  such  an  association  a  quasi  corporation."  In 
Hill  V.  Stetler,  127  Penn.  St.  145,  161,  referring  to  the  act  of  June 
2,  1874,  the  court  said  that  it  provided  for  the  creation  of  "a 
new  artificial  person  to  be  called  a  joint-stock  association,  having 
some  of  the  characteristics  of  a  partnership  and  some  of  a  corpora- 
tion." 

In  Carter  v.  Producers'  Oil  Co.,  Ltd.,  182  Penn.  St.  551,  573,  574, 
which  involved  the  validity  of  a  rule  adopted  by  a  limited  partner- 
ship association  organized  under  the  Pennsylvania  statute  of  June  2, 
1874,  and  its  supplements,  and  which  rule  prohibited  any  pei-son 
who  acquired  the  capital  stock  of  a  member  from  exercising  the 
privileges  of  a  member,  unless  he  was  elected  as  such,  the  court  said: 
"We  cannot  assent  to  the  plaintiff's  claim  that  the  defendant  com- 
pany is  a  corporation  and  restricted,  in  the  adoption  of  by-laws,  rules 
and  regulations  for  its  government,  to  such  as  it  is  within  the  power 
of  the  latter  to  prescribe.  It  may  be  conceded  that  the  defendant 
company  has  some  of  the  qualities  of  a  corporation,  but  it  is,  never- 
theless, a  partnership  association,  governed  by  the  statutes  and  arti- 
cles under  which  it  was  organized,  and  the  rules  and  regulations  it 
may  prescribe  in  execution  of  the  power  with  wliich  the  statutes  have 
invested  it." 

That  a  limited  partnerehip  association  created  under  the  Penn- 
sylvania statute  may  be  described  as  a  "quasi  corporation,"  having 
some  of  the  characteristics  of  a  corporation,  or  as  a  "new  artificial 
person,"  is  not  a  sufficient  reason  for  regarding  it  as  a  corporation 
within  the  jurisdictional  rule  heretofore  adverted  to.  That  rule  must 


CHAP.  II.]   GREAT  SOUTHERN  FIRE  PROOF  HOTEL  CO.  V.   JONES.   81 

not  be  extended.  We  are  unwilling  to  extend  it  so  as  to  embrace 
partnership  associations. 

We  have  not  overlooked  the  case  of  Andrews  Bros.  Co.  v.  Youngs- 
town  Coke  Co.,  58  U.S.  App.  444,  in  which  the  Circuit  Court  of  Ap- 
peals for  the  Sixth  Circuit,  spealdng  by  Judge  Lurton,  held  that 
limited  partnership  associations  organized  under  the  Pemisylvania 
statute  were  corporations  within  the  jurisdictional  requirement  of 
diverse  citizenship.  For  the  reasons  stated,  we  are  unable  to  concur 
in  the  view  taken  by  that  court. 

We  therefore  adjudge  that  as  the  bill  does  not  make  a  case  arising 
under  the  Constitution  and  laws  of  the  United  States,  it  was  neces- 
sary to  set  out  the  citizenship  of  the  individual  members  of  the  part- 
nership association  of  Jones  &  Laughhns,  limited,  which  brought 
this  suit. 


82  RUSSELL    V.  TEMPLE.  [CHAP.   IH. 


CIL\PTER    III. 

UNDER  WHAT,   IF  ANY,   CIRCUMSTANCES  THE 
CORPORATE  FICTION  SHOULD  BE  DISREGARDED. 


RUSSELL  V.  TEMPLE. 

3  Dane's  Abridgment  (Mass.)  108.     1798. 

[Probate  Appeal.]  In  this  case  the  heirs  of  Thomas  Russell  con- 
tended that  his  shares  in  Maiden,  Charles-River,  Haverhill,  Andover, 
and  MeiTimack  bridges,  in  Middlesex  Canal,  etc.,  ought  to  be  con- 
sidered as  real  estate,  and  his  widow,  afterwards  manned  to  Temple, 
ought  to  have  only  her  dower  for  life  in  them.  On  the  other  hand, 
Temple  and  wife  contended  they  were  personal  estate,  and  ought  to 
be  distributed  as  such,  and  she  have  one-third  part  forever.  The 
strongest  case  among  these,  in  favor  of  real  estate,  was  the  Middlesex 
Canal,  in  which  the  corporation  had  a  fee  simple  estate,  or  an  estate 
forever,  and  a  perpetual  toll.  By  the  statutes  passed  respecting  this 
canal  and  real  estate,  the  property  therein  was  divided  into  800  shares, 
and  the  shares  in  the  canal,  including  the  towing  paths  and  wharves 
thereon,  were  made  transferable  and  taxable  as  personal  estate. 
This  corporation  also  had  power  to  hold  real  estate  to  the  amount  of 
£30,000,  over  and  above  the  canal  itself,  and  this  appendant  real 
estate  was  made  taxable  as  real  estate  of  the  corporation  in  the  several 
towns  in  which  it  lay. 

It  was  argued  (for  the  widow)  that  these  shares  were  personal 
estate  for  two  reasons :  — 

1st.  Because  these  estates  can  only  exist  in  the  coiporation,  which 
alone  can  acquire  it,  alone  be  seized  or  possessed  of  it,  alone  pass  it 
away,  manage  or  repair  it,  and  so  must  hold  it  entire;  and  that  the 
corporation  is  a  moral  person  to  all  the  purposes  of  property.  Its 
tenure  is  to  their  successoi-s,  or  to  their  successors  and  assigns;  these 
estates  never  can  vest  in  or  be  divided  among  the  individual  mem- 
bers, to  hold  as  tenants  in  common,  etc.,  in  their  private  capacities. 
Only  the  corporation  can  forfeit  the  estate,  and  that  only  by  for- 
feiting their  charter;  and  onlj'  the  corporation  can  be  taxed  for  it  on 
common  law  principles;  and  on  these  can  it  alone  be  taken  in  execu- 
tion for  the  debts  of  the  corporation;  and  on  a  dissolution  of  the  cor- 
poration, "its  lands  revert  to  the  grantor,  or  his  heirs,  and  the  debts 
due  to  or  from  it  are  totally  extinguished ;  so  that  the  members  of  it 
cannot  recover  or  be  charged  with  them  in  their  natural  capacities." 


CHAP.  III.]  RUSSELL    V.  TEMPLE.  83 

And  a  grant  to  a  corporation  can  only  be  for  its  life  or  continuance. 
2  Bl.  Com.  484;  1  Lev.  239;  1  Bac.  Abr.  510.  The  case  of  the  Royal 
Exchange  Insurance  Com-pany  v.  Vaughan,  1  Burr.  155,  and  Cowper, 
79  to  86,  Gardner's  Case. 

2d.  Because  the  share  is  personal  estate,  though  the  corporation 
hold  real  estate;  for  the  individual  member  has  no  estate,  but  only  a 
right  to  such  dividends  as  the  corporation,  from  time  to  time,  assign 
to  him.  He  is  unknown  on  the  grants  made  to  it,  and  he  carmot 
grant  any  part  of  the  estate;  nor  can  he  be  taxed  for  it  but  by  statute 
law;  nor  can  any  private  member  of  a  corporation  be  distrained  for 
a  public  concern  of  it;  his  only  remedy  for  his  dividend  is  case  in  as- 
sumpsit, or  an  action  on  the  case  for  a  wrongful  refusal  or  neglect  to 
pay  or  allow  him  his  part  of  the  profits.  4  Wood's  Con.  489,  etc. ; 
Cowp.  85;  Impey's  Modern  Pleader,  83;  1  Vent.  351;  Dutch  v.  War- 
ren, 1  Stra.  406;  same  case,  2'Burr.  1011.  So  lands  may  be  real  estate 
in  one,  yet  the  trees  or  corn  gi'owing  on  them  may  be  personal  estate 
in  another.  LiffarcVs  Case,  6  Co.  46  to  50;  Imp.  M.  P.  167. 

For  the  heirs  it  was  urged  that  these  shares  were  real  estate,  be- 
cause it  was  said  the  estates  were  real  in  the  corporations;  annexed  to 
the  soil;  and  that  if  these  estates  in  the  corporations  were  real,  the 
estates  of  the  individual  members  in  them  followed  their  nature,  and 
were  real;  and  that  the  frequent  declarations  of  the  legislature  de- 
claring such  shares  personal  estate,  at  least  shew  a  doubt:  that  when 
one  has  a  right  to  receive  rent,  he  has  only  a  right  to  receive  a  sum 
of  money;  yet  it  does  not  follow  that  his  estate  is  not  real  estate,  out 
of  which  his  rent  issues. 

The  judgment  of  the  court  was,  that  these  shares  were  personal 
estate,  and  distribution  was  ordered  accordingly.  The  principal  rea- 
son of  the  decision  appears  to  be,  because  the  court  considered  that 
the  individual  member,  or  shareholder,  had  only  a  right  of  action  for 
a  sum  of  money,  his  part  of  the  net  profits,  or  dividends.  And  so  the 
law  has  been  held  to  be  since  this  decision  was  made. 

Note.  —  While,  in  a  broad  sense,  the  corporation  holds  its  prop- 
erty for  the  benefit  of  its  shareholders,  the  relation  between  the  cor- 
poration and  its  shareholders  is  a  legal,  not  an  equitable,  relation. 

The  property  of  the  corporation  cannot  be  attached  to  recover  a 
debt  against  a  shareholder.  Williamson  v.  Smoot,  7  Martin  (La.)  31. 

Service  upon  the  X  corporation  does  not  bring  the  Y  corporation 
before  the  court,  even  though  the  Y  corporation  owns  practically 
all  the  stock  of  the  X  corporation.  Peterson  v.  Chicago  Ry.  Co.,  205 
U.S.  364. 


84  PARKER    V.  BETHEL    HOTEL    CO.  [CHAP.   III. 

PARKER  V.  BETHEL  HOTEL  CO. 

90  Tenn.  255.     1896. 

Appeal  from  Chancery  Court  of  Maury  County. 

On  May  24,  1880,  P.  C.  Bethel,  W.  D.  Bethel,  Lucius  Frierson, 
Eugene  Pillow,  J.  M.  Mayes,  and  L.  W.  Black  became  incorporated, 
under  the  laws  of  the  State  of  Termessee,  as  the  Bethel  Hotel  Com- 
pany. The  business  of  this  corporation,  as  declared  in  its  charter, 
was  the  erection,  furnishing,  and  operation  of  a  hotel  in  the  town  of 
Columbia,  Tenn.,  the  hotel  building  to  include  storehouses  and  a  con- 
cert hall.  The  charter  was  taken  out  under  chapter  142  of  the  acts 
of  1875,  and  was  in  the  form  prescribed  for  hotel  companies,  except 
that  words  were  added  authorizing  it  to  build  and  own  storehouses 
and  a  concert  hall.  The  corporation  was  duly  and  regularly  organ- 
ized, with  a  capital  stock  of  $100,000,  divided  into  shares  of  $50  each. 
After  its  organization,  the  building  contemplated  by  the  charter  was 
erected  on  a  lot  owned  by  the  corporation.  The  building  was  used 
partly  for  a  hotel,  and  partly  for  other  purposes.  Septeml^er  1,  1885, 
the  Bethel  Hotel  Company  and  Lucius  Frierson  conveyed  to  Ma3^es 
&  Dodson  the  ''hotel  proper  part"  of  the  building;  by  deed  signed 
"Bethel  Hotel  Company,  W.  D.  Bethel,  President;  Lucius  Frierson, 
Secretary  and  Treasurer;  and  Lucius  Frierson."  This  conveyance 
was  authorized  by  a  vote  of  the  stockholders  at  the  last  meeting  ever 
held  by  them.  No  business  seems  to  have  been  transacted  by  the 
corporation  after  tliis  time.  On  or  about  August  28,  1886,  Frierson 
became  the  owner  of  all  the  stock  of  the  company;  but,  both  before 
and  after  that  date,  he  pledged  various  shares  as  security  for  debts  of 
liis  which  are  still  outstanding.  The  stock  so  pledged  was  not  trans- 
ferred on  the  books  of  the  company.  He  used  the  remainder  of  the 
building  as  his  own  up  to  January  12,  1892,  when  he  executed  a  deed 
in  his  own  name,  purporting  to  convey  to  Webster,  in  trust,  the  real 
estate  owned  by  the  Bethel  Hotel  Company  and  certain  stock  in  that 
company.  The  purpose  of  this  deed  was  to  secure  the  payment  of 
certain  debts  owing  by  Frierson,  preferring  one  creditor  and  pro- 
viding for  pro  rata  payment  of  the  others.  Most  of  the  creditors  of 
Frierson  who  had  loaned  him  money  on  the  stock  of  the  Bethel  Hotel 
Company  were  not  provided  for  in  the  deed  of  trust.  Parker  et  al., 
creditors  of  Frierson  and  pledgees  of  said  stock,  filed  a  bill  in  equity, 
praying  {inter  alia)  to  annul  the  trust  deed  to  Webster.  The  cause 
was  heard  before  the  Chancellor  of  Maury  County,  and  afterwards 
before  the  Court  of  Chancery  Appeals,  from  which  the  case  was 
taken  to  the  Supreme  Court. 

J.  C.  Bradford,  Sp.  J.  It  may  be  regarded  as  settled,  therefore, 
that  the  legal  title  to  the  property  conveyed  to  defendant,  Webster, 
was,  at  the  date  of  that  instrument,  in  the  Bethel  Hotel  Company, 


CHAP.  III.]  PARKER    V.  BETHEL    HOTEL    CO.  85 

where  it  had  been,  unquestioned  and  undisturbed,  since  1880,  the 
year  of  its  incorporation  and  organization.  Defendants  insist  that, 
although  Frierson  may  not  have  been  invested  with  the  legal  title, 
he,  nevertheless,  had  such  an  equitable  estate  and  interest  as  entitled 
him  to  sell  and  dispose  of  the  property.  In  other  words,  that  he  was 
the  real  owner  of  the  property,  and,  as  suchj  had  the  absolute  right  to 
use  or  dispose  of  it. 

Tliis  alleged  equitable  estate  was  not  the  creation  of  any  deed  or 
written  contract,  executed  by  the  Bethel  Hotel  Company,  or  of  any 
corporate  act  or  resolution  adopted  by  the  stockholders  or  directors, 
wliich  in  terms  referred  to  or  defined  it,  but  is  rather  the  result  and 
consequence  of  certain  facts  and  conditions,  the  existence  of  which 
is  affirmed  by  the  defendants. 

It  is  said  that  the  Bethel  Hotel  Company,  by  the  alienation  of  that 
•part  of  its  property  built  for  and  adapted  to  the  uses  and  purposes  of 
a  hotel,  deprived  itself  of  the  means  of  conducting  a  hotel  business, 
and  that,  since  1885,  the  date  of  the  sale  to  Mayes  &  Dodson,  it  had 
ceased  to  exercise  its  corporate  franchises ;  that  the  stockholders,  at 
the  meeting  held  in  September,  1885,  passed  a  resolution,  or  agreed 
among  themselves,  that  the  corporation  should  go  into  liquidation, 
and  that  Lucius  Frierson,  being  then  the  owner  of  all  the  capital 
stock  of  the  corporation,  became,  in  consequence,  the  equitable  owner 
of  all  its  property,  with  full  power  to  use  it  or  dispose  of  it  in  such 
manner  as  he  might  choose  to  do.  The  position  of  the  defendants 
seems  to  be  that  all  rights  of  the  corporation  in  the  property  were 
extinguished,  that  it  had  ceased  to  be  affected  with  any  corporate 
uses,  and  that  it  belonged  absolutely  to  Frierson. 

The  facts  affirmed  by  defendants  are  not  all  of  them  exactly  as 
found  by  the  Court  of  Chancery  Appeals.  It  is  true  that  the  corpora- 
tion sold  and  conveyed  the  hotel  part  of  its  building  to  Mayes  & 
Dodson,  retaining  only  the  stores  and  opera  house,  and  never  after- 
wards engaged  in  the  business  of  owning  and  operating  a  hotel. 
Lucius  Frierson  was  not  the  sole  stockholder  in  1885,  when  the  hotel 
was  sold,  and  did  not  become  such  until  August  28,  1886,  when  he 
purchased  the  Bethel  stock.  His  stock,  or  a  large  part  of  it,  at  that 
time  and  subsequently,  was  held  as  collateral  security  by  other  par- 
ties. It  is  not  true  that  a  resolution  was  ever  adopted  by  the  stock- 
holders directing  the  liquidation  or  winding  up  of  the  affairs  of  the 
corporation,  or  that  they  were  ever  wound  up.  The  facts,  as  found 
by  the  Court  of  Chancery  Appeals  on  this  point,  are  stated  in  its. 
opinion  in  the  following  words:  "It  may  be  fairly  inferred,  though 
it  does  not  distinctly  appear  in  terms  in  the  proof,  that  when  the 
deed  was  made  to  Mayes  &  Dodson  it  was  then  understood  between 
W.  D.  Bethel  and  Lucius  Frierson,  they  then  owning  practically  all, 
or  nearly  all,  of  the  stock,  that  Bethel  should  take  the  proceeds  of 
the  sale  to  Mayes  &  Dodson,  amounting  to  $22,500,  and  a  sufficient 


86  PARKER  V.   BETHEL  HOTEL  CO.        (cHAP.  III. 

amount,  in  addition,  from  Lucius  Friorson,  personully,  to  make  S^iO,- 
000,  and  for  this  he  would  transfer  his  stock,  SGI  ,000,  to  Frierson,  and 
that  this  arrangement  was  consunnnatcd,  so  far  as  it  coukl  be  done 
without  direct  corporate  action  of  the  corporation  itself,  hy  the  pajn-r 
of  August  28,  1880,  made  by  Bethel  to  Friei-son,  and  this  is  what  they 
understood  by  the  resolution  to  go  into  liquidation,  there  being  no 
debts  due  by  the  corporation,  and,  following  out  this  idea,  from  the 
date  of  the  sale  to  Mayes  <fc  Dotlson,  Lucius  Frierson  proceeded  to 
treat  the  property  as  his  own,  on  the  idea  that  he  himself  constituted 
the  corporation.  We  do  not  think  that  he  entertained  the  idea  that 
the  corporation  was  defunct,  but  simply  that  he  was,  him.self,  the 
corporation,  and  could  tlo  what  he  wished  with  the  a.ssets." 

In  consitlering  the  position  of  the  defendants,  that  Frierson  Ixj- 
came  the  equitable  owner  of  the  assets  of  the  corporation,  we  must, 
therefore,  leave  out  of  view  the  idea  that  there  was  any  corporate 
action  looking  to  a  dissolution  of  the  corporation  and  winding  up  of 
its  affairs.  Frierson's  estate  or  interest  in  the  property,  if  he  had  any, 
rests  on  the  postulate  that,  in  consecjuence  of  the  noiuiser  of  its  fran- 
chises and  his  sole  proprietorship  of  all  its  capital  stock,  the  corpora- 
tion was  dissolved,  and  he  became  the  equitable  owner  of  all  its 
property. 

A  corporation  can  be  dissolved,  and  its  existence  wholly  termi- 
nated, only  by  the  extinguishment  of  the  corporate  franchises  con- 
ferred by  the  State.  An  ordinary  business  corporation,  where  its 
charter  specifies  no  definite  time  for  its  continuance,  may  sell  its 
property  and  wind  up  its  atTairs  whenever  a  majority  of  the  stock- 
holders may  deem  it  advisable  (Tread well  v.  Salifibnry  Mfg.  Co., 
7  Gray,  393;  Black  v.  Delaware  &  C.  Canal  Co.,  22  N.J.  Eq.  416); 
but  the  franchises  conferred  upon  the  stockholders  by  the  State  are 
not  extinguished  by  the  cessation  from  business  thus  brought  about. 
2  Morawetz  on  Corp.,  §  1004. 

It  is  claimed  b}'  the  defendants  that  the  dissolution  of  the  corp)ora- 
tion  was  effected  by  the  fact  that  Lucius  Frierson  became  the  sole 
owner  of  all  its  capital  stock.  Admitting  it  to  be  true  that  he  was 
the  owner  of  all  the  stock  of  the  corporation,  it  by  no  means  follows 
that  the  corporation  was  thereby  dissolved  and  forfeited  its  fran- 
chises. On  this  question  the  latest  text  waiter  on  corporation  law  has 
this  to  say,  viz.:  "Contrary  to  early  opinion,  it  is  now  generallj'  held 
that  the  fact  that  all  the  shares  in  a  joint-stock  company  have  passed 
into  the  hands  of  two  members,  or  even  into  the  hands  of  a  single 
person,  does  not,  ipso  facto,  work  a  dissolution  of  the  corporation, 
since  such  sole  owner  may  so  dispose  of  the  shares,  as,  by  the  election 
of  the  necessary  directors  and  officers,  to  continue  the  corporate 
existence."  5  Thompson's  Commentaries  on  the  Law  of  Corpora- 
tions, §  6653.  And,  in  2  Morawetz  on  Corporations,  §  1009,  it  is  said: 
"It  is  well  settled  that  all  the  shares  of  a  corporation  maj''  be  held 


CHAP.  III.]  PARKER    V.  BETHEL    HOTEL    CO.  87 

b}^  a  single  person,  and  yet  the  corporation  continue  to  exist,  and,  if 
the  charter  or  by-laws  should  require  certain  acts  to  be  done  by  more 
than  one  shareholder,  the  sole  owner  may  transfer  a  portion  of  his 
shares  to  other  persons,  so  as  to  conform  to  the  letter  of  the  rule." 
It  has  been  held  that  a  corporation  wliich  has  sold  all  its  assets,  with 
the  intention  of  putting  an  end  to  its  business,  whose  officers  had  all 
resigned,  and  whose  stockholders  had  all  transferred  their  shares  to 
a  single  person,  was,  nevertheless,  not  dissolved,  and  that  its  exist- 
ence could  be  terminated  only  by  judgment  of  forfeiture  or  by  sur- 
render accepted  by  the  State.  Russell  v.  McLellan,  14  Pick.  (Mass.) 
69,  70;  Newton  Mfg.  Co.  v.  White,  42  Ga.  148;  Baldwin  v.  Canfield, 
26  Minn.  43. 

The  dissolution  of  a  pecuniary  or  business  corporation  is  effected 
in  one  of  the  following  ways,  viz. :  (1)  by  the  expiration  of  its  charter; 
(2)  by  Act  of  the  Legislature,  where  power  is  reserved  for  that  pur- 
pose, or  there  is  no  constitutional  inhibition;  (3)  by  surrender  of 
charter  which  is  accepted;  (4)  by  forfeiture  of  the  franchises  and 
judgment  of  dissolution  pronounced  by  a  Court  having  jurisdiction. 
2  Morawetz,  §  1004;  Taylor  on  Private  Corporations,  §  430.  It  is 
not  pretended  that  the  Bethel  Hotel  Company  was  dissolved  in 
either  of  the  ways  indicated.  The  charter  of  the  corporation  has  not 
expired,  neither  has  it  been  repealed  by  the  Legislature,  or  been  sur- 
rendered to  the  State  by  its  members  or  stockholders.  It  may  be  true 
that  there  was  a  nonuser  of  its  francliises  by  the  corporation  for  a 
period  of  seven  years  or  more,  occasioned  by  the  sale  of  the  only 
property  it  owned  which  could  have  been  used  for  hotel  purposes. 
Undoubtedly  the  nonuser  of  its  franchises  bj'  a  corporation  is  gi'ound 
for  dissolution  and  forfeiture  of  its  charter,  at  the  instance  of  the 
State;  but  until  sentence  of  dissolution  has  been  pronounced  by  a 
court  of  competent  jurisdiction,  in  a  proper  proceeding  instituted 
for  the  purpose,  the  corporation  will  continue  to  exist,  notwithstand- 
ing its  failure  to  use  its  franchises.  And  forfeiture  can  only  be  de- 
creed in  a  proceeding  directly  instituted  for  the  purpose,  by  the  State 
granting  it.  Code  (M.  &  V.)  §  1712;  State  v.  Butler,  15  Lea,  104,  110; 
Jersey  City  Gaslight  Co.  v.  Consumers'  Gas  Co.,  40  N.J.  Eq.  427; 
Broadwell  v.  Merritt,  87  Mo.  95.  Until  dissolution  has  been  thus 
judicially  pronounced,  neither  the  existence  of  the  corporation  nor  its 
title  to  its  property  can  be  questioned  collaterally. 

We  are  bound  to  conclude,  therefore,  that  the  Bethel  Hotel  Com- 
pany was  not  dissolved,  or  its  franchises  extinguished  for  any  of  the 
reasons  alleged  by  the  defendants,  and  that  it  is  now  a  corporation 
endued  with  life,  with  authority  to  own  property  and  exercise  all  the 
powers  conferred  on  it  by  its  charter. 

Defendants  insist  that  the  alleged  equitable  estate  of  Lucius  Frier- 
son  in  the  property  of  the  Bethel  Hotel  Company  did  not  depend 
alone  upon  the  dissolution  of  the  corporation,  but  resulted  also  from 


88  PARKER    V.  BETHEL    HOTEL    CO.  [CHAP.   IIL 

the  fact  that  he  was  the  sole  owner  of  all  its  capital  stock.  The 
proposition  is,  that  if  one  person  owns  all  the  shares  of  stock  of  a  cor- 
poration which  owes  no  debts,  he,  in  virtue  of  such  ownership,  be- 
comes the  equitable  owner  of  all  its  property,  or,  at  least,  ma}'-  sell 
and  dispose  of  it  by  deed,  if  he  choose  to  do  so.  This  proposition  is 
argued  by  counsel  for  defendant  with  force  and  ability,  and  is  sup- 
ported by  some  authority.  It  has  found  favor  with  the  Supreme 
Court  of  Maryland  (Swift  v.  Smith,  65  Md.  428,  433);  but  the  de- 
cision of  that  learned  court  is  opposed  by  the  current  of  authority, 
and  seems  to  us  to  overlook  and  ignore  certain  principles  that  are 
fundamental. 

A  corporation  and  its  shareholders  are  distinct  legal  entities.  In 
Keith  V.  Clark,  4  Lea,  718,  this  court  held  that,  notwithstanding  the 
State  owned  all  the  stock  in  the  Bank  of  Tennessee,  "the  bank  and 
the  State  are  entirely  different  legal  entities,"  and,  in  Lillard  v. 
Porter,  2  Head,  175,  it  was  said,  "stockholders  are  totally  distinct 
from  the  corporation."  Important  consequences  result  from  this 
rule.  The  shareholders  are  neither  responsible  for  the  debts  nor  for 
the  torts  of  the  corporation.  In  the  absence  of  special  circumstances, 
the  shareholders  cannot  be  parties,  either  plaintiffs  or  defendants,  in 
actions  respecting  corporate  rights,  nor  have  they  any  title  or  direct 
interest  in  the  property  of  the  corporation. 

"Shareholders,"  says  Thompson,  "are  not  joint  tenants  or  in  any 
other  sense  co-owners  of  the  corporate  property,  either  before  or 
after  its  dissolution.  The  title  to  it  rests  exclusively  in  the  legal  en- 
tity called  the  corporation.  A  share  of  the  capital  stock  merely  gives 
the  right  to  partake,  according  to  the  amount  put  into  the  fund,  of 
the  surplus  profits  of  the  corporation,  and  ultimately',  on  the  dissolu- 
tion of  it,  of  so  much  of  the  fund  thus  created  as  remains  unimpaired 
and  is  not  liable  for  debts  of  the  corporation."  Commentaries  on  the 
Law  of  Corporations,  §  1071.  As  the  shareholders  have  no  direct 
interest  in  the  corporate  property,  they  cannot  convey  the  real  estate 
of  the  corporation,  though  all  join  in  the  deed. 

In  Wheelock  v.  Moulton,  15  Vt.  519,  Redfield,  J.,  stated  the  rea- 
sons for  the  rule  in  his  usual  clear  and  accurate  style.  In  that  case, 
Moulton  and  Hutchinson,  sole  proprietors  and  owners  of  all  the  stock 
of  a  corporation,  conveyed  its  real  estate,  in  mortgage,  to  secure 
the  repajTuent  of  money  borrowed  of  the  plaintiff,  Wheelock.  He 
brought  suit  to  enforce  his  mortgage.  Judge  Redfield  said:  "The 
fact  that  the  signers  of  this  deed  owned  the  whole  of  the  shares  will 
make  no  difference  in  regard  to  the  necessity  of  a  vote  of  the  corpo- 
ration, in  order  to  convey  the  land.  The  title  to  the  land  was  in  the 
corporation,  not  in  the  individual  shareholders.  The  deed  of  one,  or 
of  any  number  of  the  stockholders,  will  not  affect  the  title  to  the 
land.  The  share  owners  are  not  tenants  in  common  of  the  land.  They 
have  no  title  whatever  to  any  of  the  property  of  the  corporation.  It 


CHAP.  III.]  PARKER    V.  BETHEL    HOTEL    CO.  89 

is  true  that  one  who  owned  all  the  shares  might  control  the  corpora- 
tion, and  so  he  could  if  he  owned  a  majority  of  the  shares;  but  he 
could,  in  either  case,  do  it  only  by  a  vote  of  the  corporation,  at  a 
meeting  held  in  strict  accordance  with  the  statutes  of  the  corpora- 
tion." 

And  in  Humphreys  v.  McKissick,  140  U.S.  304,  Mr.  Justice  Field, 
discussing  the  same  question,  said:  "The  property  of  a  corporation  is 
not  subject  to  the  control  of  individual  members,  whether  acting 
separately  or  jointly.  They  can  neither  incumber  nor  transfer  that 
property,  nor  authorize  others  to  do  so.  The  corporation  —  the 
artificial  being  created  —  holds  the  property,  and  alone  can  mort- 
gage or  transfer  it,  and  the  corporation  acts  only  through  its  officers, 
subject  to  the  conditions  prescribed  by  law." 

A  very  instructive  case  on  this  question  is  Baldwin  v.  Canfield,  26 
Minn.  43.  The  facts  of  that  case  were  very  similar  to  those  of  this 
case,  and  the  direct  question  now  under  consideration  was  passed 
upon.  The  opinion  of  the  court  was  in  accord  with  the  cases  above 
cited.  See  also  Button  v.  Hoffman,  61  Wis.  20. 

We  are  thus  led,  both  by  reason  and  authority,  to  the  conclusion 
that  Lucius  Frierson,  as  sole  stockholder  of  the  Bethel  Hotel'  Com- 
pany, had  no  title,  legal  or  equitable,  to  its  property.  The  title  tq  the 
property  was  in  the  Bethel  Hotel  Company,  and  could  only  be  con- 
veyed by  it.  The  conveyance  of  its  real  estate  is  one  of  the  most 
solemn  acts  of  a  corporation,  and  it  can  only  be  done  in  pursuance  of 
a  vote  of  the  corporation,  and  by  deed  executed  in  the  form  and  mode 
prescribed  by  law.  Thompson's  Commentaries  on  the  Law  of  Cor-, 
porations,  §  5096.  At  common  law  a  corporation  could  not  execute 
a  deed  to  realty  except  under  seal ;  and  the  general  corporations  Act 
of  1875,  under  which  the  Bethel  Hotel  Company  was  organized, 
provides  that,  if  the  corporation  have  no  seal,  it  shall  be  bound  by  the 
signature  of  its  name  by  a  duly  authorized  officer. 

To  have  made  a  valid  conveyance  of  the  real  estate  of  the  com- 
pany, it  was  necessary,  therefore,  that  the  deed  should  have  been 
executed  in  the  name  of  the  corporation,  under  seal,  if  it  had  one, 
and,  if  not,  its  name  should  have  been  signed  by  an  agent  duly  au- 
thorized by  its  governing  agency,  its  board  of  directors.  Garrett  v. 
Belmont  Land  Co.,  94  Tenn.  460.  As  we  have  seen,  nothing  of  this 
kind  was  done.  The  deed  to  defendant,  Webster,  was  executed  by 
Lucius  Frierson,  in  his  own  name  and  under  his  own  signature.  The 
Bethel  Hotel  Company,  although  it  owned  the  property,  was  in  no 
sense  a  party  to  it.  For  this  and  other  reasons  given,  the  deed  of 
Lucius  Frierson,  conveying  the  real  estate  of  the  Bethel  Hotel  Com- 
pany to  defendant,  W.  J.  Webster,  was  void,  and  conveyed  to  him 
no  title  or  interest  therein. 

Note.  —  The  owner  of  all  the  stock  of  a  corporation  is  not  entitled 


90  COOK    V.  BURLINGTON.  [CHAP.   III. 

to  replevy  the  property  of  the  corporation  from  a  stranger.  Button  v. 
Hoffman,  61  Wis.  20.  Nor  sue  on  a  cause  of  action  belonj2;ing  to  the 
corporation.    Fitzgerald  v.  Missouri  Pacific  Ry.  Co.,  45  Fed.  812. 

Nor  is  he  hable  for  the  debts  of  the  corporation.  Whiting  v. 
Maiden  &  Melrose  Railroad,  202  Mass.  298,  304;  Atchison  R.R.  Co. 
V.  Cochran,  43  Kan.  225.  See  also  Stone  v.  Cleveland  Ry.  Co.,  202 
N.Y.  352. 

A  court  of  equity,  on  winding  up  the  affairs  of  a  corporation  on  the 
expiration  of  its  charter,  cannot  order  a  sale  of  the  property  of  an- 
other corporation,  although  all  the  stock  of  the  latter  belongs  to  the 
former  corporation.  Stewart  v.  Pierce,  116  Iowa,  733.  An  English 
company,  owning  98%  of  the  stock  of  an  American  corporation,  is 
not  assessable  to  income  tax  upon  the  full  amount  of  the  profits  of  the 
American  corporation.  Kodak,  Limited  v.  Clark,  [1902]  2  K.B.  450. 


COOK  V.   BURLINGTON. 

59  Iowa,  251.     1882. 

The  plaintiffs  are  the  executors  of  the  estate  of  James  W.  Grimes, 
deceased.  They  are  residents  of  the  city  of  Burhngton,  where  the 
estate  is  situated.  Part  of  the  estate  consists  of  shares  of  stock  in  the 
Dunleith  and  Dubuque  Bridge  Co.,  which  is  a  corporation  of  that 
name,  incorporated  under  the  general  incorporation  laws  of  the 
State  of  Iowa,  and  having  its  principal  place  of  business  in  Dubuque 
county.  The  corporation  owns  a  bridge  across  the  Mississippi  River, 
from  the  city  of  Dubuque,  Iowa,  to  the  eastern  shore  of  the  river  in 
the  State  of  Illinois,  and  said  bridge  is  all  the  tangible  property 
owned  by  the  corporation.  The  bridge  was  assessed  for  taxation  at 
Dubuque,  and  the  taxes  were  paid.  The  shares  of  stock  in  the  bridge 
company  held  and  owned  by  the  estate  of  Grimes  were  also  as- 
sessed for  taxation  for  the  same  year  at  the  city  of  Burlington.  The 
plaintiffs  claimed  that  the  stock  was  not  liable  to  taxation,  and  ap- 
pealed from  the  board  of  equalization  of  the  city  of  Burlington  to  the 
Circuit  Court.  Upon  a  trial  in  the  Circuit  Court  it  was  held  that  the 
assessment  of  the  stock  was  authorized  by  law,  and  plaintiffs  ap- 
peal. 

RoTHRocK,  J.  The  assessment  of  the  bridge  as  the  property  of  the 
corporation  was  authorized  by  law.  Appeal  of  The  Des  Moines  Water 
Company,  48  Iowa,  324.  Whether  the  shares  of  stock  can  be  legally 
assessed  and  taxed  as  the  property  of  the  stockholders  for  the  same 
year  for  which  the  property  of  the  corporation  is  assessed  and  taxed 
was  not  determined  in  that  case.  It  was  said,  however,  that  "the 
statute  provides  that  the  stock  of  such  corporations  shall  be  as- 
sessed at  its  cash  value.  When  assessed  and  taxed  under  the  statute, 


CHAP.  III.]  COOK    V.  BURLINGTON.  91 

stock  must  be  taxed  as  the  property  of  the  respective  owners,  and 
there  is  no  provision  maldng  the  corporation  liable  therefor." 

We  have  then  the  question  in  this  case  whether  the  shares  of  stock 
may  be  taxed  in  addition  to  the  taxation  of  the  property  of  the  cor- 
poration. 

And  we  may  say,  once  for  all,  at  the  outset,  that  our  views,  as  ex- 
pressed in  the  case  just  cited,  that  the  statute  provides  that  the  stock 
shall  be  assessed  and  taxed,  remains  unchanged.  This  conclusion 
is  not  founded  upon  any  doubtful  construction  of  the  statute,  but 
upon  its  plain,  certain  and  unequivocal  language  and  meaning.  The 
statute  imposing  this  burden  upon  the  stock  is  found  in  section  813 
of  the  Code,  and  is  as  follows:  "Depreciated  bank  notes  and  the 
stock  of  corporations  and  companies  shall  be  assessed  at  their  cash 
value.  .  .  ." 

It  is  idle  to  contend  in  the  face  of  this  plain  and  explicit  language 
that  the  legislature  has  not  required  that  stock  in  corporations  shall 
be  assessed,  and  the  only  question  now  for  determination  is,  does  the 
legislature  have  the  power  to  determine  that  the  property  of  a  cor- 
poration and  the  stock  shall  both  be  taxed. 

Counsel  for  appellants  contend  that  no  such  power  exists,  because 
it  is  duplicate  or  double  taxation  of  the  same  property,  and  it  is  in- 
sisted that  "this  court  has  over  and  over  again  declared  that  double 
taxation  is  forbidden  by  our  Constitution."  If  tliis  statement  were 
correct,  and  we  should  concede  that  the  question  here  presented  were 
one  of  duplicate  taxation,  the  case  could  easily  and  speedily  be  dis- 
posed of  by  a  prompt  reversal.  But,  wliile  it  is  true  that  this  court 
in  Tallman  v.  Butler  County,  12  Iowa,  534,  said  that  it  "is  neither 
the  policy  nor  the  justice  of  the  law  to  tolerate  double  taxation," 
and  in  U.S.  Express  Co.  v.  Ellyson,  28  Id.  378,  that  "double  taxation 
would  be  so  unjust  as  to  excite  disfavor  of  both  courts  and  legisla- 
ture," and  in  McGregor's  Executors  v.  Vanpel,  24  Id.  436,  that  mort- 
gages upon  real  estate  should  be  held  to  be  taxable  "unless  this  will 
lead  to  double  taxation,"  yet  it  never  has  been  held  in  this  State, 
that  what  is  denominated  duplicate  taxation  is  in  excess  of  the  legis- 
lative power.  The  most  that  can  be  said  of  these  utterances  of  this 
court  is,  that  it  should  be  held  in  disfavor  by  courts  and  legislatures. 

In  Cooley  on  Taxation,  165,  it  is  said:  "It  has  properly  and  justly 
been  held  that  a  construction  of  the  laws  was  not  to  be  adopted  that 
would  subject  the  same  property  to  be  twice  charged  for  the  same 
tax,  unless  it  was  required  by  the  express  words  of  the  statute  or  by 
necessary  implication." 

Upon  the  question  as  to  whether  the  imposition  of  taxes  upon  the 
property  of  a  corporation  and  upon  the  shares  of  stock  in  the  hands  of 
stockholders,  the  general  observations  upon  the  subject  of  duplicate 
taxation  found  in  Cooley  on  Taxation,  page  159,  seem  to  us  to  be  ap- 
propriate to  be  here  quoted.  It  is  there  said:  "A  system  of  indirect 


92  COOK   V.  BURLINGTON.  [CHAP.  III. 

taxes,  combined  with  a  system  of  general  taxation  by  value,  must 
often  have  the  effect  to  duplicate  the  burden  upon  some  species  of 
property  or  upon  some  persons,  and  the  taxation  of  stockholders  of 
a  corporation  and  also  of  the  corporation  itself,  must  sometimes  pro- 
duce a  like  result.  There  is  also,  sometimes,  what  seems  to  l^e  double 
taxation  of  the  same  property  to  two  individuals,  as  where  the  pur- 
chaser of  property  on  credit  is  taxed  on  its  full  value  while  the  seller  is 
taxed  to  the  same  amount  on  the  debt.  .  .  .  Now,  whether  there  is 
injustice  in  the  taxation,  in  every  instance  in  which  it  can  be  shown 
that  one  individual,  who  has  been  directly  taxed  his  due  proportion, 
is  also  compelled  indirectly  to  contribute,  is  a  question  we  have  no 
occasion  to  discuss.  It  is  sufficient  for  our  purposes  to  show  that  the 
decisions  are  nearly,  if  not  quite,  unanimous  in  holding  that  taxation 
is  not  invalid  because  of  any  such  unequal  results." 

It  must  be  conceded  that  the  taxation  of  the  property  of  the  cor- 
poration and  also  of  the  stock  bears  no  resemblance  to  taxing  the 
same  tract  of  land  twice  to  the  same  person,  nor  once  to  A,  and  again 
to  B.  That  would  be  a  double  taxation,  which  we  suppose  would  not 
be  allowable  in  any  State  in  the  Union.  It  would  he  a  direct  dis- 
crimination and  inequality  in  the  exercise  of  the  taxing  power,  which 
would  impose  a  gi-eater  burden  upon  one  citizen  than  upon  another 
upon  the  same  kind  of  property.  But  the  case  at  bar  is  quite  differ- 
ent. The  corporation  is  a  person  distinct  from  the  stockholder.  It 
is  true,  it  is  what  is  denominated  an  artificial  person,  and  may  be 
said  to  be  ideal  and  intangible.  But  that  it  is  a  person  in  law  is  the 
first  principle  learned  by  the  student  in  opening  any  book  on  corpora- 
tions. Its  stockholders  are  distinct  and  different  persons.  They  are 
usually  not  liable  for  its  debts,  and  have  no  right  to  the  enjoyment  or 
possession  of  its  property  during  the  period  of  its  duration  or  until 
it  be  dissolved  by  some  procedure  known  to  the  law.  The  stock- 
holder is  entitled  to  dividends  upon  his  stock,  if  there  be  any 
dividends,  and  the  value  of  his  stock  depends  upon  prospective 
dividends,  and  the  dividends  depend  upon  the  net  earnings  of  the 
corporation.  If  the  bridge  in  this  case  be  taxed,  the  tax  must  be 
paid  from  the  income,  and  this  reduces  the  value  of  the  stock,  so 
that  there  is  no  dupUcate  taxation,  so  far  at  least  as  the  tax  upon  the 
bridge  reduces  the  value  of  the  stock. 

In  McGregor's  Exec'rs  v.  Van-pel,  supra,  this  court  held  that  a 
mortgage  given  to  secure  the  payment  of  the  purchase-money  of 
the  premises  mortgaged  is  not  exempt  from  taxation.  In  that  case 
it  is  said  that  ''a  system  of  assessments  operating  with  entire 
equality  and  with  absolute  justice  is  a  desideratum  in  government 
yet  unattained,  and  perhaps  unattainable."  And  in  Finley  v.  Phila- 
delphia, 32  Pa.  St.  381,  it  is  said:  "There  is  nothing  poetical  about  tax 
laws,  whenever  they  find  property  they  claim  contribution  for  its  pro- 
tection without  any  special  respect  to  the  owner  or  his  occupation." 


CHAP.  III.]  COOK   V.  BURLINGTON.  93 

The  best  devised  system  of  taxation  based  upon  the  values  of 
property  must,  of  necessity,  produce  unequal  results,  so  long  as  the 
attempt  is  made  to  tax  all  property  including  real  estate,  personal 
chattels,  and  moneys  and  credits.  One  person  will  be  taxed  upon 
the  real  estate  bought  upon  credit,  and  another  upon  the  obligation 
which  he  holds  for  the  purchase-money.  And  this  must  necessarily 
be  so  or  there  would  be  but  little  taxation  upon  credits,  because,  for 
the  most  part,  they  are  either  the  representative  of  money  or  prop- 
erty of  some  Idnd  held  by  another.  If  as  is  said  in  Cooley  on  Taxa- 
tion, p.  100,  "all  the  property  in  a  town  is  sold  on  credit  and  the  prop- 
erty is  taxed  to  the  purchasers,  and  the  debts  to  sellers,  it  is  manifest 
that  the  town  taxes  twice  as  much  wealth  as  lies  witliin  its  borders." 
And  yet  under  the  system  of  taxation  adopted  by  the  State  of  Iowa, 
it  camiot  be  claimed  that  the  assessor  must  inquire  of  the  owner  of 
promissory  notes,  or  mortgages,  whether  they  are  credits  for  taxable 
property  which  has  been  sold  by  the  holder  of  these  credits. 

In  the  case  at  bar  the  stockholders  paid  to  the  corporation  a  cer- 
tain sum  of  money.  The  corporation  used  this  money  in  the  con- 
struction of  a  toll -bridge  from  which  the  corporation  derived  an 
income.  The  agreement  between  the  contracting  parties  is  that  the 
corporation  is  to  manage  and  control  the  bridge,  make  the  necessary 
repairs,  and  pay  the  taxes  assessed  against  the  bridge,  and  after  de- 
ducting these  legitimate  and  necessary  expenses  pay  to  the  stock- 
holder liis  proportionate  share  of  the  net  earnings,  and  upon  the  dis- 
solution of  the  corporation  the  stockholder  is  to  be  repaid  his  money 
advanced  from  the  property  belonging  to  the  dead  corporation. 
Now,  suppose  this  very  contract  were  made  with  a  natural  person 
instead  of  a  corporation,  and  the  stockholder  or  creditor  should  make 
a  claim  that  the  obligation  held  by  him  was  not  taxable.  There 
would  be  no  more  grounds  for  such  claim  under  our  system  of  taxa- 
tion than  there  would  be  for  the  claim  that  if  A  loans  B  $100,  which 
is  invested  in  merchandise,  the  debt  is  not  taxable  because  the  mer- 
chandise is  taxable. 

These  illustrations,  it  appears  to  us,  demonstrate  that  if  we  were  to 
determine  that  the  legislature  has  no  constitutional  power  to  impose 
this  tax  upon  the  stockholder,  it  would  open  a  door  into  a  sea  of 
trouble  in  the  administration  of  the  revenue  laws  of  the  State. 

In  disposing  of  this  important  question  we  have  not  reviewed  the 
authorities  cited  by  the  respective  counsel  of  the  parties.  It  is  suf- 
ficient to  say  that  these  views  are  supported  by  the  very  great  ma- 
jority of  adjudged  cases  upon  this  subject.  We  think  the  circuit 
court  correctly  determined  that  the  shares  of  stock  are  taxable.  And 
if  the  public  interests  of  this  State  require  that  either  the  property 
of  a  corporation  of  this  character,  or  the  stock  therein  be  exempt 
from  taxation,  that  relief  must  come  from  the  law-making  power.  It 
will  be  understood  that  the  decision  in  this  case  will  have  no  applica- 


94        FOSTER    &    SONS    V.  COM'rS    OF    INLAND    REVENUE.       [CHAP.  III. 

tion  to  capital  stock  in  manufacturing  companies.  By  chapter  57  of 
the  laws  of  1880  such  stock  is  exempt  from  assessment  and  taxation. 

Affirmed. 

Note.  —  People  v.  Williams,  198  N.Y.  54.  A,  "for  his  personal 
convenience,"  conveyed  real  estate  to  a  corporation,  and  nearly  all 
of  the  stock  was  held  by  A.  Taxes  were  paid  on  the  real  estate.  Held, 
the  corporation  must  also  pay  a  tax  on  its  capital  stock. 

Cf.  Benedict  v.  Dakin,  243  111.  384,  388.  A  contract  to  find  a  pur- 
chaser for  the  assets  of  a  corporation  is  satisfied  by  finding  a  pur- 
chaser for  all  the  stock  of  the  corporation. 


JOHN  FOSTER  &  SONS,   LIMITED  v.  COMMISSIONERS 
OF  INLAND   REVENUE. 

[1894.]     1  Q.B.  516. 

Case  stated  by  Commissioners  of  Inland  Revenue. 

The  Stamp  Act  imposes  an  ad  valwem  duty  "upon  conveyance  or 
transfer  on  sale  of  any  property."  The  consideration,  as  appears  from 
another  clause  of  the  Act,  need  not  always  be  money,  but  may  be 
stock  or  marketable  securities.  The  Act  provides  that  the  term  "  con- 
veyance on  sale"  includes  every  instrument  "whereby  any  prop- 
erty upon  the  sale  thereof  is  legally  or  equitably  transferred  to  or 
vested  in  the  purchaser  or  any  other  person  on  his  behalf  or  by  his 
direction." 

Eight  persons,  who  had  for  many  years  carried  on  business  in  part- 
nership as  John  Foster  &  Son,  being  desirous  that  the  firm  should  be 
reconstructed  as  a  Limited  Company  (registered  with  limited  lia- 
bility under  the  Companies  Acts),  agreed  to  terminate  their  part- 
nership, and  to  transfer  all  the  firm  property  to  a  Limited  Company, 
stjded  John  Foster  &  Son  Limited,  to  be  formed  of  all  the  partners 
exclusively  for  thg  purpose  of  taldng  over  the  same  subject  to  all  the 
liabilities;  the  whole  of  the  ordinary  shares,  preference  shares,  and 
debenture  stock  of  the  company  to  be  allotted  among  the  partners 
in  proportion  to  their  respective  shares  in  the  partnership  estate.  In 
accordance  with  this  agreement,  by  deed  of  indenture  between  the 
eight  persons  who  composed  the  partnership  and  the  Limited  Com- 
pany, registered  under  the  Companies  Acts  under  the  name  of  John 
Foster  &  Son  Limited,  all  the  partnership  property  was  conveyed  to 
the  Limited  Company. 

The  Commissioners  assessed  an  ad  valorem  duty  upon  the  deed,  as 
coming  under  the  head  of  a  "conveyance  or  transfer  on  sale." 

In  the  Queen's  Bench  Division,  Cave,  J.,  held  that  the  assessment 
was  erroneous,  and  Wright,  J.,  took  the  opposite  view.  Wright,  J., 


CHAP.  III.]       FOSTER    &    SONS    V.  COM'rS    OF    INLAND    REVENUE.         95 

withdrew  his  judgriaent,  and  the  appeal  from  the  Commissioners  was 
allowed. 

From  this  decision  of  the  Divisional  Court,  the  defendants  ap- 
pealed to  the  Court  of  Appeal. 

Counsel  for  respondents  contended  that  in  order  to  constitute  a 
sale  there  must  be  two  different  parties  capable  of  making  an  agree- 
ment, and  there  must  be  two  different  things,  the  property  sold  and 
the  price  given  for  it.  In  the  present  case  there  has  merely  been  a 
re-arrangement  of  ownership.  The  parties  remained  the  same,  and 
nothing  was  parted  with,  and  nothing  was  given.  It  was  like  a  con- 
veyance of  property  to  trustees  upon  trust  to  carry  on  the  business, 
and  divide  the  proceeds  arising  from  it  amongst  the  conveying  per- 
sons. 

LiNDLEY,  L.J.  I  confess  that,  with  great  deference  to  Cave,  J., 
I  cannot  see  the  difficulty  in  this  case. 

The  material  sections  of  the  Act  of  1870  must  fii-st  be  considered. 
[The  Lord  Justice  then  read  §§70  and  71  of  the  Stamp  Act,  1870,  and 
continued] :  The  importance  of  §  71,  to  my  mind,  is  this:  it  shews  that 
there  may  be  a  conveyance  on  sale,  although  the  consideration  for 
it  is  not  cash  or  money,  but  may  include  or  consist  of  stock  or  market- 
able securities.  The  definition  of  "stock"  and  "marketable  securi- 
ties" will  be  found  in  §  2.  Then  §  78  imposes  a  stamp  duty  on  con- 
veyances not  otherwise  charged,  and  the  schedule  shews  what  the 
stamps  are  that  are  imposed  upon  conveyances  that  are  charged. 
First  we  have  "  conveyance  or  transfer  whether  on  sale  or  otherwise  " 
of  certain  stocks  and  dividends.  The  present  case  does  not  come 
within  that  head.  Then  we  have  "conveyance  or  transfer  on  sale,  of 
any  property"  .  .  .  "where  the  amount  or  value  of  the  considera- 
tion for  the  sale  does  not  exceed  £5."  That  fits  in  uath  §§70  and  71. 
Then  we  come  to  "Conveyance  or  transfer  bj^  way  of  security  of  any 
property  or  of  any  security";  and  then  we  have  "Conveyance  or 
transfer  of  any  kind  not  hereinbefore  described."  We  must  accord- 
ingly consider  under  which  of  these  heads  the  particular  deed  in  this 
case  comes.  It  certainly  does  not  come  under  the  first,  nor  under 
"conveyance  or  transfer  by  way  of  security  of  any  property,"  and 
the  alternative  is  between  "conveyance  or  transfer  on  sale"  and 
"conveyance  or  transfer  of  any  kind  not  hereinbefore  described." 

Now,  the  document  in  this  case  is  an  indenture  made  between 
eight  gentlemen  of  the  first  eight  parts,  and  "John  Foster  &  Sons 
Limited  (hereinafter  called  'the  company'),  of  the  9th  part."  Paus- 
ing there  for  a  moment:  although  the  persons  of  the  first  eight  parts 
may  be,  and  were  members,  and  the  only  members,  of  John  Foster 
&  Co.  Limited,  John  Foster  &  Co.  Limited  is  not  those  eight  indi- 
viduals; John  Foster  &  Co.  Limited,  is  a  corporation.  We  have  ac- 
cordingly two  parties,  one  party  consisting  of  several  individuals,  and 
the  other  party  consisting  of  a  corporation.  Whether  they  are  or  are 


96        FOSTER    &    SONS    V.  COM'rS    OF    INLAND    REVENUE.       [ciIAP.  III. 

not  the  mcmbei-s,  or  the  only  members  of  the  corporation,  is  wholly 
immaterial.  The  corporation  is  a  totally  different  person  from  them 
in  any  capacity  you  choose  to  assign  to  them  except  a  corporate  one. 
[The- Lord  Justice  then  stated  the  recitals  in  and  the  operative  part  of 
the  conveyances,  and  continued] :  — 

Then  the  parties  of  the  first  eight  parts  put  their  seals  to  the  in- 
strument, and  the  company  puts  its  seal  to  it.  Now,  what  is  that 
instrument?  It  is  certainly  a  conveyance  of  property ;  that  is  obvious. 
In  order  to  amount  to  a  conveyance  of  property  there  must  be  a  per- 
son conveying  and  a  person  taking,  and  j'ou  have  them  both  here. 
The  persons  conveying  are  the  persons  named  in  the  first  eight  parts, 
and  the  persons  taking  are  the  corporation  named  in  the  ninth 
part. 

Now,  what  is  the  consideration?  The  consideration  for  the  transfer 
of  this  property  is,  I  agi-ee,  not  money,  but  it  is  stocks  and  securities, 
which  for  this  purpose  are  to  be  regarded  as  equivalent  to  money  by 
reason  of  §  71  of  the  Act  to  which  I  have  already  alluded.  Then  what 
have  we  got?  To  sum  it  up  shortly,  it  is  a  conveyance  of  property 
from  one  person  to  another,  for  money,  or  what  is,  according  to  the 
provisions  of  the  statute,  equivalent  to  money.  What  is  that  except 
a  conveyance  on  sale?  What  else  can  you  call  it?  It  is  certainly  not 
a  gift;  it  is  not  an  exchange;  it  is  not  a  partition;  it  is  not  a  mortgage. 
I  do  not  know  what  it  is  unless  it  is  a  conveyance  on  sale.  I  do  not 
know  what  is  necessary  to  constitute  a  sale,  except  a  transfer  of  prop- 
erty from  one  person  to  another  for  money,  or  for  the  purposes  of  the 
Stamp  Act,  for  stock  or  marketable  securities. 

But  then  it  is  argued  that  it  is  only  a  redistribution  of  property. 
I  do  not  consider  it  a  redistribution  at  all.  It  is  an  entire  transfer  of 
property  from  one  set  of  people  to  another  person  altogether,  and 
whether  there  are,  as  there  may  well  be  hereafter,  additional  persons 
taking  shares  in  this  company,  is  perfectly  immaterial. 

Again  it  is  argued  on  behalf  of  the  appellants  that  this  instrument 
is  in  substance  nothing  more  than  a  conveyance  to  a  trustee  to  carry 
on  the  business  in  trust  for  the  grantor.  Just  try  that.  Supposing 
there  is  a  conveyance  by  half-a-dozen  people,  transferring  their  prop- 
erty to  a  trustee  on  trust  to  carry  on  the  business  for  them,  can  you 
in  any  sense  of  the  word,  legal  or  business-like,  or  otherwise,  call  that 
trustee  a  buyer?  There  is  no  buying,  there  is  no  sale  to  him  at  all,  nor 
is  there  any  money,  or  stock,  or  securities,  or  anything  else  parted 
with  by  him.  Then  it  was  urged  that  these  shares  can  derive  no  value 
unless  the  company  gets  this  property  transferred  to  them.  That  is 
possible  enough.  That  is  to  say,  in  other  words,  that  the  shares  in 
the  company  would  be  valueless  unless  the  company  had  assets.  Of 
course  they  would  be,  but  that  does  not  affect  the  question  whether 
there  is  a  sale  or  a  conveyance  or  not.  I  think  myself  that  Cave,  J., 
has  attached  too  little  importance  to  the  fact  that  you  have  here  a 


CHAP.  III.]       FOSTER    &    SONS    V.  COM'rS    OF    INLAND    REVENUE.        97 

distinct  seller,  and  a  distinct  buyer,  and  that  in  point  of  law  it  is 
immaterial  that  in  the  present  case  the  buyer  is  a  corporation  which 
consists  of  the  eight  persons  who  formed,  and  who  are,  the  pairtners. 
The  appeal  must  be  allowed. 

Note.  —  Jordan  Marsh  Co.  v.  Beals,  201  Mass.  163.  A  guaranty- 
in  writing  "to  pay  all  bills  .  .  .  which  may  hereafter  be  contracted 
at  your  house  by  W,"  addressed  to  Jordan  Marsh  and  Company, 
a  copartnership,  does  not  bind  the  guarantor  to  pay  a  bill,  contracted 
by  W.  with  the  Jordan  INIarsh  Company,  a  corporation,  which,  after 
the  guaranty  was  executed  and  delivered,  was  organized  by  and 
composed  of  the  same  persons  who  formerly  made  up  the  copartner- 
ship and  which  carried  on  business  at  the  same  place  and  in  the  same 
manner  that  the  copartnership  had. 

Brighton  Packing  Co.  v.  Butchers'  Association,  211  IMass.  398. 
A  made  a  lease  to  the  Batchelder  &  Snyder  Company,  a  South 
Dakota  corporation.  Later  the  Batchelder  &  Synder  Company,  a 
]\Iaine  corporation,  was  formed,  and  the  lease  assigned  to  it  by  the 
South  Dakota  corporation.  Thereafter  a  modification  and  exten- 
sion of  this  lease  was  executed  by  A  and  the  Maine  corporation.  A 
was  ignorant  of  the  formation  of  the  Maine  corporation,  and  sup- 
posed that  he  was  contracting  with  the  South  Dakota  corporation. 
The  court  held  that  the  modification  and  extension  was  not  binding 
upon  A.  Sheldon,  J.,  said  (p.  403) :  "The  claim  has  been  made  also 
that  it  is  only  in  a  technical  sense  that  these  two  companies  could  be 
called  distinct  entities.  They  had  the  same  capital  stock  and  practi- 
cally the  same  stockholders,  officers  and  agents ;  the  Maine  company 
had  taken  over  all  the  assets  and  assumed  all  the  liabilities  of  the 
other,  and  was  carrying  on  the  same  business,  at  the  same  stand,  in 
the  same  manner  and  under  the  same  management.  The  master  has 
found  that  for  practical  purposes  the  two  companies  were  the  same. 
Accordingly  the  plaintiff  contends  that  an  agreement  with  the  one  is 
the  same  as  an  agi-eement  with  the  other,  that  the  defendant's  igno- 
rance of  their  separate  identity  was  immaterial,  that  the  agreement 
may  be  treated  as  made  with  either  company  indifferently,  was  cap- 
able of  enforcement  by  either  or  at  least  by  the  Maine  company,  and 
is  valid  in  the  hands  and  for  the  benefit  of  the  plaintiff.  But  we 
cannot  assent  to  this  reasoning.  These  are  two  distinct  corporations, 
created  by  the  laws  of  two  different  States.  The  powers  of  each  cor- 
poration are  limited  and  controlled  by  the  statutes  of  the  State  which 
created  it,  and  it  is  scarcely  conceivable  that  the  statutes  of  the  two 
States  are  the  same  or  that  the  franchises  and  powers  of  the  two  cor- 
porations are  identical.  But  if  this  were  so,  it  would  remain  true  that 
they  are  the  creation  of  two  different  governments,  the  offspring  of 
different  parents,  and  not  only  distinct  legal  entities,  but  having 
separate  and  distinct  existences.  They  could  and  did  make  contracts 


98  GALLAGHER    V.  GERMANIA    BREWING    CO.  [CIIAP.  III. 

with  each  other;  they  might  bring  suits  against  each  other.  They  are 
in  no  respect  the  same  person." 

Cf.  -New  York  &  Brooklyn  Ferry  Co.  v.  New  York,  146  N.Y.  145. 


GALLAGHER  v.   GERMANIA  BREWING   CO. 

53  Minn.  214.     1893. 

Mitchell,  J.  The  plaintiff,  as  assignee  of  one  Westphal  under  a 
general  assignment  for  the  benefit  of  creditors,  brought  this  action 
to  recover  for  goods  sold  and  delivered  by  his  assignor  to  the  defend- 
ant corporation.  Jacob  Barge  and  John  Vander  Horck  intervened, 
and  set  up  in  their  complaint  that  they  owned,  and  for  nearly  two 
years  had  owned  (each  one  half),  all  the  capital  stock  of  the  defend- 
ant, no  other  person  but  themselves  having  any  interest  in  the  stock 
or  property  of  the  corporation;  that  each  of  them  had  a  valid  and 
unsatisfied  judgment  against  Westphal  upon  a  cause  of  action  which 
accrued  before  the  assigmnent  to  plaintiff;  that  Westphal  was,  and 
for  over  two  years  had  been,  utterly  insolvent;  and  that  his  estate, 
of  which  plaintiff  is  the  assignee,  was  so  hopelessly  insolvent  that  it 
was  insufficient  to  pay  even  the  expenses  of  administering  the  assign- 
ment. The  relief  sought  was  that  their  claims  against  Westphal 
might  be  allowed,  in  equal  amounts,  as  equitable  set-offs  to  the  claim 
of  the  plaintiff  against  the  defendant  corporation.  From  an  order 
overruling  a  demurrer  to  the  complaint,  the  plaintiff  appeals,  his  con- 
tention being  —  First,  that  Barge  and  Vander  Horck  had  no  such 
interest  in  the  litigation  as  to  entitle  them  to  intervene;  second,  that 
their  claims  cannot  be  set  off  against  a  claim  against  the  corporation, 
because  a  corporation  is  a  legal  entity,  entirely  distinct  from  its 
stockholders.  These  two  propositions  amount  really  to  the  same 
thing,  for,  if  Barge  and  Vander  Horck  cannot  set  off  their  claims 
against  that  of  plaintiff  against  the  corporation,  they  have  no  such 
interest  in  the  subject  of  litigation  as  would  entitle  them  to  intervene ; 
on  the  other  hand,  if  their  claims  are  proper  equitable  set-offs,  their 
right  to  intervene  for  the  purpose  of  setting  them  up  is  verj^  clear. 
The  case  is  certainly  a  novel  one,  for  we  doubt  whether  an  instance 
can  be  found  in  the  books  where  stockholders  ever  attempted  to  set 
up  their  several  equities  by  way  of  set-off  to  claims  against  the  cor- 
poration. Of  course,  the  want  of  a  precedent  is  by  no  means  control- 
ing  with  courts,  especially  in  administering  equitable  relief;  but  it 
would  seem  that,  if  the  relief  here  asked  was  consistent  with  legal  or 
equitable  principles,  some  case  would  be  found  where  it  had  been 
granted. 

The  facts  of  the  present  case  appeal  to  a  natural  sense  of  justice, 
for  while,  by  action  of  law,  a  corporation  is  a  distinct  entity,  yet  in 


CHAP.  III.]  GALLAGHER    V.  GERMANIA    BREWING    CO.  99 

reality  it  is  an  association  of  persons  who  are  in  fact  the  beneficial 
owners  of  all  the  corporate  property.  Hence,  if  interveners  cannot 
set  off  their  claims,  the  practical  result  is  that  Westphal's  estate  will 
collect  its  entire  claim  out  of  what  is  really  their  property,  while  the 
estate  is  at  the  same  time  indebted  to  them  on  claims  of  greater 
amount,  which  they  will  wholly  lose  because  of  Westphal's  insol- 
vency; but,  as  has  been  often  said,  hard  cases  are  hable  to  make  bad 
law. 

The  right  of  equitable  set-off  is,  of  course,  not  derived  from,  or 
dependent  upon,  statute,  but  rests  upon  a  distinctly  equitable  doc- 
trine, which  courts  of  equity  have  applied  on  certain  well-recognized 
equitable  grounds,  the  object  being  to  effect  a  clear  equity  and  pre- 
vent irremediable  injustice;  and  it  may  be  stated  as  a  general  rule 
that,  whenever  necessary  to  accomplish  that  end,  the  courts  will 
permit  an  equitable  set-off,  although  the  debts  accrued  in  different 
rights;  as,  for  example,  by  allowing  a  separate  debt  to  be  set  off 
against  a  joint  debt,  or,  conversely,  a  joint  debt  against  a  separate 
debt.  They  will  also  disregard  the  nominal  parties  to  the  record, 
and  consider  the  real  parties  in  interest;  as,  for  example,  when  the 
assignor  of  a  chose  in  action  sues  for  the  benefit  of  the  assignee,  or  a 
trustee  for  the  benefit  of  the  cestui  que  trust.  Hence,  had  the  plain- 
tiff's claim  been  a  joint  one  against  the  interveners,  there  would  have 
been  no  doubt  of  their  right  to  set  off  their  separate  claims  against 
it,  for  insolvency  is  well  recognized  as  a  distinct  equitable  ground  for 
allowing  such  a  set-off.  But  such  a  case  is  not" analogous  to  the  pres- 
ent. To  allow  the  set-off  here,  it  is  necessary  to  wholly  ignore  the 
legal  doctrine,  or  fiction,  whichever  you  may  call  it,  that  a  corpora- 
tion is  an  entity  separate  and  distinct  from  the  body  of  its  stock- 
holders, and  to  treat  it  as  a  mere  association  of  individuals  who  are 
the  real  parties  in  interest.  In  dealing  with  the  rights  of  creditors, 
and  the  obligations  existing  between  a  corporation  and  its  share- 
holders by  reason  of  their  contract  of  membership,  undoubtedly  the 
courts  often  find  it  necessary  to  consider  the  real  parties  in  interest 
as  the  individual  shareholders;  but  it  may  be  laid  down  as  a  rule 
that,  except  in  such  cases,  it  has  been  found  absolutely  essential,  for 
the  administration  of  justice,  to  treat  a  corporation  as  a  collective 
entity,  without  regard  to  its  individual  shareholders.  In  no  other 
way  can  the  title  to  corporate  property  be  kept  free  from  complica- 
tion and  uncertainty.  The  transferable  nature  of  stock  in  a  corpora- 
tion is  also  a  good  reason  why  the  theory  of  a  corporate  entity  should 
be  preserved,  and  why  it  is  necessary  to  discriminate  sharply  be- 
tween corporate  rights  and  obligations  and  those  of  shareholders  per- 
sonally. If  the  rights  or  liabilities  of  a  coi-poration  could  be  affected 
by  the  acts  of  the  stockholders,  except  when  acting  in  the  corporate 
name,  or  if  shareholders  could  set  up  their  several  equities  against 
persons  having  claims  against  the  corporation,  or,  conversely,  if 


100  JACKSON   V.  HOOPER.  [cHAP.  III. 

claims  in  favor  of  the  corporation  could  be  set  off  against  claims 
against  individual  stockholders,  it  can  easily  be  seen  into  what  con- 
fusion and  chaos  corporate  affairs  would  inevitably  fall. 

Inasmuch  as  the  two  interveners  own  all  the  stock  of  this  corpora- 
tion, the  facts  of  this  case  seem  comparatively  free  from  embarrass- 
ments, and  the  contention  of  respondent  quite  plausible.  But,  sup- 
pose there  were  fifty  other  stockholders  (which  would  not  alter  the 
principle),  what  would  be  the  result?  Could  interveners  then  inter- 
pose their  claims  as  set-offs,  and,  if  so,  could  they  do  so  to  the  full 
amount  of  their  claims,  or  only  in  the  proportion  which  their  shares 
bore  to  the  whole  capital  stock?  And,  if  the  former,  would  they  have 
a  claim  for  the  excess  against  the  corporation,  or  a  right  to  call  on 
the  other  stockholders  for  contribution? 

Again,  the  right  of  set-off,  if  any  exists,  must  be  mutual.  Hence, 
if  stockholders  can  interpose  their  indi\ddual  demands  as  set-offs  to 
a  demand  against  the  corporation,  it  follows  that  a  defendant  can 
set  up  demands  against  the  individual  stockholders  as  set-offs  to 
demands  in  favor  of  the  corporation. 

Illustrations  might  be  multipUed  indefinitely  to  show  that  to 
recognize  any  such  right  would  result  in  the  worst  sort  of  complica- 
tions, and  that  the  only  safe  or  sound  rule  is  to  adhere  strictly,  in  such 
cases,  to  the  doctrine  of  a  corporate  entity  distinct  from  the  indi- 
vidual stockholders. 

What  means,  if  any,  the  interveners  might  have  had,  or  may  here- 
after have,  of  protecting  themselves,  it  is  not  now  our  business  to 
inquire,  but  we  are  clear  that  their  claims  against  plaintiff's  as- 
signor are  not  the  subjects  of  equitable  set-off  to  a  claim  against  the 
defendant  corporation. 

Order  reversed. 

Note.  —  Cf .  Gay  v.  Hudson  River  Co.,  187  Fed.  12,  where  the 
officers  of  a  subsidiary  corporation  agi-eed  that  claims  by  it  might 
be  offset  by  claims  against  the  parent  corporation. 


JACKSON  V.   HOOPER. 

76  N.J.  Eq.  592.     1909. 

Dill,  J.  The  bill  and  injunction  in  tliis  case  rest  upon  the  theory 
that  the  complainant,  who  united  with  the  defendant  Horace  E. 
Hooper  in  acquiring  in  equal  shares  all  the  stock  of  two  foreign  cor- 
porations, pursuant  to  an  agreement  claimed  to  create  a  partnership 
or  joint  adventure,  is  entitled  to  treat  the  two  corporations,  organ- 
ized under  foreign  laws,  as  mere  agencies  or  instrumentalities  in 
the  conduct  of  the  joint  business  and  to  subject  not  only  the  stock 


CHAP.  III.]  JACKSON   V.  HOOPER.  101 

owned  by  both  parties,  but  all  the  corporate  property  to  the  control 
of  the  court  of  chancery  accordmg  to  the  principles  of  the  law  of 
partnership. 

Prior  to  1900  the  complainant  and  the  defendant  Horace  E. 
Hooper  had  been  associated  in  London,  England,  in  the  business  of 
publishing  and  selhng  subscription  books,  "tlii-ough  the  agency  of  a 
company  known  as  'The  Clarke  Company,  Ltd.,'"  an  English  cor- 
poration. In  1900  they  acquired  in  equal  portions  all  the  stock  of 
that  company  under  an  agreement  that  "upon  the  acquisition  of  the 
Clarke  interests  and  so  long  as  they  might  be  associated  together 
in  business,  their  general  policy  in  respect  of  their  joint  undertakings 
should  be  determined  by  mutual  assent,  each  to  have  and  exercise 
the  authority  and  control  of  equal  partners." 

In  1902,  to  avoid  the  English  tax  law,  the  business  transacted  in 
England  was  separated  from  that  conducted  elsewhere.  The  Clarke 
Company,  Ltd.,  was  dissolved,  and  its  assets  and  all  the  business 
carried  on  by  the  parties  in  interest  were  conveyed  to  two  corpora- 
tions, one  "Hooper  &  Jackson,  Ltd.,"  of  England,  to  carry  on  the 
business  in  the  United  Kingdom;  the  other,  a  New  York  corporation, 
"The  Encyclopaedia  Britannica  Company,"  to  operate  elsewhere. 
The  stock  and  securities  of  these  corporations  were  issued  to  the  two 
parties  equally  in  payment  for  the  property  thus  acquired  by  the 
corporations  from  these  parties.  The  bill  alleges  that  both  these 
corporations  were  "intended  to  become  merely  instrumentalities  or 
agencies  for  carrying  out  certain  partnership  purposes,"  and  to  be 
subject  to  the  original  agreement. 

In  1903,  for  reasons  of  their  own,  the  parties  dissolved  the  New 
York  corporation  and  transferred  its  assets  to  an  IlHnois  corporation 
of  the  same  name  and  under  the  same  general  understanding  that 
the  business  should  be  carried  on  as  a  partnership,  with  five  directors, 
of  whom  the  complainant  and  Hooper  were  two,  the  other  three 
being  "nominal"  directors. 

As  to  the  "nominal"  directors  the  bill  alleges  in  the  plainest  lan- 
guage that  they  were  mere  dummies,  both  in  the  New  York  com- 
pany and  its  successor,  the  Illinois  corporation,  and  says:  "It  was 
clearly  understood  that  the  election  of  particular  persons  to  these 
three  positions  was  not  intended  to,  and  did  not,  confer  upon  them 
any  authority  or  control  or  the  management  of  the  business  of  the 
plaintiff  and  Hooper,  but  that  at  all  times  such  persons,  employes  or 
others,  should  have  no  right  or  authority  whatever  in  corporate 
matters  other  than  to  vote  as  directed  by  Hooper  and  the  plaintiff 
acting  jointly." 

From  1902  to  1908  the  business  in  which  the  companies  were 
engaged,  including  the  pubhcation  of  the  Encyclopaedia  Britannica, 
extended  all  over  the  civilized  world  and  ran  up  into  millions,  the 
accounts  receivable  alone,  at  the  time  of  the  filing  of  the  bill,  amount- 


102  JACKSON    V.  HOOPER.  [CHAP.   III. 

ing  to  over  $2,000,000.  DurinR  all  this  time,  according  to  the  bill, 
the  busine.s.s  was  conducted  in  the  names  of  corporations  hut  always 
in  accordance  with  the  original  agreement  as  to  equal  ownei-ship, 
interest,  authority  and  control,  the  three  nominal  tlirectors  being 
mere  employes  and  automatons  of  the  parties,  and  the  existence  of 
the  corporations  being  always  disregarded  "except  as  agencies  and 
instrumentalities  created  by  them  for  carrying  out  certain  of  their 
co-partnership  purposes." 

In  1908  the  complainant  and  Hooper  quarreled  as  to  the  business 
policy,  and  their  dilTerences  having  become  irreconcilable  the  thereto- 
fore dummy  directoi-s  voted  with  Hooper  and  against  the  complain- 
ant. This,  as  the  bill  puts  it,  constituted  a  breach  of  the  so-called 
partnership  agreement  that  Jackson  and  Hooper  should  have  equal 
control  and  equal  voice  in  the  management  of  the  companies  and  that 
the  other  three  directoi-s  should  Ix*  and  remain  dummies. 

The  charge  of  the  bill  is  that  Hooper  and  the  three  nominal  di- 
rectors pa.ssed  corporate  resolutions  and  amended  by-laws  which 
changed  the  complainant's  alleged  partnership  control,  contrary  to 
his  wish,  or,  in  other  words,  that  the  three  dunnny  directors,  assist- 
ing Hooper,  practically  ousted  the  complainant  from  his  alleged 
partnei"ship  control  over  the  corporation.  Tliis  was  done  by  the 
passage  of  resolutions,  as,  for  example,  requiring  checks  to  be  signed 
by  two  officers,  thus  putting  it  out  of  the  complainant's  control  to 
draw  on  the  assets  of  the  company,  as  a  partner  would,  whenever  he 
saw  fit  and  by  his  own  cheek. 

The  relief  asked  for  is  that  the  court  appoint  a  receiver  of  all  the 
assets  and  joint  property  of  the  complainant  and  the  defendant 
Horace  E.  Hooper,  including  their  stock  in  the  two  corporatioiLs, 
such  receiver  to  have  the  usual  powers  of  receivers  of  assets  of  a 
copartnership;  that  the  defendants -— directors  of  the  Illinois  cor- 
poration —  be  restrained  from  selling  any  of  the  assets  of  the 
copartnership,  including  such  stock,  or  from  voting  upon  the  same; 
from  withdrawing  from  the  business  heretofore  conducted  by  Hooper 
and  the  complainant  or  from  any  one  of  their  bank  accounts,  in  what- 
ever name  the  same  may  be,  any  money  otherwise  than  in  the  ordi- 
nary course  of  business;  that  defenilants  be  restrained  from  prevent- 
ing complainant  from  participating,  as  prior  to  1908,  in  the  conduct  of 
the  business  carried  on  by  the  complainant  and  Hooper,  whether 
the  said  business  is  carried  on  in  the  name  of  themselves  or  their  com- 
panies; that  the  defendants  be  enjoined  from  causing  any  assets  of 
the  copartnership  to  be  transferred  to  or  by  the  Illinois  corporation, 
irrespective  of  the  name  in  which  such  assets  stand,  from  selling 
either  the  English  or  American  rights  of  the  Encyclopaedia  Britan- 
nica,  eleventh  edition,  or  disposing,  except  in  the  ordinary  course  of 
business,  of  any  other  assets  of  the  copartnership,  whether  they  stand 
in  individual  or  corporate  names;  that  the  copartnership  be  dis- 


CHAP.  III.]  JACKSON    V.  HOOPER.  103 

solved,  that  an  account  be  taken  and  that  the  assets  of  the  copart- 
nership be  sold  and  distributed  between  the  complainant  and  Horace 
E.  Hooper. 

After  a  careful  review  of  the  facts  the  vice-chancellor  concluded 
that  while  the  complainant  had  been  unable  to  establish  the  exist- 
ence of  a  copartnership  between  himself  and  Horace  E.  Hooper,  he 
did  prove  that  "the  series  of  transactions  set  out  in  the  bill  .  .  .  be- 
longed to  that  class  of  transactions  which  are  known  by  the  name  of 
joint  adventures"  and  are  subject  to  the  same  rules  of  law  which 
apply  to  partnerships.  He  held  that  the  complainant  was  entitled 
to  a  preliminary  "injunction  broad  enough  to  hold  the  status  quo 
and  yet  so  limited  as  not  to  interfere  with  the  orderly,  regular  and 
usual  conduct  of  the  business." 

He  granted  an  injunction  which,  although  reciting  that  nothing 
therein  should  "interfere  or  be  deemed  to  interfere  with  the  integrity 
or  autonomy  of  the  two  corporations  mentioned  in  the  bill  of  com- 
plaint, to  wit,  Hooper  and  Jackson,  Ltd.,  an  English  corporation, 
and  the  Encyclopaedia  Britannica  Company,  an  Illinois  corpora- 
tion, or  either  of  them,  or  to  interfere  with  the  business  or  property  of 
either  of  said  corporations,  except  as  herein  spedfically  stated,"  forth- 
with proceeds  to  enjoin  the  defendants,  who,  with  the  complainant, 
constitute  the  entire  boards  of  directors  of  the  English  and  Illinois 
corporations,  from  transferring  any  of  the  shares  of  stock  therein, 
from  withdrawing  from  the  business  of  the  complainant  and  Hooper 
or  "from  any  one  of  the  bank  accounts  of  the  said  business,  in  what- 
ever name  the  same  may  be,  any  money  or  moneys  for  the  private  or 
personal  use  of  the  defendants  ...  or  otherwise  than  in  the  payment 
in  the  ordinary  course  of  business,"  except  that  such  defendants  as 
are  employes  may  receive  their  respective  salaries.  He  further  issued 
a  mandatory  injunction  that  the  complainant  and  the  defendant 
Horace  E.  Hooper  may  withdraw  such  sums  for  their  private  use  as 
they  may  mutually  agree  upon,  or,  in  absence  of  an  agreement  be- 
tween them,  that  each  may  draw  $5000  per  month;  that  either  com- 
plainant or  said  Hooper  shall  have  the  right  to  sign  checks  for  such 
amount,  except  that  any  debt  of  the  business  may  be  paid  out  of  the 
funds  thereof  in  whatever  name  standing.  The  order  further  enjoins 
the  defendants  from  interfering  with  the  complainant  in  his  entrance 
and  exit  to  and  from  any  office  where  the  business  is  carried  on  or  in 
his  examination  of  its  books  and  accounts,  and  proceeds  to  enjoin  the 
defendants  from  transferring  or  causing  to  be  transferred  any  of  the 
assets  of  the  English  corporation  to  the  Illinois  corporation,  or  vice 
versa,  except  in  the  regular  course  of  business,  and  from  "selling  or 
causing  to  be  sold  "  the  rights  of  the  Encyclopaedia  Britannica  Com- 
pany in  the  eleventh  edition,  or  "any  assets  of  the  said  business 
carried  on  by  the  complainant  and  the  defendant  Horace  E.  Hooper, 
in  whosesoever  name  the  same  may  stand." 


104  JACKSON    v.  HOOPER.  [ciIAP.  III. 

In  our  view  of  the  ease  the  fundamental  question  is  not  whether 
the  complainant  has  established  the  ajijeement  alleged,  but  whether, 
assuming  that  he  has,  the  court  has  the  power  to  enforce  it. 

The  first  question  to  be  discussed  is  whether,  a.ssuming  the  fact  of 
the  partnership  or  joint  adventure  as  alleged  to  be  satisfactorily 
proven,  the  complainant  anil  the  defendant,  after  the  organization 
of  the  foreign  corporations,  were,  as  matter  of  law,  partnere  or 
merely  sharehoklers. 

It  is  conceded  that  the  corporations  in  question  were  legally  or- 
ganized, existing  and  doing  business  under  foreign  laws.  It  is  not 
disputed  that  when  the  corporations  were  formed  and  the  stock  and 
bond  interests  acquired  the  parties  retained  no  legal  title  to  the  pTop- 
erty  or  business  transferred.  It  is  not  questioned  that  the  forms  of 
law  were  complied  with  by  the  election  of  dircctoi-s  and  ofhcere 
and  the  prosecution  of  the  coqiorate  business.  Indeed,  the  record 
abounds  with  evidence  establisliing  the  fact  that  the  corporations 
as  such,  through  their  officers  and  agents,  made  contracts  and  in  gen- 
eral transacted  the  business  for  which  they  were  organized.  Thus, 
from  1904  to  1909,  promissory  notes  for  over  a  million  dollai"s  were 
executed  by  and  in  the  name  of  the  Illinois  corporation. 

It  is  true  that  director'  and  stockholders'  meetings  were  seldom 
held  and  that  the  financial  and  other  business  affairs  of  the  corpora- 
tion were  often  informally  and  loosely  conducted;  yet,  on  the  whole, 
the  operations  of  the  companies  were  the  same  as  those  of  innumer- 
able other  so-called  "  close  corporations  "  in  which  all  the  stock  is 
held  by  a  few  pereons  who  are  as  one  in  the  conduct  and  policy  of 
corporate  action. 

It  is  claimed,  however,  that  these  owners  of  all  the  stock  were 
really  copartner,  doing  business  in  corporate  form  for  their  own  con- 
venience, and  that  a  court  of  equity  has  the  power  to  control  the 
property  and  affairs  of  the  companies  even  to  the  extent  of  eliminat- 
ing the  corporate  functions  and  powers  as  mere  incidents  and  wholly 
disregarding  the  sul)stantive  law  governing  the  creation,  supervision 
and  dissolution  of  corporations.  We  cannot  subscribe  to  any  such 
doctrine. 

An  agreement  or  course  of  dealing  by  which  corporations  are  or- 
ganized for  the  purpose  of  using  them  merely  as  agencies  or  instru- 
mentalities, or  forms  in  the  conduct  of  a  copartnership  or  joint  busi- 
ness, and  by  the  consent  of  the  parties  in  interest  to  be  independent 
of  statutory  control,  cannot  be  recognized,  enforced  or  perpetuated 
by  the  court  of  chancery  in  this  state. 

It  is  fundamental  that,  no  matter  how  the  shares  of  stock  are 
held,  the  corporation  itself  is  an  entity  wholly  separate  and  distinct 
from  the  individuals  who  compose  and  control  it. 

The  complainant  and  the  defendant,  though  owning  the  entire 
capital  stock  of   the  two  corporations,  are  not,  as  expressed    by 


CHAP.  III.]  JACKSON   V.  HOOPER.  105 

Chief  Justice  Waite  in  the  leading  case  of  Pullman  Palace  Car  Co. 
V.  Missouri  Pacific  Railway  Co.,  115  U.S.  587,  "the  corporation,  in 
the  sense  of  that  term  as  appHed  to  the  management  of  the  corporate 
business  or  the  control  of  the  corporate  property." 

The  law  never  contemplated  that  persons  engaged  in  business  as 
partners  may  incorporate,  with  intent  to  obtain  the  advantages  and 
immunities  of  a  corporate  form  and  then,  Proteus-like,  become  at 
will  a  copartnership  or  a  corporation,  as  the  exigencies  or  purposes  of 
their  joint  enterprise  may  from  time  to  time  require. 

The  policy  of  the  law  is  to  the  contrary.  If  the  parties  have  the 
rights  of  partners  they  have  the  duties  and  liabilities  imposed  by  law 
and  are  responsible  in  solido  to  all  creditors. 

If  they  adopt  the  corporate  form,  with  the  corporate  shield  ex- 
tended over  them  to  protect  them  against  personal  liability,  they 
cease  to  be  partners  and  have  only  the  rights,  duties  and  obligations 
of  stockholders.  They  cannot  be  partners  inter  sese  and  a  corporation 
as  to  the  rest  of  the  world. 

Furthermore,  upon  grounds  of  public  policy,  the  doctrine  con- 
tended for  cannot  be  tolerated  as  it  renders  nugatory  and  void  the 
authority  of  the  legislature  —  a  co-ordinate  branch  of  the  govern- 
ment —  established  by  the  constitution  in  respect  to  the  creation, 
supervision  and  winding  up  of  corporations. 

These  views  are  amply  sustained  by  abundant  authority. 

"A  corporation  is  a  legal  person  just  as  much  as  an  individual," 
said  the  court  in  Sheffield,  etc.,  Buildirig  Society,  22  Q.B.D.  476.  And 
in  Society  v.  Abbott,  2  Beav.  567,  Lord  Langdale,  master  of  rolls, 
held  that,  as  in  this  case,  great  confusion  arises  by  failure  to  distin- 
guish the  body  corporate  from  the  individuals  who  constitute,  "not 
the  corporation,  but  all  the  members  of  the  corporation." 

The  doctrine  repeatedly  urged  by  the  complainant  and  adopted 
by  the  vice-chancellor,  viz.,  that  "the  English  and  Illinois  corpora- 
tions were,  respectively,  agencies  by  which  they  (Jackson  and 
Hooper)  accompHshed  their  results,"  was  expressly  repudiated  by 
the  House  of  Lords  in  Salomon  v.  Salomon,  Limited,  45  Week.  Rep. 
193;  L.R.  App.  Cas.  (1897)  22,  where  Lord  Halsbury  met  this 
argument,  saying:  "I  will,  for  the  sake  of  argument,  assume  the 
proposition  that  the  court  of  appeal  lays  down,  that  the  formation  of 
the  company  was  a  mere  scheme  to  enable  Salomon  to  carry  on  busi- 
ness in  the  name  of  the  company.  .  .  .  Either  the  limited  company 
was  a  legal  entity  or  it  was  not.  If  it  was,  the  business  belonged  to 
it  and  not  to  Salomon.  If  it  was  not,  there  was  no  person  and  no 
thing  to  be  an  agent  at  all,  and  it  is  impossible  to  say  at  the  same  time 
that  there  is  and  there  is  not  a  company." 

And  Lord  Macnaghten  thus  concurred:  "The  company  is  at  law 
a  different  person  altogether  from  the  subscribers  to  the  memoran- 
dum, and,  though  it  may  be  that  after  incorporation  the  business  is 


106  JACKSON  V.   HOOPER.  [cHAP.  III. 

precisely  the  same  as  it  was  before,  and  the  same  persons  are  man- 
agers, and  the  same  hands  receive  the  profits,  tiie  company  is  not  in 
law  the  agent  of  the  subscribei*s  or  trustee  for  them." 

Two  years  earlier  Lord-Justice  Li.ndley  a.sserted  the  same  rule 
in  the  case  of  Newman  tt  Co.,  [l!?ll);jj  1  Ch.  674,  685:  ''  It  is  true  that 
tlvis  company  was  a  small  one,  and  is  what  is  called  a  private  com- 
pany, but  its  corporate  capacity  cannot  be  ignored.  Those  who  form 
such  companies  obtain  great  advantages,  but  accomi)anied  by  some 
disadvantages.  .  .  .  \n  incorporated  company's  assets  are  its  i)rop- 
erty  and  not  the  property  of  the  sharehoKlers  for  the  time  being. 
.  .  .  The  court  is  bound  to  recognize  the  company  as  incorporated, 
and  to  give  effect  to  all  the  conseciuences  of  such  incorporation." 

The  same  theory  and  the  same  argument  urged  ui)on  this  yourt 
by  the  complainant's  counsel  were  presented  to  the  court  of  hust 
resort  of  Massachusetts  more  than  seventy-five  years  ago,  and  in  a 
case  strikingly  similar  to  and  on  all  fours  with  the  case  at  bar.  That 
court  characterized  the  argument  as  ingenious  but  dedarcil  the 
theory  fallacious  and  the  conclusions  unsountl.  Riisstll  v.  M'Lrlhin, 
14  Pick.  63. 

The  Massachuscits  court  said  of  the  bill  in  that  case:  "This  \v:is 
a  bill  in  e(|uity,  setting  forth  that  the  plaintiff  and  the  defendant 
were  owners  of  a  manufactory  in  Framingham  from  1823  to  the 
time  of  filing  the  bill;  that  in  1826  they  organized  themselves,  un- 
der an  act  of  incorporation  passed  in  1813,  by  the  name  of  the 
Framingham  Manufacturing  Company,  and  that  the  business,  both 
l)efore  and  after  such  organization,  was  carried  on  1)V  them  jointly  as 
partners,  and  praying  for  an  account  and  for  general  relief." 

The  plaintiff  and  the  defendant  purchased  in  equal  portions  the 
entire  stock  of  a  manufacturing  company  pursuant  to  a  written 
agreement  that  they  should  thereby  become  partners  in  the  business 
thus  carried  on. 

"During  the  period  from  1823  to  1826  the  business  of  manufac- 
turing was  carried  on  in  the  factory  und(T  the  direction  of  the  parties, 
sumlry  goods  were  manufactured  and  sold,  sundry  parcels  of  stock 
were  purchased,  and  moneys  were  advanced  and  received  by  the 
parties,  respectively,  and  some  accounts  were  rendered  by  one  to  the 
other  purporting  to  set  forth  some  of  their  dealings.  No  regular  cor- 
porate meetings  were  held  during  that  period,  but  such  formal  pro- 
ceedings as  were  had  appear  from  two  books  produced  l)y  the  de- 
fendant as  the  records  of  the  corporation." 

The  issue  was  as  to  whether  the  plaintiff  and  the  defendant  were 
partners  or  shareholders.  The  court,  after  discussing  the  difference 
in  law  between  a  shareholder  and  a  partner,  said:  — 

"It  was  argued  that  the  proposal  of  the  defendant  to  the  plaintiff 
to  become  jointly  interested  in  this  concern,  each  taking  eight 
shares,  made  them  partners  or  joint  tenants  or  tenants  in  common, 


CHAP.  III.]  JACKSON    V.  HOOPER.  107 

ipso  facto,  upon  its  adoption.  But  we  cannot  perceive  that  infer- 
ence, for  the  corporation  continued.  The  parties  did  not,  by  the  new 
arrangement,  acquire  a  legal  title  to  the  corporate  property.  They 
had,  indeed,  joint  and  equal  control  over  it,  but  their  acts  and  doings 
must  appear  through  the  proceedings  of  the  corporation  in  the  due 
forms  of  the  law, 

"It  is  said  that  the  parties  held  for  two  years  without  doing  any 
corporate  act.  If  it  were  so,  we  cannot  perceive  that  they  would  be- 
come partners  instead  of  corporators. 

"Upon  the  whole,  we  are  of  opinion  that  these  parties  are  not 
partners,  tenants  in  common  or  joint  tenants,  and  that  the  bill  must 
be  dismissed." 

The  court  cited  Pratt  v.  Bacon,  10  Pick.  123,  likewise  a  decision 
of  the  court  of  last  resort  and  to  the  same  effect.  The  Pratt  Case 
has  been  cited  with  approval  in  Von  Arnim  v.  American  Tube 
Works,  188  Mass.  515,  and  the  Russell  Case  in  Welch  v.  Bank, 
122  N.Y.  189. 

In  this  state,  Einstein  v.  Rosenfeld,  38  N.J.Eq.  (11  Stew.)  309,  an- 
nounces the  same  rule.  The  facts  were  similar  to  those  in  the  case  at 
bar,  excepting  that  the  corporation  was  a  domestic  one. 

Chancellor  Runyon  said:  "It  is  urged,  however,  that  in  this  case 
the  corporation  was  but  a  mere  form  which  the  partners  gave  to 
what  was,  in  fact,  only  a  copartnership,  and  that  this  court  is  there- 
fore at  liberty  to  treat  and  deal  with  it  as  a  copartnership.  The  bill 
alleges  that  the  corporation  is  a  quasi  partnership.  It  appears  by 
the  answer  that  a  partnership  was  at  first  agreed  upon  between  the 
parties,  but  it  was  afterwards  agreed  between  them  to  form  a  cor- 
poration instead.  It  is  entirely  clear  that  the  court,  in  dealing  with 
the  subject,  must  treat  the  company  as  a  corporation,  and  it  cannot, 
in  order  to  acquire  jurisdiction  over  it  to  dissolve  it,  disregard  and 
ignore  its  form  and  character." 

This  decision  was  quoted  with  approval  by  this  court  in  Stern- 
berg V.  Wolff,  56  N.J.  Eq.  (11  Dick.)  389,  which  appeared  again  in 
chancery,  56  N.J.  Eq.  (11  Dick.)  555.  Two  sets  of  stockholders  were 
contending  for  control.  Complainant  owned  one  half  of  the  stock 
and  defendant  the  other  half.  Suit  was  filed  to  restrain  the  defend- 
ant from  acting  as  treasurer  and  for  a  receiver. 

In  denying  an  order  for  an  injunction  and  receiver,  Vice-Chancellor 
Pitney  held  that  the  remedies  available  as  between  partners  and 
"joint  adventurers"  cannot  be  applied  to  stockholders  of  corpora- 
tions. 

[The  court  then  considered  two  further  questions:  (1)  whether  the 
alleged  agreement  that  the  directors  of  the  Illinois  corporation,  other 
than  Jackson  and  Hooper,  should  be  mere  nominal  directors  without 
the  right  to  exercise  independent  judgment  and  subject  to  their 
joint  dictation  and  control,  was  enforceable;  and  (2)  whether  the 


108  BANK    OF    UNITED    STATED    V.  DEVEAUX.  [CHAP.   III. 

injunction  did  not  improperly  assume  to  regulate  the  management 
of  tlu;  internal  affairs  of  foreign  corporations.] 

Wo  hold  that  the  parties  are  not  partners  as  to  the  corporate  prop- 
erty, but  merely  stockholders  in  two  foreign  corporations,  distinct 
legal  entities;  that  the  agreement  whereby  these  dummy  directors 
were  bound  to  act  in  accordance  with  the  will  of  the  complainant 
and  Hooper  was  illegal  and  therefore  unenforceable  in  any  court; 
that  the  whole  suljject-matter  of  the  controversy  relates  to,  and  the 
injunction  attempts  to  regulate,  the  management  of  the  internal 
affairs  of  two  foreign  corporations;  that  the  court  of  chancery  has 
no  jurisdiction  to  entertain  the  bill  and  that  the  injunction  and  all 
proceedings  thereunder  should  be  vacated  and  held  for  naught. 

For  the  reasons  already  given  the  order  appealed  from  is  reverse(j, 
with  costs. 

Note.  —  Cf.  In  re  Rieger,  157  Fed.  609,  in  which  the  bankruptcy 
court,  after  appointing  receivers  of  the  property  of  certain  partners, 
extended  the  receivership  over  the  property  of  a  corporation,  sub- 
stantially all  the  stock  of  which  was  owned  by  the  partners.  See 
also  Cole  v.  Price,  22  Wash.  18. 


BANK  OF   UNITED  STATES  v.   DEVEAUX. 

5  Cranch  (U.S.)  61.     1809. 

Error  to  the  Circuit  Court  for  the  District  of  Georgia. 

The  declaration,  or  petition,  as  it  is  there  called,  was  as  followp-.  — 

District  of  ( leorgia. 

To  the  honourable  the  judges  of  the  sixth  circuit  court  of  the 
United  States,  in  anil  for  the  elistrict  aforesaid. 

The  petition  of  The  President,  Directors  and  Company,  of  the 
Bank  of  the  United  States,  which  said  bank  was  established  under 
an  act  of  Congress  entitled  "An  act  to  incorporate  the  subscribers  to 
the  Bank  of  the  United  States,"  passed  the  25th  day  of  February, 
1791,  showeth. 

That  Peter  Deveaux  and  Thomas  Robertson,  both  of  the  city  of 
Savannah,  Esquires,  have  endamaged  your  petitioners  in  the  sum  of 
three  thousand  dollars,  for  this,  to  wit,  that  the  said  Thomas  Robert- 
son, then  acting  under  authority  from  the  said  Peter  Deveaux,  on 
the  20th  day  of  April,  1807,  at  Savannah,  in  the  district  aforesaid, 
and  within  the  jurisdiction  of  this  honourable  court,  with  force  and 
arms  entered  into  the  house  and  premises  of  your  petitioners,  at 
Savannah  aforesaid,  and  then  and  there  seized,  took,  and  detained, 
two  boxes  (the  goods  and  chattels  of  your  petitioners)  containing 
each  one  thousand  dollars  in  silver,  then  and  there  found  in  the  pos- 


CHAP.  III.]  BANK    OF    UNITED    STATES    V.  DEVEAUX.  109 

session  of  your  petitioners,  and  being  of  the  value  of  two  thousand 
and  four  dollars,  and  carried  the  same  away,  and  converted  and  dis- 
posed thereof  to  their  own  use,  and  other  wrongs  to  your  petitioners 
then  and  there  did  against  the  peace  of  the  district,  and  to  the  great 
damage  of  your  petitioners;  therefore  your  petitioners  say  they  are 
injured,  and  have  sustained  damage  to  the  value  of  three  thousand 
dollars,  and  therefore  they  bring  suit.  And  your  petitioners  aver 
that  they  are  citizens  of  the  State  of  Pennsylvania,  and  the  said 
Peter  Deveaux  and  Thomas  Robertson  are  citizens  of  the  State  of 
Georgia.  Wherefore  your  petitioners  pray  process,  etc. 

And  the  said  Peter  and  Thomas,  by  R.  L.  their  attorney,  come  and 
defend  the  force  and  injury,  when,  etc.,  and  pray  judgment  of  the 
declaration  aforesaid,  because  they  say  that  the  sixth  circuit  court 
of  the  United  States  ought  not  to  have  and  entertain  jurisdiction  of 
the  said  declaration,  and  the  matters  therein  contained,  for  that  the 
said  president,  directors  and  company  of  the  bank  of  the  United 
States  aver  themselves  to  be  a  body  politic  and  corporate,  and  that 
in  that  capacity  these  defendants  say  they  cannot  sue  or  be  sued, 
plead  or  be  impleaded  in  this  honourable  court,  by  any  thing  con- 
tained in  the  constitution  or  laws  of  the  same  United  States,  and  this 
they  are  ready  to  verify;  wherefore,  for  want  of  jurisdiction  in  this 
behalf,  they  pray  judgment,  and  their  costs,  etc. 

To  this  plea  there  was  a  demurrer  and  joinder,  and  judgment  in 
favour  of  the  defendants  upon  the  demurrer. 

Marshall,  Ch.  J.,  The  jurisdiction  of  this  court  being  limited, 
so  far  as  respects  the  character  of  the  parties  in  this  particular  case, 
"to  controversies  between  citizens  of  different  States,"  both  parties 
must  be  citizens,  to  come  within  the  description. 
i  That  invisible,  intangible,  and  artificial  being,  that  mere  legal 
entity,  a  corporation  aggregate,  is  certainly  not  a  citizen;  and,  con- 
sequently, cannot  sue  or  be  sued  in  the  courts  of  the  United  States, 
unless  the  rights  of  the  members,  in  this  respect,  can  be  exercised  in 
their  corporate  name.  If  the  corporation  be  considered  as  a  mere 
faculty,  and  not  as  a  company  of  individuals,  who,  in  transacting 
their  joint  concerns,  may  use  a  legal  name,  they  must  be  excluded 
from  the  courts  of  the  union. 

The  duties  of  this  court,  to  exercise  jurisdiction  where  it  is  con- 
ferred, and  not  to  usurp  it  where  it  is  not  conferred,  are  of  equal 
obligation.  The  constitution,  therefore,  and  the  law,  are  to  be  ex- 
pounded, without  a  leaning  the  one  way  or  the  other,  according  to 
those  general  principles  which  usually  govern  in  the  construction  of 
fundamental  or  other  laws. 

A  constitution,  from  its  nature,  deals  in  generals,  not  in  detail.  Its 
framers  cannot  perceive  minute  distinctions  which  arise  in  the  prog- 
ress of  the  nation,  and  therefore  confine  it  to  the  establishment  of 
broad  and  general  principles. 


110  BANK    OF    UNITED    STATES    V.  DEVEAUX.  [cHAF.   III. 

The  judicial  department  was  introduced  into  the  American  con- 
stitution under  impressions,  and  with  views,  whit-h  are  too  api)arent 
not  to  be  perceived  l)y  all.  However  true  the  fact  may  Ix?,  that  the 
tribunals  of  the  States  will  administer  justice  as  impartially  as  those 
of  the  nation,  to  parties  of  every  description,  it  is  not  less  true  that 
the  constitution  itself  either  entertains  apprehensions  on  this  subject, 
or  views  with  such  indul}!;f'nce  the  jjossible  fears  and  apprehensions  of 
suitors,  that  it  has  established  national  tribunals  for  the  decision  of 
controversies  between  aliens  and  a  citizen,  or  between  citizens  of  dif- 
ferent States.  Aliens,  or  citizens  of  different  States,  are  not  less  sus- 
ceptible of  these  apprehensions,  nor  can  they  i)e  supposed  to  l)e  less 
the  objects  of  constitutional  provision,  because  they  are  allowed  to 
sue  by  a  corporate  name.  That  name,  indeed,  cannot  be  an  alien  or 
a  citizen;  but  the  persons  whom  it  represents  may  be  the  one  or  the 
other;  and  the  controversy  is,  in  fact  and  in  law,  between  those  poT- 
sons  suing  in  their  corporate  character,  by  their  corporate  name,  for 
a  corporate  right,  and  the  individual  against  whom  the  suit  may  be 
instituted.  Substantially  and  essentially,  the  parties  in  such  a  case, 
where  the  members  of  the  corporation  are  aliens,  or  citizens  of  a  dif- 
ferent State  from  the  opposite  party,  come  within  the  spirit  and 
terms  of  the  jurisdiftion  conferred  by  the  constitution  on  the  na- 
tional tribunals. 

Such  has  been  the  universal  understanding  on  the  sul)ject.  Re- 
peatedly has  this  court  decided  causes  between  a  corporation  and  an 
individual  without  feeling  a  doubt  respecting  its  jurisdiction.  Those 
decisions  are  not  citetl  as  authority;  for  they  were  made  without  con- 
sidering this  particular  point;  but  they  have  much  weight,  as  they 
show  that  this  point  neither  occurred  to  the  bar  or  the  bench;  and 
that  the  common  understanding  of  intelligent  men  is  in  favour  of  the 
right  of  incorporated  aliens,  or  citizens  of  a  different  State  from  the 
defendant,  to  sue  in  the  national  courts.  It  is  by  a  course  of  acute, 
metaphysical  and  abstruse  reasoning,  which  has  been  most  ably  em- 
ployed on  this  occasion,  that  this  opinion  is  shaken. 

As  our  ideas  of  a  corporation,  its  privileges  and  its  disabilities,  are 
derived  entirely  from  the  English  books,  we  resort  to  th^m  for  aid, 
in  ascertaining  its  character.  It  is  defined  as  a  mere  creature  of  the 
law,  invisible,  intangible,  and  incorporeal.  Yet,  when  we  examine  the 
subject  further,  we  find  that  corporations  have  been  included  within 
terms  of  description  appropriated  to  real  persons. 

The  statute  of  Henry  VIII,  concerning  bridges  and  highways, 
enacts,  that  bridges  and  highways  shall  be  made  and  repaired  by  the 
" inhabita?its  of  the  city,  shire,  or  riding,"  and  that  the  justices  shall 
have  power  to  tax  every  "inhabitant  of  such  city,"  etc.,  and  that  the 
collectors  may  "distrain  every  such  inhabitant  as  shall  be  taxed  and 
refuse  payment  thereof,  in  his  lands,  goods  and  chattels." 

Under  this  statute  those  have  been  construed  inhabitants  who  hold 


CHAP.  III.]  BANK    OF    UNITED    STATES    V.  DEVEAUX.  Ill 

lands  within  the  city  where  the  bridge  to  be  repaired  lies,  although 
they  reside  elsewhere. 

Lord  Coke  says,  "every  corporation  and  body  politic  residing  in 
any  county,  riding,  city,  or  town  corporate,  or  having  lands  or  tene- 
ments in  any  shire,  qum  propriis  manibus  et  sumptibus  possident  et 
habent,  are  said  to  be  inhabitants  there,  within  the  purview  of  this 
statute." 

The  tax  is  not  imposed  on  the  person,  whether  he  be  a  member  of 
the  corporation  or  not,  who  may  happen  to  reside  on  the  lands;  but 
is  imposed  on  the  corporation  itself,  and,  consequently,  this  ideal 
existence  is  considered  as  an  inhabitant,  when  the  general  spirit  and 
purpose  of  the  law  requires  it. 

In  the  case  of  The  King  v.  Gardner,  reported  by  Cowper,  a  cor- 
poration was  decided,  by  the  court  of  king's  bench,  to  come  within 
the  description  of  "occupiers  or  inhabitants."  In  that  case  the  poor 
rates,  to  wliich  the  lands  of  the  corporation  were  declared  to  be  liable, 
were  not  assessed  to  the  actual  occupant,  for  there  was  none,  but  to 
the  corporation.  And  the  principle  established  by  the  case  appears  to 
be,  that  the  poor  rates,  on  vacant  ground  belonging  to  a  corporation, 
may  be  assessed  to  the  corporation,  as  being  inhabitants  or  occupiers 
of  that  ground.  In  this  case  Lord  Mansfield  notices  and  overrules 
an  inconsiderate  dictum  of  Justice  Yates,  that  a  corporation  could 
not  be  an  inhabitant  or  occupier. 

These  opinions  are  not  precisely  in  point;  but  they  serve  to  show 
that,  for  the  general  purposes  and  objects  of  a  law,  this  invisible,  in- 
corporeal creature  of  the  law  may  be  considered  as  having  corporeal 
qualities. 

It  is  true  that  as  far  as  these  cases  go  they  serve  to  show  that  the 
corporation  itself,  in  its  incorporeal  character,  may  be  considered  as 
an  inhabitant  or  an  occupier;  and  the  argument  from  them  would 
be  more  strong  in  favour  of  considering  the  corporation  itself  as  en- 
dowed for  this  special  purpose  with  the  character  of  a  citizen,  than 
to  consider  the  character  of  the  individuals  who  compose  it  as  a  sub- 
ject which  the  court  can  inspect,  when  they  use  the  name  of  the  cor- 
poration, for  the  purpose  of  asserting  their  corporate  rights.  Still  the 
cases  show  that  this  technical  definition  of  a  corporation  does  not 
uniformly  circumscribe  its  capacities,  but  that  courts  for  legitimate 
purposes  will  contemplate  it  more  substantially. 

There  is  a  case,  however,  reported  in  12  Mod.  which  is  thought  pre- 
cisely in  point.  The  corporation  of  London  brought  a  suit  against 
Wood,  by  their  corporate  name,  in  the  mayor's  court.  The  suit  was 
brought  by  the  mayor  and  commonalty,  and  was  tried  before  the 
mayor  and  aldermen.  The  judgment  rendered  in  this  cause  was 
brought  before  the  court  of  king's  bench  and  reversed,  because  the 
court  was  deprived  of  its  jurisdiction  by  the  character  of  the  indi- 
viduals who  were  members  of  the  corporation. 


112  BANK    OF    UNITED    STATES    V.  DEVEAUX.  [cHAP.  III. 

In  that  case  the  objection,  that  a  corporation  was  an  invisible,  in- 
tangible thinp;,  a  more  incorporeal  legal  entity,  in  which  the  chanicters 
of  the  individuals  who  coini)osed  it  were  completely  merged,  was 
urged  and  was  considered.  The  judges  unanimously  declared  that 
they  could  look  beyond  the  coqiorate  name,  and  notice  the  character 
of  the  individual.  In  the  opinions,  whieh  were  delivered  f^iriatini, 
several  cases  are  put  which  serve  to  illustrate  the  principle,  and  fortify 
the  decision. 

The  case  of  The  Mayor  and  Commonalty  v.  Wood  is  the  stronger, 
because  it  is  on  the  point  of  jurisdiction.  It  appears  to  the  court  to  l>c 
a  full  authority  for  the  case  now  under  consideration.  It  seems  not 
possible  to  distinguish  them  from  each  other. 

If,  then,  the  Congress  of  the  United  States  had,  in  terms,  enacted 
that  incorporated  aliens  might  sue  a  citizen,  or  that  the  incorporated 
citizens  of  one  State  might  sue  a  citizen  of  another  State,  in  the  federal 
courts,  by  its  corporate  name,  this  court  would  not  have  felt  itself 
justified  in  declaring  that  such  a  law  transcended  the  constitution. 

The  controversy  is  substantially  between  aliens,  suing  by  a  cor- 
porate name,  and  a  citizen,  or  i)etween  citizens  of  one  State,  suing  by 
a  corporate  name,  and  those  of  another  State.  When  these  are  .said  to 
be  substantially  the  parties  to  the  controversy,  the  court  does  not 
mean  to  liken  it  to  the  case  of  a  trustee.  A  trustee  is  a  real  person 
capable  of  being  a  citizen  or  an  alien,  who  has  the  whole  legal  estate 
in  himself.  At  law,  he  is  the  real  proi)rietor,  and  he  re{)resents  him- 
self, and  sues  in  his  own  right.  But  in  this  ciuse  the  corporate  name 
represents  persons  who  are  members  of  the  corporation. 

If  the  Constitution  would  authorize  Congress  to  give  the  courts 
of  the  Union  jurisdiction  in  this  case,  in  consequence  of  the  character 
of  the  members  of  the  corporation,  then  the  judicial  act  ought  to  be 
construed  to  give  it.  For  the  term  citizen  ought  to  be  understood  as 
it  is  used  in  the  constitution,  and  as  it  is  used  in  other  laws.  That  is, 
to  describe  the  real  persons  who  come  into  court,  in  this  case,  under 
their  corporate  name. 

That  corporations  composed  of  citizens  are  considered  by  the 
legislature  as  citizens,  under  certain  circumstances,  is  to  be  strongly 
inferred  from  the  registering  act.  It  never  could  be  intended  that  an 
American  registered  vessel,  abandoned  to  an  insurance  company 
^composed  of  citizens,  should  lose  her  character  as  an  American  ves- 
sel; and  yet  this  would  be  the  consequence  of  declaring  that  the 
members  of  the  corporation  were,  to  every  intent  and  purpose,  out 
of  view,  and  merged  in  the  corporation. 

The  court  feels  itself  authorized  by  the  case  in  12  Mod.  on  a  ques- 
tion of  jurisdiction,  to  look  to  the  character  of  the  individuals  who 
compose  the  corporation,  and  they  think  that  the  precedents  of  this 
court,  though  they  were  not  decisions  on  argument,  ought  not  to  be 
absolutely  disregarded. 


CHAP.  III.]  BANK    OF    UNITED    STATES    V.  DEVEAUX.  113 

If  a  corporation  may  sue  in  the  courts  of  the  union,  the  court  is  of 
opinion  that  the  averment  in  this  case  is  sufficient. 

Being  authorized  to  sue  in  their  corporate  name,  they  could  make 
the  averment,  and  it  must  apply  to  the  plaintiffs  as  individuals,  be- 
cause it  could  not  be  true  as  applied  to  the  corporation. 

Judgment  reversed;  plea  in  abatement  overruled,  and  cause  remanded. 

Note.  —  In  Strawbridge  v.  Curtiss,  3  Cranch,  267,  the  Supreme 
Court  decided  that,  where  there  are  two  or  more  joint  plaintiffs  and 
two  or  more  joint  defendants,  each  of  the  plaintiffs  must  be  capable 
of  suing  each  of  the  defendants  in  the  federal  courts,  in  order  to  sup- 
port the  jurisdiction.  Strawbridge  w^as  a  citizen  of  Massachusetts. 
One  of  the  defendants  was  a  citizen  of  Vermont;  the  other  defend- 
ants were  citizens  of  Massachusetts;  and  it  was  held  that  the  fed- 
eral court  had  not  jurisdiction. 

A  logical  application  of  the  combined  principles  of  Strawbridge  v. 
Curtiss  and  Bank  v.  Deveaux  was  made  in  Commercial  Bank  v. 
Slocomb,  14  Pet.  60.  The  plaintiffs,  citizens  of  Louisiana,  brought  an 
action  in  a  federal  court  against  a  Mississippi  corporation.  The  de- 
fendant pleaded  that  two  of  the  members  of  the  corporation  were 
citizens  of  Louisiana,  and  it  was  held  that,  upon  the  facts  thus 
pleaded,  the  court  had  not  jurisdiction. 

In  Louisville,  Cincinnati,  Etc.,  R.R.  Co.  v.  Letson,  2  How.  497,  a 
citizen  of  New  York  brought  a  suit  in  a  circuit  court  against  a  corpo- 
ration of  South  Carolina,  two  shareholders  in  which  were  citizens  of 
North  Carolina.  The  statute  provided  that  the  circuit  courts  should 
have  jurisdiction  where  "the  suit  is  between  a  citizen  of  the  State 
where  the  suit  is  brought,  and  a  citizen  of  another  State."  The 
defendant  contended  that  under  this  statute  the  court  had  no  juris- 
diction where  the  suit  was  by  a  citizen  of  one  State  against  citizens 
of  a  second  and  a  third  State;  and  that  the  suit  in  question  was  such 
a  suit.  The  court  held  that  the  circuit  court  had  jurisdiction.  Mr. 
Justice  Wayne  said  (p.  555) :  "After  mature  dehberation,  we  feel  free 
to  say  that  the  cases  of  Strawbridge  and  Curtis  and  that  of  the  Bank 
and  Deveaux  were  carried  too  far,  and  that  consequences  and  infer- 
ences have  been  argumentatively  drawn  from  the  reasoning  em- 
ployed in  the  latter  which  ought  not  to  be  followed.  Indeed,  it  is 
difficult  not  to  feel  that  the  case  of  the  Bank  of  the  United  States  and 
the  Planters'  Bank  of  Georgia  is  founded  upon  principles  irreconcil- 
able with  some  of  those  on  which  the  cases  already  adverted  to  were 
founded.  The  case  of  the  Commercial  Bank  of  Vicksburg  and  Slo- 
comb was  most  reluctantly  decided  upon  the  mere  authority  of  those 
cases.  We  do  not  think  either  of  them  maintainable  upon  the  true 
principles  of  interpretation  of  the  Constitution  and  the  laws  of  the 
United  States.  A  corporation  created  by  a  State  to  perform  its  func- 
tions under  the  authority  of  that  State  and  only  suable  there,  though 


114  BANK    OF    UNITED    STATES    V.  DEVEAUX.  [cHAP.   III. 

it  may  have  members  out  of  the  State,  seems  to  us  to  l>e  a  person. 
thoujj;h  an  artificial  one,  inhabit  in^  and  belonKinn  to  that  State,  and 
therefore  entitled,  for  the  purpose  of  suiny;  and  beinji;  sued,  to  be 
tleemed  a  citizen  of  that  State.  We  remark  too,  that  the  cases  of 
Strawbridge  and  Curtis  and  the  Bank  antl  Deveaux  have  never  been 
satisfactory  to  the  bar,  aiul  that  they  were  not,  especially  the  last, 
entirely  satisfactory  to  the  court  that  made  them.  They  hav.-  been 
followed  tdways  most  reluctantly  and  with  dissatisfaction.  By  no 
one  was  the  correctness  of  them  more  (luestioned  than  by  the  late 
chief  justice  who  gave  them.  It  is  within  the  knowledge  of  several 
of  us,  that  he  repeatedly  expressed  regret  that  those  decisions  had 
been  made,  adding,  whenever  the  sul)ject  was  mentioneil,  that  if  the 
point  of  jurisdiction  was  an  original  one,  the  conclusion  would  he 
different.  We  think  we  may  safely  assert,  that  a  majority  of  the 
members  of  this  court  have  at  all  times  partaken  of  the  san^e  regret, 
and  that  whenever  a  ca.se  has  occurred  on  the  circuit,  involving  the 
application  of  the  ca.'^e  of  the  Bank  and  Deveaux,  it  wjus  yielded  to, 
because  the  decision  had  been  made,  and  not  because  it  w:us  thought 
to  be  right.  We  have  already  said  that  the  case  of  the  Bank  of 
Vicksburg  and  Slocomb,  14  Peters,  w:us  most  reluctantly  given,  upon 
mere  authority." 

Marshall  v.  Baltimore  &  Ohio  R.R.  Co.,  10  How.  314.  The  phiin- 
tiff  averred  that  he  was  a  citizen  of  Virginia,  and  that  the  defendant 
wius  a  corporation  by  the  act  of  the  (leneral  .\.ssembly  of  Maryland. 
It  was  objected  that  this  :iv(Tment  was  insufficient  to  show  jurisdic- 
tion in  the  fetleral  court:  The  court  held  it  wius  sufficient.  Mr.  Jus- 
tice Grier  said  (pp.  328,  329):  "The  persons  who  act  under  these 
faculties,  and  use  this  corporate  name,  may  be  justly  presumed  to  be 
resident  in  the  State  whicli  is  the  necessary  habitat  of  the  corporation, 
and  where  alone  they  can  l)e  made  sui)ject  to  suit;  and  should  be 
estopped  in  equity  from  averring  a  different  tlomicil  as  against  those 
who  are  compelled  to  seek  them  there,  and  can  find  them  there  and 
nowhere  else.  .  .  .  The  presumption  arising  from  the  habitat  of  a  cor- 
poration in  the  place  of  its  creation  being  conclusive  as  to  the  resi- 
dence or  citizenship  of  those  who  use  the  corporate  name  and  exer- 
cise the  faculties  conferred  by  it,  the  allegation  that  the  'defendants 
are  a  l)otly  corporate  by  the  act  of  the  General  Assembly  of  Mary- 
land '  is  a  sufficient  averment  that  the  real  defendants  are  citizens 
of  that  State." 

St.  Louis  &  San  Francisco  Rij.  Co.  v.  James,  161  U.S.  545.  The 
plaintiff  below  was  a  citizen  of  Missouri.  The  defendant  was  a  Mis- 
souri corporation,  which  had  been  reincorporated  as  an  Arkansas 
corporation.  The  action  was  brought  in  the  federal  court  in  Arkan- 
sas, and  it  was  held  that  such  court  did  not  have  jurisdiction.  Mr. 
Justice  Shiras  said  (p.  562) :  "To  fully  reconcile  all  the  expressions 
used  in  these  cases  would  be  no  easy  task,  but  we  think  the  following 


CHAP.  III.]  BAISTK    OF    UNITED    STATES    V.  DEVEAUX,  115 

propositions  may  be  fairly  deduced  from  them:  There  is  an  indis- 
putable legal  presumption  that  a  state  corporation,  when  sued  or 
suing  in  a  Circuit  Court  of  the  United  States,  is  composed  of  citizens 
of  the  State  which  created  it,  and  hence  such  a  corporation  is  itself 
deemed  to  come  within  that  provision  of  the  Constitution  of  the 
United  States  wliich  confers  jurisdiction  upon  the  Federal  courts  in 
'  'controversies  between  citizens  of  different  States.' 

"It  is  competent  for  a  railroad  corporation  organized  under  the 
laws  of  one  State,  when  authorized  so  to  do  by  the  consent  of  the 
State  which  created  it,  to  accept  authority  from  another  State  to 
extend  its  railroad  into  such  State  and  to  receive  a  grant  of  powers  to 
own  and  control,  by  lease  or  purchase,  railroads  therein,  and  to  sub- 
ject itself  to  such  rules  and  regulations  as  may  be  prescribed  by  the 
second  State.  Such  legislation  on  the  part  of  two  or  more  States  is 
not,  in  the  absence  of  inhibitory  legislation  by  Congress,  regarded  as 
within  the  constitutional  prohibition  of  agreements  or  compacts 
between  States. 

"Such  corporations  may  be  treated  by  each  of  the  States  whose 
legislative  grants  they  accept  as  domestic  corporations. 

"The  presumption  that  a  corporation  is  composed  of  citizens  of 
the  State  which  created  it  accompanies  such  corporation  when  it 
does  business  in  another  State,  and  it  may  sue  or  be  sued  in  the 
Federal  courts  in  such  other  State  as  a  citizen  of  the  State  of  its 
original  creation. 

"We  are  now  asked  to  extend  the  doctrine  of  indisputable  citizen- 
ship, so  that  if  a  corporation  of  one  State,  indisputably  taken,  for 
the  purpose  of  Federal  jurisdiction,  to  be  composed  of  citizens  of  such 
State,  is  authorized  by  the  law  of  another  State  to  do  business  therein, 
and  to  be  endowed,  for  local  purposes,  with  all  the  powere  and  priv- 
ileges of  a  domestic  corporation,  such  adopted  corporation  shall  be 
deemed  to  be  composed  of  citizens  of  the  second  State,  in  such  a 
sense  as  to  confer  jurisdiction  on  the  Federal  courts  at  the  suit  of  a 
citizen  of  the  State  of  its  original  creation. 

"We  are  unwilling  to  sanction  such  an  extension  of  a  doctrine 
which,  as  heretofore  estabUshed,  went  to  the  very  verge  of  judicial 
power.  That  doctrine  began,  as  we  have  seen,  in  the  assumption  that 
State  corporations  were  composed  of  citizens  of  the  State  which 
created  them;  but  such  assumption  was  one  of  fact,  and  was  the  sub- 
ject of  allegation  and  traverse,  and  thus  the  jurisdiction  of  the  Fed- 
eral courts  might  be  defeated.  Then,  after  a  long  contest  in  this 
court,  it  was  settled  that  the  presumption  of  citizenship  is  one  of 
law,  not  to  be  defeated  by  allegation  or  evidence  to  the  contrary. 
There  we  are  content  to  leave  it." 

See  also  Missouri  Pacific  Ry.  Co.  v.  Castle,  224  U.S.  541,  545. 

In  Great  Southern  Fire  Proof  Hotel  Co.  v.  Jones,  111  U.S.  449, 
Mr.  Justice  Harlan  said  (p.  456) :  "  The  rule  that  for  purposes  of 


116        U.S.  V.  MILW.\UKEE    REFRIGERATOR    TRANSIT    CO.       [cHAP.   III. 

jurisdiction  and  within  the  meaning  of  the  cluus*'  of  the  Constitu- 
tion extending  the  judicial  iK)\ver  of  the  United  States  to  contro- 
versies between  citizens  of  ditl'erent  States,  a  corporation  w:ws  to 
be  deemed  a  citizen  of  the  Stale  creating  it,  has  Ix'en  so  long  rec- 
t)gnize(l  and  iipi)lied  that  it  is  not  now  to  be  questioned." 

In  Xoitlurn  Securities  Co.  v.  United  States,  193  U.S.  197,  Mr. 
Justice  BuKWKU  sjwke  (p.  302)  of  a  corporation  as  "by  fiction  of  law 
recognizetl  for  some  purposes  as  a  person  and  for  purposes  of  juris- 
diction :is  a  citizen." 

In  Doctor  V.  Iltirrington,  19(3  U.S.  r)79,  the  plaint  ids.  citizens  of  New 
Jersey,  lus  siiarelioidei-s  in  a  New  York  corporation,  brought  suit  in 
a  federal  court  agaiiust  the  corF>oration  and  certain  other  defend- 
ants who  were  citizens  of  New  York.  It  was  contendinl  that  the 
plaintitTs  must  be  presumetl  to  \)0  citizens  of  New  York  and  tiierefore 
that  tiie  court  was  without  juristliction.  This  contention  was  not 
upheld. 

Washington  Insurance  Co.  v.  Price,  1  Hopkins,  Chancery  Reports 
(N.Y.)  1.  The  statute  provided  that  "where  the  chancellor  shall  Ix? 
a  ixu'ty  to  a  suit  in  chancery,  the  i>ill  shall  Im'  filed  l:>efore  the  Chief 
Justice  of  the  State."  The  chancellor  w:us  a  shareholder  in  a  corpora- 
tion which  filed  a  suit  in  chancery.  He  declined  to  determine  the 
suit:  "The  chancellor  is  a  party  to  a  suit  in  this  court  by  or  against 
a  corporate  co!nj)any,  in  which  he  is  a  stockholder.  .  .  .  The  Chief 
Justice  has  jurisdiction  of  such  suits."  Cf.  Sttairt  v.  Mfchonics* 
Bank,  19  John  (N.Y.)  496,  501. 


UNITED  STATES  v.  MILWAUKEE  REFRIGERATOR 
TRANSIT  CO. 

142  Fed.  247.     1905. 

Sanborn,  District  Judge.  This  is  a  bill  in  equity  for  an  injunction 
to  prevent  the  payment  of  alleged  rebates  on  freight,  brought  under 
Elkins  Act,  February  19.  1903,  c.  708.  32  Stat.  847  [U.S.  Comp.  St. 
Supp.  1905,  p.  599].  The  defence  outlined  in  argument  of  the  d(nnur- 
rcrs  is  that  it  appeai-s  on  the  face  of  the  bill  that  the  alleged  rebates 
were  not  paid  back  to  the  shipper  (the  brewing  company) ,  but  to  the 
Refrigerator  Transit  Company,  and,  in  substance  and  effect,  nothing 
more  is  shown  than  the  pa\Tnent  to  a  soliciting  agent  (the  transit 
company)  of  a  commission  of  an  eighth  or  tenth  of  the  published 
tariff  rates,  thus  showing,  in  real  effect,  acts  neither  unlawful,  im- 
moral, nor  injurious.  A  motion  is  also  made  on  behalf  of  the  brewing 
company  to  strike  out  certain  allegations  averring  prior  and  discon- 
nected illegal  acts  on  its  part,  said  to  be  material  in  proof,  to  charac- 
terize the  acts  of  its  principal  oflficers  and  managers  in  organizing 


CHAP.  III.]      U-.S.  V.  MILWAUKEE   REFEIGERATOR   TRANSIT    CO.         117 

the  transit  company,  and  rebut  the  theory  that  the  moneys  paid  by 
the  carriers  to  the  transit  company  were  paid  as  commissions  for 
obtaining  the  business  and  not  as  prohibited  rebates. 

The  provisions  of  section  10  of  the  Interstate  Commerce  Act,  the 
Act  of  1889  (Act  March  2,  1889,  25  Stat.  857  [U.S.  Comp.  St.  1901, 
p.  3160]),  and  the  Elkins  Act,  may  be  thus  summarized:  — 

Section  10,  Interstate  Commerce  Act. 

Common  carriers,  and  the  officers  of  such  as  are  corporations,  re- 
ceivers, agents,  etc.,  of  such  corporations,  are  prohibited  from  giving 
rebates,  preferences,  and  advantages,  and  making  unjust  discrim- 
inations, and  are  punishable  by  fine  and  imprisonment.  Under  this 
section  only  the  agents  of  corporate  carriers,  and  not  the  carriers 
themselves,  were  punishable.  U.S.  v.  Mich.  Cent.  R.  Co.,  (D.  C.) 
43  Fed.  26. 

Act  of  1889. 

Agents  of  carriers:  Any  common  carrier,  and  officers  and  agents 
of  corporation  carriers,  who  by  means  of  false  billing,  classification, 
weighing,  or  other  device  or  means,  shall  assist,  suffer,  or  permit  any 
one  to  obtain  transportation  at  less  than  established  rates,  shall  be 
guilty  of  a  misdemeanor,  punishable  by  fine  and  imprisonment. 

Shippers:  Any  person  or  corporation  agent  shipping  property, 
who  shall  knowingly,  by  false  billing,  classification,  etc.,  or  other  de- 
vice or  means,  with  or  without  the  carrier's  consent  or  connivance, 
obtain  carriage  at  less  than  such  established  rates,  shall  be  deemed 
guilty  of  fraud,  declared  to  be  a  misdemeanor,  punishable  by  fine 
and  imprisonment. 

Bribery  to  obtain  unjust  discrimination:  Any  such  person,  officer, 
etc.,  who  shall  by  paying  money  or  thing  of  value,  or  by  sohcitation, 
induce  a  carrier  to  discriminate  unjustly  in  his  favor  as  against  other 
shippers,  or  aid  or  abet  such  discrimination,  shall  be  deemed  guilty  of 
a  misdemeanor,  punishable  by  fine  and  imprisonment. 

Tort  action:  Shippers  discriminated  against  are  given  action  for 
damages  against  such  person,  officer,  etc.,  as  well  as  the  carrier. 

Corporation  carriers  themselves,  it  will  be  noticed,  are  not  within 
the  penalties  of  these  acts;  and  the  defence  that  the  supposed  dis- 
crimination was  made  not  under  hke  circumstances  and  conditions 
was  always  available. 

Elkins  Act  of  1903. 

Corporation  carriers  are  made  liable  to  the  same  extent  as  were 
their  agents  under  the  earlier  statutes,  but  subject  to  fine  only,  not 
imprisonment.  Their  wilful  failure  to  pubHsh  tariffs  or  rates,  or 
strictly  observe  them,  is  a  misdemeanor  punishable  by  fine.  It  is 
made  unlawful  and  punishable  for  any  person  or  corporation  to  offer. 


lis         U.S.  V.  MILWAUKEE    REFRIGEIIATOR    TR.\NSIT    CO.       [cHAP.   III. 

grant,  or  give,  or  to  solicit,  accept,  or  receive,  or  offer  so  to  do,  any 
rebate,  concession,  or  discriniination  in  respect  of  tr:insi>ort:iti()ii  in 
interstate  or  foreign  commerce  by  common  carriers  within  the  former 
statutes,  whereby  any  such  projierty  shall,  by  any  device  whatever, 
l)e  carried  at  less  than  the  published  tariff  rate.  Oflfences  under  the 
earlier  acts,  f()llo\ve<l  by  convictions  after  this  act,  are  punishable 
only  by  fine.  The  acts  or  omi.ssions  of  agents  are  deemetl  the  acts  or 
omissions  of  the  carrier  also.  The  published  rate  is  matle  conclusive, 
anil  any  departure  therefrom  punishable.  Suits  in  equity  by  the  com- 
mission, as  well  jLs  those  directeil  by  the  Attorney-deneral,  are  au- 
thorized, and  the  provisions  of  the  e.\'j)e<lition  act  and  anti-trust  act 
are  made  applicable.  It  will  Ik»  observed  that  this  act  makes  the  cor- 
poration carriers  themselves  Uable,  eliminates  the  question  of  like 
circumstances  and  conditions  by  making  the  published  rate  con- 
clusive, and  abolishes  jvanishment  by  imprisonment. 

In  effect  the  bill  in  this  case  is  claimeil  to  charge  the  creation  by 
a  shipper  of  a  dummy  corporation  as  a  de\ice  to  cover  rebates  on 
large  shipments  of  In'er  in  interstate  and  foreign  traffic.  The  carriers 
which  are  charged  with  i)aying  th(»  rebates  are  joined  its  defendants, 
and  .some  of  them  have  file<l  general  demurrers  for  want  of  equity  in 
the  bill.  The  I'abst  Brewing  Company  hjus  also  moved  to  strike  out 
the  following  par;igraph:  — 

"That  until  the  pitssage  and  promulgation  of  the  act  of  Congress 
entitled  'An  act  to  further  regulate  commerce  with  foreign  nations 
and  states,'  approvetl  February  19,  1903,  said  defendant  Palwt 
Brewing  Company  harl,  through  the  agency  of  said  Gustav  G. 
Pabst  and  Frederick  Pabst,  habitually  received  from  many  of  the 
railroads  and  common  carriers,  which  so  transporttnl  the  Ix'er  and 
other  articles  so  shippetl  by  it  from  the  State  of  Wisconsin  into  for- 
eign countries  and  states  other  than  Wisconsin,  rebates  and  conces- 
sions and  other  discriminations." 

The  bill,  after  stating  that  the  Pabst  Brewing  Company,  Mil- 
waukee Refrigerator  Transit  Company,  and  Wisconsin  Central  Rail- 
way Company  are  Wisconsin  corporations,  and  the  other  defendants 
foreign  corporations,  that  the  Attorney-General  has  directed  these 
proceedings,  that  the  shipments  originate  in  Milwaukee  and  con- 
tinue in  other  states  ami  countries,  contains  the  following  allegations, 
here  given  in  brief  outline  (the  figures  refer  to  the  numbered  para- 
graphs of  the  bill) :  — 

(11)  The  transit  company  was,  on  October  7,  1903,  organized, 
inter  alia,  to  operate  refrigerator  cars  on  defendants'  and  other  lines. 
It  owTis  or  controls  540  such  cars.  It  was  conceived,  and  is  operated, 
as  defendants'  carriers  well  knew,  as  a  device  to  cover  the  receiving 
of  rebates,  concessions,  and  discriminations,  to  wit,  an  eighth  or 
tenth  of  the  published  rate;  wherebj'  the  traffic  is  carried  at  less  than 
published  rates.   Such  rebates  are  paid  and  accepted  under  the  pre- 


CHAP.  III.]       U.S.  V.  MILWAUKEE    REFRIGERATOR    TRANSIT    CO.         119 

tence,  claim,  and  guise  of  "commissions,"  and  amount  to  large  sums 
to  complainants  unknown. 

(12)  The  transit  company  was  incorporated  by  procurement  of  the 
attorneys  of  the  brewing  company,  and  at  its  instance  and  request, 
with  a  capital  of  S150,000,  having  five  directors,  and  with  power  to 
acquire  and  operate  refrigerator  cars,  and  contract  for  the  supply  and 
operation  of  refrigerator  transportation  by  land  and  water. 

(13)  The  brewing  company  is  a  Wisconsin  corporation  operating 
a  large  brewery,  and  selling  and  shipping  beer  into  all  the  states  and 
territories  and  to  purchasers  in  foreign  countries.  It  has  a  capital  of 
$10,000,000  or  10,000  shares.  Gustav  Pabst  and  Fred  Pabst  are 
brothers,  owning  2000  shares,  and  with  their  mother  and  sisters  over 
half  of  the  stock.  They  vote  and  control  a  majority  of  the  stock,  and 
have  alwaj^s  directed  and  controlled  the  election  of  directors,  and 
their  action ;  they  have  been  and  are  its  president,  vice-president,  and 
general  managers,  and  have  always  controlled  all  its  sales,  purchases, 
and  shipments. 

(14)  (Here  occurs  the  passage  above  quoted  as  to  rebates  prior  to 
the  Elkins  Act.)  Upon  the  passage  of  that  act  the  brewing  company 
was  no  longer  able  to  directly  secure  rebates,  and  cast  about  for  some 
device  to  evade  the  statute,  and  the  Pabsts,  as  such  officers,  and  one 
Howe,  as  traffic  manager,  intending  to  contrive  and  operate  a  device 
for  such  evasion,  caused  the  transit  compan}^  to  be  formed.  Of  its 
1500  shares,  1340  were  issued  to  the  two  Pabsts,  35  shares  to  Fred 
Pabst's  wife,  and  the  balance  to  dummy  directors,  to  give  color  to 
the  claim  that  its  stock  was  not  owned  by  the  brewing  company. 
After  investigation  bj^  the  interstate  commerce  commission  in  IMay, 
1905,  Gustav  Pabst  transferred  his  stock  in  the  transit  company  to 
Fred  Pabst,  and  had  some  person  elected  director  in  his  place;  but 
such  acts  were  colorable  merely,  he  still  retaining  a  large  pecuniary 
interest  in  the  corporation,  and  participating  in  its  control. 

(15)  Immediately  on  the  creation  of  the  transit  company  the 
Pabsts,  as  controlling  officers  of  the  brewing  company,  contracted 
with  themselves  as  executive  officers  of  the  transit  company,  for  a 
term  not  j^et  expired,  to  give  the  latter  exclusive  control  of  the  ship- 
ment of  all  freight  of  the  brewing  companj^  mo\dng  in  interstate  and 
foreign  commerce,  which  it  is  still  exercising.  The  contract  was  made 
to  enable  the  transit  company  to  route  the  shipment  of  such  freight 
on  the  lines  of  such  companies  as  will  paj'-  rebates,  and  withhold  it 
from  such  as  will  not;  and  all  the  rebates,  concessions,  and  discrim- 
inations charged  in  the  bill  have  been  exacted  by  threats  of  such 
diversion.  Many  thousand  tons  of  said  freight  have  been  hauled  by 
defendant  carriers  since  the  contract  was  made.  On  such  shipments 
the  brewing  company  pays  to  the  carriers  the  full  tariff  rate,  and 
the  carriers  pay  the  transit  company  for  use  of  its  refrigerator  cars 
for  mileage  three  fourths  of  a  cent  to  a  cent  per  mile,  and  in  addition 


120        U.S.  V.  MILWAUKEE    REFRIGERATOR   TRANSIT    CO.       (CHAP.   III. 

an  eighth  or  tenth  of  the  8um.s  paid  them  b>'  the  brewing  company; 
and  in  every  instance  the  proiMTty  is  transported  l»y  dcf»-n«hiMt  car- 
riei-s  at  an  eighth  or  tenth  less  than  the  puhhshed  taritT.  Such  re- 
bates amount  to  many  thou-sands  of  dollars,  the  exact  sum  unknown 
to  comphiinants. 

(10)  All  the  defendant  carriers  well  knew  that  the  transit  com- 
pany was  organized  in  the  interest  of  the  brewing  company,  and  for 
the  puri)ose  of  evading  the  law,  aiul  paid  such  rebates  with  the  like 
purj)ose  and  intent. 

(IS)  The  transit  company  claims  and  pretends  that  such  repay- 
ments were  made  and  accejjted  lus  compensation  for  its  services  in 
soliciting  and  procuring  freight  for  carriage  by  defendants;  but  such 
claim  or  pretence  is  untrue.  The  transit  company  has  entire  control 
of  all  the  shipping  business  of  the  brewer>',  comprising  almost  the 
entire  business  of  the  transit  company,  which  it  does  not  solicit;  the 
oidy  possible  consideraticm  moving  from  it  to  the  carrier  i>eing  its 
refraining  to  divert  the  business.  All  such  repayments  have  alwa>'8 
been  known  to  all  said  parti(^  to  l)e  a  device  for  unlawful  rebate, 
concession,  and  discrimination.  Hut  such  payments  constitute  un- 
lawful concession  and  discrimination,  whether  or  not  the  transit 
company  solicits  the  shipments,  which,  if  not  so  solicited  and  pro- 
cured, would  be  diverted  from  the  carrier  so  paying. 

(After  disposing  of  another  point.)  It  is  further  es.scntial,  to  bring 
the  ca.se  within  the  law,  that  the  repayments  \>v  niade  to  the  brewing 
coini)any,  or  for  its  benefit,  directly  or  indirectly,  and  not  merely  to 
third  persons  for  obtaining  the  business;  other^vise  the  repayment  i.s 
no  more  than  a  salary  or  other  exp<Mis<^  incident  to  the  carrier's  busi- 
ness. The  remaining  (juestion,  th(>n,  is  whether  this  is  sufficiently 
shown  in  the  bill.  It  is  forcibly  argued  that  the  bill  carefully  avoids 
the  statement  that  the  brewing  company  received  the  money  re- 
paid, or  even  that  it  was  paid  back  for  its  benefit :  and  that  the  two 
corjiorations  are  not  only  distinct  legal  entities,  but  have  dilTerent 
stockholders.  The  bill  shows  the  creation,  by  the  controlling  in- 
terests of  the  brewing  company,  of  a  dummy  corporation,  with 
dummy  directors,  antl  scienter  of  its  character  by  the  carriers,  with 
intent  to  evade  the  law.  It  is  argued  that  these  averments  show  that 
the  transit  company  is  merely  the  alter  ego  of  the  brewing  corjwra- 
tion;  both  being  sulxstantially  identical  in  interest  and  control,  and 
the  brewing  company  the  ultimate  beneficiar\',  in  some  fonn,of  the 
operations  in  question.  Now  is  not  this  the  usual  device  of  a  shipper 
securing  discrimination  by  manipulation  of  carriers  in  which  it  is 
interested? 

That  the  transit  company  is  controlled  by  the  managing  agents  of 
the  brewing  company  is  entirely  clear.  But  is  it  controlled  by  the 
shipper  corporation?  The  solution  of  this  question  depends  on 
whether  the  brewing  corporation,  in  a  case  like  this,  is  an  association 


CHAP.  Ill,]      U.S.  V.  MILWAUKEE    REFRIGERATOR   TRANSIT    CO.        121 

of  individuals,  rather  than  a  legal  entity  apart  from  those  who  own 
and  control  it.  No  doubt  the  general  rule  that  a  corporation  is  a 
legal  entity,  an  institution,  artificial,  intangible,  existing  only  by 
legal  contemplation,  and  separate  and  apart  from  its  constituents, 
is  firmly  imbedded  in  the  common  law  of  this  country.  It  has  been 
so  laid  down  in  hundreds  of  cases.  In  the  Dartmouth  College  Case, 
Chief  Justice  Marshall  adopted  and  expressed  it,  almost  in  the 
exact  language  of  Lord  Coke,  in  Coke  on  Littleton,  27b;  and  this 
definition  has  been  universally  approved,  especially  in  cases  in- 
volving the  extent  of  the  corporate  powers. 

It  is,  however,  most  significant  that  the  Supreme  Court  of  the 
United  States  was  the  first  to  break  away  from  the  notion  that  a 
corporation  is  only  a  legal  entity,  when  its  literal  application  would 
operate  with  injustice.  If  a  corporation  is  only  a  legal  entity,  of 
course  it  cannot  be  a  citizen  of  a  state.  Hence  the  Supreme  Court, 
in  order  to  sustain  the  most  important  and  far-reaching  jurisdiction 
of  the  national  courts  over  corporations,  depending  on  the  citizen- 
ship of  the  parties,  was  obHged  to  adopt  some  other  theoiy  of  cor- 
porate constitution  than  that  laid  down  by  the  great  chief  justice. 
This  was  accomplished  by  holding  that  a  corporation  is  an  associa- 
tion of  persons  who  may  have  citizenship,  and  following  this  tvith 
the  adoption  of  a  fiction  of  law,  supported  by  a  conclusive  presump- 
tion, by  which  the  members  of  a  coi^poration  are  conclusively  pre- 
sumed to  be  citizens  of  the  state  creating  it.  Hope  Ins.  Co.  v.  Board- 
man,  5  Cranch,  57,  3  L.  Ed.  36;  Louisville,  etc.,  R.  Co.  v.  Letson,  2 
How.  497,  11  L.  Ed.  353;  Marshall  v.  R.  Co.,  16  How.  314,  14  L.  Ed. 
953.  In  reaching  these  results,  the  court,  in  answering  the  argument 
that  a  corporation  is  an  artificial  person,  a  mere  legal  entity,  in- 
visible and  intangible,  said  that  it  was  not  reasonable  that  those  who 
deal  with  corporate  affairs  or  agents  should  be  deprived  of  the  valu- 
able privilege  of  litigating  in  the  federal  courts  by  a  syllogism,  or 
rather  sophism  which  deals  subtly  with  words  and  names,  without 
regard  to  the  things  or  persons  they  are  used  to  represent.  16  How. 
327,  14  L.  Ed.  953.  "For  all  purposes  of  acting,  contracting,  and 
judicial  remedy,"  said  Mr.  Justice  Grier,  "they  can  speak,  act,  and 
plead  only  through  their  representatives  or  curators."  Id.  Thus  the 
idea  that  a  corporation  is,  for  some  purposes,  an  aggregation  of  in- 
dividuals, and  not  a  legal  entity,  was  adopted,  through  a  fiction  of 
law,  and  given  full  effect.  It  was  the  same  land  of  fiction  by  which 
the  English  Court  of  Exchequer  usurped  jurisdiction  by  permitting 
an  allegation  that  plaintiff  was  the  king's  debtor,  and  then  allowing 
no  one  to  deny  it. 

But  when  the  case  of  a  consolidated  corporation  incorporated  in 
two  or  more  states,  having  the  same  stockholders,  arose,  the  Su- 
preme Court  partially  returned  to  the  rule  that  a  corporation  is  a 
legal  entity,  existing  only  in  contemplation  of  law.  And  it  wa^a  held 


122         U.S.  V.  MILWAUKEE    UEFRIGEIUTOR    TILiNSIT    CO.      (cHAP.  Ill 

that  there  are  as  many  coriwrations  as  there  arc  states  in  which  the 
same  j^njup  of  {ktsous  is  incorpomtrd.    In  each  of  such  'is 

concUisivcly  presumed  tluit  the  sharclioltlcrs  are,  for  ju:  aal 

purposes,  citizens  of  that  state  alone.  Hence,  a  citizen  o!  llhnois 
cannot  in  Illinois  sue  in  a  fetleral  court  the  Chicago  6c  Northwestern 
Railway  C'omj)any,  consolidated  by  incori)oration  in  lK)th  Illinois 
and  Wisconsin;  hut  he  may  do  so  in  Wisconsin.  linilrtHul  Co.  v. 
Whtdcr,  1  lilack,  2.S(3,  17  I..  t>l.  yMJiailwayCo.y.  Whitton,  13  Wall. 
270,  2S;i,  20  L.  E<l.  571.  This  result  was  reached  by  applying  the 
rule  that  the  Ic^al  entity  existinn  by  force  of  law  can  have  no  exist- 
ence beyond  the  state  or  sovtniKnty  which  brings  it  into  life  and 
indues  it  with  its  faculties  and  powers.  Id.  *'It  is  true  that  for  cer- 
tain puri)ost\s  the  law  will  n'cognize  the  coq)oration  us  on  entity  dis- 
tinct from  the  individual  stockholders;  but  that  fiction  is  only  re- 
.sortcd  to  for  the  purjMxs*'  of  working  out  the  lawful  objects  of  the 
coq)oration.  It  is  n«'ver  resortj-il  to  when  it  would  work  an  injury  to 
any  one,  or  allow  the  coqujration  to  iH'r|H»trate  a  fniud  u|>on  any- 
iKxly."  Held  that  stock  in  one  corporation  directe<l  by  another  cor- 
|M)ration  to  Ih>  issue<l  to  the  sto<kholders  of  the  latter,  and  paid  for 
by  it,  wj\s  in  reality  re<'eived  by  the  corjMiration.  The  Sjxtrt.tninn 
Shot  Co.  V.  Americnn  Shot  it  Liati  Co.  (SujM'rior  Court  of  Cincin- 
nati) 30  Wkly.  Law  Bui.  87;  State  v.  Standard  Oil  Co.,  40  Ohio  St. 
137,  177.  30  N.K.  271».  1.')  L.  II.  A.  14.").  34  .\m.  St.  Hep.  .>ll.  "The 
abstract  idea  of  a  corporation,  the  l«>gal  I'utity,  the  impalpable  and 
intangible  creation  of  human  thought,  is  it.solf  a  fiction,  and  has  lx»en 
appropriately  (lescril>e<l  as  a  figure  of  speech.  It  so^^'es  very  well  to 
designate  in  our  minds  the  collective  action  an«l  agency  of  numy  in- 
(livi(lu:ds  jus  permitted  by  the  law;  and  the  substantial  inquir>'  al- 
ways is  what  in  a  given  ca.se  luis  l)een  that  collective  action  and 
agency?"  People  v.  Xorth  River  Sugar  Refining  Co.,  121  N.Y.  582, 
621.  24  X.E.  a34. 9  L.  R.  \.  33. 18  .\m.  St.  Rep.  8.13.  "  A  corporation 
is  an  artificial  jM^rson,  create<l  by  l;iw  as  the  representative  of  those 
persons,  natural  or  artificial,  who  contribute  to  and  Ix'come  the 
holders  of  shares  in  the  property  intrusted  to  it  for  a  common  pur- 
pose. ...  It  is  exclusively  the  work  of  the  law."  In  re  Gibb's  Estate, 
157  Pa.  50,  27  Atl.  38:?.  22  L.  R.  A.  276,  281.  "Corporations  are  but 
associations  of  individuals."  Ilightoivcr  v.  Thornton,  8  Ca.  402,  52 
Am.  Dec.  412;  1  Kyd  on  Corp.  13.  "Who,  in  law,  constitute  the 
company,  if  it  be  not  the  stockholders?"  Gelpcke  v.  Blake.  19  Iowa, 
268.  "A  private  corporation  is,  in  fact,  but  an  association  of  indi- 
\'iduals  unitctl  for  a  lawful  purpose  and  permitted  to  use  a  common 
name  in  their  business,  and  to  have  a  change  of  members  in  their 
business."  Field,  J.,  in  Kansas  Pacific  v.  Atchison  Railroad,  112 
l^S.  414.  5  Sup.  Ct.  208,  28  L.  Ed.  794.  On  the  other  hand,  when 
dealing  with  the  question  of  corporate  power,  the  Supreme  Court  has 
gone  so  far  as  to  hold  that  a  contract  ultra  inres  of  the  corporation, 


CHAP.  III.]         U.S.  V.  MILWAUKEE    REFRIGERATOR   TRANSIT   CO.       123 

although  assented  to  by  all  the  stockholders,  is  void.  Oregon  Rail- 
way &  Navigation  Co.  v.  Oregonian  Ry.  Co.,  130  U.S.  1,  9  Sup.  Ct. 
409,  32  L.  Ed.  837. 

A  stockholder  owning  nearly  all  the  stock  cannot  bind  the  cor- 
poration by  a  contract  made  in  his  individual  capacity.  Donoghue 
V.  /.  &  L.  M.  Ry.  Co.,  87  Mich.  13,  49  N.W.  512;  Finley  Shoe  & 
Leather  Co.  v.  Kurtz,  34  Mich.  89;  England  v.  Dearborn,  141  Mass. 
590,  6  N.E.  837.  It  seems  that  an  act  of  all  the  stocldiolders,  as  in- 
dividuals, binds  the  corporation,  as  no  one  can  object.  Bundy  v. 
Iron  Co.,  38  Ohio  St.  300  (mortgage  by  all  but  one  stockholder,  to 
the  remaining  one,  of  corporate  property,  executed  in  the  individ- 
ual names  of  the  stockholders,  held  valid).  A  corporation,  from  one 
point  of  view,  may  be  considered  an  entity,  without  regard  to  its 
shareholders,  yet  the  fact  remains  self-evident  that  it  is  not  in  reality 
a  i^erson  or  thing  distinct  from  its  consistent  parts.  The  word  cor- 
poration is  but  a  collective  name  for  the  members  who  compose  the 
association.  Home  Fire  Ins.  Co.  v.  Barber  (Neb.)  93  N.W.  1024, 
60  L.  R.  A.  927;  City  of  Nashville  v.  Ward,  16  Lea,  27;  People  v. 
North  River,  etc.,  Co.  (Sup.)  3  N.Y.  Supp.  401,  2  L.  R.  A.  33;  Ford  v. 
Chicago  Milk  Shippers'  Ass'n,  155  111.  166,  39  N.E.  651,  27  L.  R.  A. 
298;  First  Nat.  Bk.  v.  Trebein  Co.,  59  Ohio  St.  316,  52  N.E.  834; 
Buffalo  Loan,  etc.,  Co.  v.  Medina  Gas,  etc.,  Co.  (Sup.)  42  N.Y.  Supp. 
781.  If  any  general  rule  can  be  laid  down,  in  the  present  state  of  au- 
thority, it  is  that  a  corporation  will  be  looked  upon  as  a  legal  entity 
as  a  general  rule,  and  until  sufficient  reason  to  the  contrary  appears ; 
but,  when  the  notion  of  legal  entity  is  used  to  defeat  public  conven- 
ience, justify  wrong,  protect  fraud,  or  defend  crime,  the  law  will  re- 
gard the  corporation  as  an  association  of  persons.  This  much  may 
be  expressed  without  approving  the  theory  that  the  legal  entity  is 
a  fiction,  or  a  mere  mental  creation;  or  that  the  idea  of  invisibility 
or  intangibility  is  a  sophism.  A  corporation,  as  expressive  of  legal 
rights  and  powers,  is  no  more  fictitious  or  intangible  than  a  man's 
right  to  his  own  home  or  his  own  liberty. 

Applying  the  rule  here  laid  down  to  the  circumstances  shown  to 
surround  the  brewing  company  and  transit  company,  can  it  be 
doubted  that  there  really  is,  in  substance  and  effect,  an  identity  of 
interest,  or  that  the  brewing  company,  considered  as  an  association 
of  individuals,  really  owns  and  fully  controls  the  transit  company? 
Or  that  the  payment  of  the  eighth  or  tenth  of  the  rate  is  in  reality, 
and  in  some  form,  a  payment  to,  or  for  the  benefit  of,  the  shipper? 
I  think  sufficient  is  alleged  to  show  this.  Moreover,  it  clearly  ap- 
pears that  the  shipper  practically  controls  the  transit  company,  and 
I  think  this  shows  a  sufficient  identity  of  interest  among  the  share- 
holders of  both  in  these  repayments  to  make  them  rebates,  if  paid 
and  received  with  unlawful  intent.  It  is  said  that  the  procurement  of 
the  shipments  through  the  contract  is  the  mere  soliciting  of  them  for 


124        U.S.  V.  MILWAUKEE    REFRIOERATOR   TRANfilT    CO.       (cHAP,  III. 

the  carriers,  for  which  they  are  hiwfully  authorize<l  to  pay  a  part  of 
the  rate,  in  order  to  ^et  the  Ijusincss;  and  the  transit  c()ni|)any,  own- 
ing a  hirge  nuinl^er  of  refrigerator  cars,  and  wishing  to  keep  them 
employed,  simply  gives  the  freight  to  those  comjK'ting  shippers  who 
will  make  the  best  terms,  the  business  Ix^ing  of  great  volume,  and  the 
sums  paid  for  freights  large.  But  this  theory  of  inno<'ence  is  ex- 
ploded by  the  fact,  as  alleged  (whatever  the  actual  prm>f  may  show), 
that  the  transit  company  is  a  mere  separate  name  for  the  brewing 
company,  l>eing  in  fact  the  same  collection  of  persons  and  interests. 
Assuming  the  truth  of  the  avennents,  the  device  adopteii  is  "neither 
new,  nor  deserving  of  new  success."  As  the  patent  lawyers  sjiy  of  an 
aggregation,  there  is  no  new  m<xle  of  o|M'ration,  new  us<\  or  new  re- 
sult —  simply  the  use  of  old  things  in  a  diilerent  situation. 

There  is,  no  doubt,  some  tendency  in  these  days  to  accept  general 
and  vague  charges  of  wrong-<loing  on  the  part  of  the  corjMirations 
at  a  premium.  .Much  h:us  hapiMMie<l  to  arouse  public  feelitjg  on  this 
sensitive  subject.  For  many  years  transportation  development  was 
encouraged  in  ever>'  possible  way.  The  muni(*ipal  aid  craze  was  on 
early  form  of  such  stinnilation.  Frai.se  for  those  who  were  .seeking 
command  of  the  trade  of  the  world  was  unstinted  and  without  di.s- 
.sent,  and  criticism  forgotten.  But  now  that  we  an^  lK>ginning  to  feel 
the  tyranny  of  arbitrary  and  ovenvhelming  industrial  and  com- 
mercial |)Ower,  the  tendency  is  to  go  to  the  other  extreme,  and  it  be- 
comes easy  to  excite  prejudice  leading  to  injustice.  The  courts  will 
no  doubt  be  somewhat  influenrod  by  such  ten<lency;  but  .so  far  as 
possible  it  is  for  them  to  keej)  fundamental  rules  steadily  in  view,  and 
with  discrimination  and  careful  reflection  .sec  to  it  that  injustice  is 
prevented.  .Ios<>ph  Cooke  once  facetiously  sai<l  that  he  had  never 
travelled  in  I'ennsylvania,  but  ha»l  often  visit<'<l  the  domains  of  the 
Pennsylvania  Railroad  Company.  These  and  other  like  domains  are 
now  subject  to  widesprco*!  attack;  but  it  will  not  be  forgotten  that 
they  are  our  domains,  and,  if  they  are  l>eing  despoiled,  the  spoliation 
is  the  work  of  our  trustees,  who  must  indcvd  be  brought  to  book,  but 
the  trust  i)rojK*rty  at  the  same  time  preserved. 

Note.  —  United  States  v.  Delaware  d'  Hudson  Co.,  213  U.S.  366. 
The  Hepi)urn  Act  (.\ct  of  June  29.  1906,  c.  3591,  34  Stat.  .584)  made 
it  unlawful  for  any  railroad  company  to  transport,  in  interstate  com- 
merce, "any  article  or  commodity,  other  than  timlx'r  and  the  manu- 
factured products  thereof,  manufactured,  mined,  or  produced  by  it, 
or  under  its  authority,  or  which  it  may  ovnti  in  whole  or  in  part,  or 
in  which  it  may  have  any  interest  direct  or  indirect."  It  was  held 
(p.  413)  that  this  did  not  make  it  unlawful  for  the  railroads  to  trans- 
port commodities  o^^•ned  "by  a  bona  fide  corporation  in  which  the 
transporting  carrier  holds  a  stock  interest."  But  in  I'nited  States  v. 
Lehigh  VaUey  R.R.  Co.,  220  U.S.  257,  the  court  held  that  it  was  open 


CHAP.  III.]  BANK    V.  TREBEIN.  125 

to  the  Government  to  question  the  right  of  a  railroad  company  to 
transport  commodities  of  a  corporation  in  which  the  company  owns 
stock  and  uses  its  power  as  a  stockholder  to  obliterate  all  distinc- 
tions between  the  two  corporations. 

Enos  V.  Hanff,  95  Neb.  184.  By  chapter  82  of  the  Laws  of  Ne- 
braska for  1907  it  was  made  unlawful  to  conduct  a  saloon  in  a  build- 
ing owned  or  controlled  by  a  manufacturer  of  beer.  The  Storz  Brew- 
ing Company,  a  manufacturer  of  beer,  transferred  a  building  to  the 
Independent  Realty  Company,  and  a  license  to  sell  liquoi-s  in  such 
building  was  granted  by  the  municipal  authorities  authorized  to 
issue  licenses.  Gottlieb  Storz  owned  3061  out  of  3065  shares  of  the 
stock  of  the  Storz  Brewing  Company.  His  wife  owned  3058  out  of 
3060  shares  of  the  stock  of  the  Independent  Realty  Company.  The 
court  held  that  the  license  should  not  have  been  granted,  as  the  build- 
ing was  controlled  by  the  Storz  Brewing  Company,  sa3dng  (p.  187) : 
"Where  the  financial  interests  of  husband  and  wife  are  thus  united, 
the  court,  in  furtherance  of  a  public  policy  established  by  the  legisla- 
ture, will  look  beyond  the  legal  entity  of  a  corporation  to  the  rela- 
tions of  the  indi\'iduals  behind  it  and  enforce  the  law  according  to 
its  terms."  But  the  court,  on  rehearing,  reversed  this  decision  (152 
N.W.  397).  The  court  said  that  if  the  Storz  Brewing  Company  or- 
ganized or  promoted  the  Realty  Company  and  transferred  the  prop- 
erty for  the  purpose  of  enabling  the  brewing  company  to  continue 
to  control  it  for  the  purpose  of  leasing  it  as  a  saloon,  there  could  be 
no  doubt  that  the  company  so  formed  would  be  for  an  illegal  pur- 
pose, and  might  be  dissolved  by  quo  warranto;  this  question,  however, 
was  not  one  which  the  hcensing  authorities  were  fitted  to  pass  upon. 
"The  licensing  board  may  exercise  its  discretion,  and  is  not  required 
to  gi'ant  a  license  if  a  doubt  is  entertained  as  to  the  good  faith  in  the 
proceedings  in  any  respect.  On  the  other  hand,  it  seems  clear  that 
the  Legislature  never  intended  that  the  licensing  board  should  be 
compelled  to  enter  upon  such  investigations  as  are  suggested  by  this 
objection." 

Northern  Securities  Co.  v.  United  States,  193  U.S.  197,  is  considered, 
infra,  in  the  chapter  on  Offenses  under  the  Sherman  Anti-Trust  Act. 


BANK  V.   TREBEIN. 

59  Ohio  St.  316.     1898. 

MiNSHALL,  J.  We  are  unable  to  see  how,  as  against  his  creditors, 
the  transaction  by  which  F.  C.  Trebein,  with  his  wife,  his  daughter, 
his  son-in-law,  and  his  brother-in-law,  formed  "The  F.  C.  Trebein 
Company"  and  then  conveyed  to  it  every  vestige  of  property  he  had 
not  before  conveyed,  either  to  his  wife  or  to  his  daughter,  can  be  sus- 


126  BANK    V.  TRKBEI.V.  (CHAP.   III. 

taincfl,  against  the  justice  of  their  demand  to  have  the  pro|x?rty  so 
trunsforred  adniinisterod  for  the  l)on('fit  of  all  his  cnHUfors  under  the 
insolvent  laws  of  this  state.  He  was  at  the  time  haWle  in  a  large  sum 
of  money  on  indorsements  he  luul  made  for  the  aecommotlation  of 
the  Straw  Paper  (^impany,  of  which  he  w:us  a  meml)er  and  one  of  its 
directors.  He  knew  it  was  iibout  to  fail  and  that  he  would  have  to 
respond  to  these  indorsiMnents,  This  fact  induced  the  conveyances 
he  had  before  made  to  his  wife  and  to  his  daughter,  whether  for  a 
valid  consideration  or  not,  was  not  considered  by  the  court  for  the 
reiusons  stated  in  its  finding,  that  there  were  suit.s  tiien  jx'ntling  to 
set  them  a.siile.  The  capital  of  The  F.  ('.  Trebein  ( 'ompany  was  fixed 
at  SdO.tKX),  divided  into  (UK)  shares  of  SHK)each.  Trel>ein  taking  5% 
of  the  shares  and  each  of  the  other  persons  named  taking  one  share. 
It  wius  formcnl  on  Januar>'  22,  189.'),  TrelnMn  Iwing  made  the  presi- 
dent, trcjusurer,  and  general  manager,  and  he  conveyed  to  thi'  com- 
pany the  property  in  (piestion,  estimateil  to  be  worth  $<)(), (KM),  iini\ 
receiveil  therefor  the  shares  above  state<l,  and  at  once  placed  all  of 
them,  except  one,  in  pursuance  of  his  original  purjiose,  with  three  of 
the  banks  who  held  his  indorsement's  of  the  paper  of  the  Straw  Paper 
Company,  for  the  purpos<>  of  seeuring  them  on  his  indorsi'ments;  and 
he  continued  in  the  control  aiul  management  of  the  miUing  and  grain 
business  as  he  had  l)efore  the  corporation  was  formed  and  the  con- 
veyance maile.  The  court  found  that  this  was  all  done  in  gofnl  faith. 
But,  in  view  of  the  facts,  we  an-  unable  to  s«'e  how  the  court  could 
have  meant  more  than  that  he  meant  no  wrong  by  it.  (lood  faith 
in  law,  however,  is  not  to  l)e  meiusure<l  always  by  a  man's  own  stand- 
ard of  right,  but  by  that  which  it  has  atioi)ted  and  pre.scril>ed  as  a 
standard  for  the  observance  of  all  men  in  their  dealings  with  each 
other.  When  one  conveys  all  his  property  to  another  with  the  inten- 
tion of  hindering  and  delaying  his  creditors,  or  a  part  of  them,  in 
pursuing  their  legal  remedies  against  him  and  his  propertj',  his  con- 
duct in  law  is  deemed  fraudulent,  however  honestly  he  may  have  in- 
tended to  ileal  with  all  his  creditors  in  the  future.  Trimble  v.  Dnty, 
10  Ohio  St.  118.  The  good  faith  of  a  party  under  .such  circum.stances 
must  be  determined  by  the  legal  effect  of  what  he  delilx^rately  does. 
Brinkerhoff  v.  Tracy,  55  Ohio  St.  558;  Lee  v.  Hennick,  52  Ohio  St. 
177;  (ia^he  v.  Young,  51  Ohio  St.  376,  389.  The  formation  of  the  cor- 
poration and  the  conveyance  to  it  by  Trebein  of  all  the  property  he 
then  had,  necessarily  hindered  and  delayed  all  his  creditors  in  the 
pursuit  of  their  claims  against  him.  The  formation  of  the  corporation 
in  no  way  facilitated  the  transaction  of  his  milling  })usiness  and  that 
connected  with  it.  Nothing  was  added  to  his  capital,  unless  we  re- 
gard the  few  hundred  dollars  that  may  have  been  paid  for  the  four 
shares  of  stock  taken  by  the  other  members  of  his  family  such  an  addi- 
tion. E\'idently  an  adtlition  to  capital  was  not  the  controlling  object. 
The  transaction  cannot  be  likened  to  a  conveyance  to  a  third  person 


CHAP.  III.]  BANK    V.  TREBEIN.  127 

for  a  valuable  consideration;  considered  in  the  light  of  the  facts,  it 
was  no  more  than  a  conveyance  from  himself  to  himself.  The  corpo- 
ration was  in  substance  another  F.  C.  Trebein.  His  identity  as  owner 
of  the  property  was  no  more  changed  by  his  conveyance  to  the  com- 
pany than  it  would  have  been  by  taking  off  one  coat  and  putting  on 
another.  He  was  as  much  the  substantial  owner  of  the  property 
after  the  conveyance  as  before ;  and  had  substantially  the  same  use  of 
it  as  if  the  conveyance  had  not  been  made.  The  only  purpose  the 
creation  of  the  corporation  and  the  conveyance  to  it  subserved,  was 
to  hinder  creditors  in  levying  upon  the  property  and  selling  it  on 
execution  at  law;  and  it  is  this  hindrance  the  law  will  not  permit, 
and,  when  ascertained  in  a  proper  proceeding,  requires  the  convey- 
ance to  be  set  aside  and  the  property  administered  for  the  benefit  of 
all  the  creditors  of  the  fraudulent  grantor. 

It  is  suggested  that  the  property  may  be  levied  on.  This  is  true, 
but  it  cannot  be  sold  on  execution  until  the  conveyance  is  set  aside ; 
for  it  is  not  the  policy  of  the  law  to  sell  a  law  suit.  It  is  also  suggested 
that  the  stock  of  Trebein  may  be  reached  by  a  proceeding  provided 
by  statute.  This  is  true,  but  it  is  not  the  simple  proceeding  of  an 
execution  at  law;  besides  few  persons,  at  this  daj-,  would  care  to 
take  stock  in  a  manufacturing  or  any  similar  company,  with  its 
statutory  liability  attached,  as  a  substitute  for  tangible  property. 

The  fiction  by  which  an  ideal  legal  entity  is  attributed  to  a  duly 
formed  incorporated  company,  existing  separate  and  apart  from  the 
individuals  composing  it,  is  of  such  general  utility  and  application,  as 
frequently  to  induce  the  belief  that  it  must  be  universal,  and  be  in 
all  cases  adhered  to,  although  the  greatest  frauds  may  thereby  be 
perpetrated  under  the  fiction  as  a  shield.  But  modern  cases,  sus- 
tained by  the  best  text  writers,  confine  the  fiction  to  the  purposes  for 
which  it  was  adopted  —  convenience  in  the  transaction  of  business 
and  in  suing  and  being  sued  in  its  corporate  name,  and  the  contin- 
uance of  its  rights  and  liabilities,  unaffected  by  changes  in  its  cor- 
porate members;  and  have  repudiated  it  m  all  cases  where  it  has 
been  insisted  on  as  a  protection  to  fraud  or  any  other  illegal  transac- 
tion. Thus  in  Brundred  v.  Rice,  49  Ohio  St.  540,  where  an  incorpora- 
tion had  been  formed  for  the  purpose  of  gi'V'ing  effect  to  an  illegal 
agreement -between  it  and  a  railroad  company  for  a  discrimination 
in  freights  between  it  and  other  shippers,  the  fiction  was  disregarded, 
and  a  recovery  allowed  against  the  promoters  by  one  who  had  been 
thus  discriminated  against,  in  like  manner  as  if  the  corporation  had 
no  existence.  See  also  the  following  citations:  jMorawetz  on  Corpo- 
rations, §§  1  and  227;  Railway  Co.  v.  Miller,  51  N.W.  981;  Gas  Com- 
pany V.  West,  50  Iowa,  16;  Booth  v.  Bunce,  33  N.Y.  139;  State  ex. 
rel.  Atty.-Gen.  v.  Standard  Oil  Co.,  49  Ohio  St.  137;  Bennett  v.  Minott, 
28  Oregon,  339,  348. 

In  Montgomery  Web  Co.  v.  Dienelt,  133  Pa.  St.  585,  which  was  a 


128  I'EOPLE    V.  SOUTH    lUVEU    .SUGAR    REFINING    CO.       (CIIAP.  UI. 

suit  by  a  crc«litor  of  one  company  to  8ct  aside  a  conveyance  by  it  to 

another,  as  in  fraud  of  liin  ri^^hts,  it  apiM'an*<l  that  the  latter  was 
formed  sulxstantijilly  by  the  stockholdei-s  of  the  former,  who  relin- 
(iuishe<l  their  sto<k  in  it  for  stock  in  the  latter;  this  Ix-inj?  substan- 
tially all  the  consideration  si^*'"  '>>'  ^^w'  purcluusinK  company.  This 
was  held  to  Ik*  a  fraud  on  the  cre«iitor»  of  the  former  company,  called 
theAronia.  Tin- cius*- din-s  not  differ  in  principle  from  tli'  '«»rc 

us.   Here  the  conveyance  W!ls  by  an  individurd,  :ind  in  en;  um 

of  stock  taken  in  the  corporation  formetl.  The  judRe,  delivering  the 
opinion.  s;ud:  "Is  the  Montgomery  Company  .so  completely  a  new 
and  different  company  fn)m  tlw  Aronia  Company  that  the  law  must 
close  its  eyes  to  the  fact  that  the  differenct'  is  a  mere  jungle  of  names? 
We  do  not  think  there  is  any  compulsioji  to  such  le^al  blimlness. 
Settled  Keneral  principles,  and  the  analogies  of  the  law,  are  auaiiist 
such  a  cont<'ntion.  If  th«'  cori)oration  had  merely  changed  its  name, 
there  could  have  l)een  no  doubt  of  the  continued  liability  of  the 
proiM-rty."  Judgmaxt  reirrscd. 

NoTK.  — See,  accord.  Kelhxjg  v.  Douglas  ''  •  r-"'  '^  Kan.  43; 
Ik-nmU  V.  Minott,  2.S  Or.  .'WU. 

aoni'ilU's  Trustee  v.  Patent  Caramel  Co.,  Ltd.,  [I'JlJj  I  Iv.B.  599. 
A  conveyance  of  profxTty  by  A.  a  f:ulinK  debtor,  to  a  conipany, 
f«)rmed  by  himself  and  a  confinlerate  to  receive  the  profxTty,  was  set 
aside  on  the  jjround  that  the  company,  throuRh  its  directors,  knew 
that  th<'  conveyance  w:us  intend<'<|  to  hinder  the  creditors  of  A.  The 
court  did  not  speak  of  disn>nardinu  the  coq)orate  fiction.  Sec  also 
In  re  Darid  A'  Adlard,  [191 1]  2  K.H.  (i94. 

In  Noble  v.  Burnett  Co.,  208  Ma.ss.  75,  the  court  said  (p.  83) :  "  The 
corporation  w;us  not  a  purcha.siT  witliout  notice.  Tin'  officers  and 
organizers  were  memin'rs  of  the  tirm.  and  they  held  nearly  all  the 
stock.  Their  knowledge  was  the  knowledge  of  the  corporation." 


PEOPLE  V.  NORTH   RIVER  SUGAR   REFINING  CO. 

121   N.V.  582.     1890. 

This  action  was  brought  by  the  attorney-general  to  have  the  de- 
fendant "dissolved,  its  charter  vacated  and  its  corporate  existence 
annulleil." 

The  complaint  alleged,  and  it  was  fovmd,  that  defendant  is  a  cor- 
poration organized  untler  the  CJeneral  Manufacturing  Act;  that  it, 
together  with  other  corporations  engaged  in  the  business  of  sugar 
refining,  in  violation  of  law  and  in  abu.se  of  its  powers,  became  a  party 
to  antl  carrietl  out  a  certain  agreement.  Some  of  the  material  fea- 
tures of  this  agreement  are,  in  substance,  as  follows:  — 


CHAP.  III.]       PEOPLE    V.  NORTH    RIVER    SUGAR    REFINING    CO.  129 

All  the  shares  of  the  capital  stock  of  all  the  corporations  shall  be 
transferred  to  a  board  consisting  of  eleven  persons. 

In  lieu  of  the  capital  stock  of  each  corporation,  certificates  not 
exceeding  $50,000,000  shall  be  issued  by  the  board,  and  allotted  in 
certain  proportions  to  the  respective  corporations.  15  per  cent  of  the 
certificates  thus  allotted  to  each  corporation  shall  be  left  with  the 
board ;  the  remaining  85  per  cent  shall  be  divided  among  the  former 
stockholders  in  proportion  to  the  amount  of  stock  formerly  owned 
by  each. 

The  board  of  eleven  persons,  holding  all  the  stock  of  all  the  cor- 
porations, may  transfer  shares  to  persons  whom  it  may  desire  should 
be  constituted  directors  of  such  corporations. 

The  several  corporations  shall  maintain  their  separate  organiza- 
tions, and  each  shall  carry  on  and  conduct  its  own  business. 

The  profits  arising  from  the  business  of  each  corporation  shall  be 
paid  over  by  it  to  the  board  hereb}'-  created,  and  the  aggregate  of  said 
profits,  or  such  amount  as  may  be  designated  for  dividends,  shall  be 
proportionately  distributed  by  said  board,  at  such  times  as  it  may 
determine,  to  the  holders  of  the  certificates  issued  by  said  board  for 
capital  stock. 

No  action  shall  be  taken  by  the  board  which  shall  create  liability 
])Y  it  or  by  its  members. 

The  certificates  retained  by  the  board  (15  per  cent  of  the  entire 
issue)  shall  be  subject  to  be  disposed  of  by  the  board  either  for  the 
acquisition  of  other  refineries  to  become  parties  to  this  agreement, 
payment  for  additional  capacity,  or  by  appropriations  to  the  several 
refineries.  •* 

The  funds  necessary  to  enable  the  board  to  make  the  payments 
herein  provided  to  be  made  by  it  may  be  raised  by  mortgage  to  be 
made  by  the  corporations,  or  either,  any,  or  all  of  them,  on  their 
property,  and  by  such  other  means  as  shall  be  satisfactory  to  such 
board. 

Vacancies  in  the  board  by  expiration  of  office  shall  be  filled  at  an 
annual  meeting  of  the  holders  of  certificates,  at  which  said  holders 
shall  vote  according  to  the  number  of  shares  for  which  they  hold 
certificates. 

Finch,  J.  The  judgment  sought  against  the  defendant  is  one  of 
corporate  death.  The  State,  which  created,  asks  us  to  destroy;  and 
the  penalty  invoked  represents  the  extreme  rigor  of  the  law.  Its 
infliction  must  rest  upon  grave  cause,  and  be  warranted  by  material 
misconduct.  The  life  of  a  corporation  is  indeed  less  than  that  of  the 
humblest  citizen,  and  yet  it  envelopes  great  accumulations  of  prop- 
erty, moves  and  carries  in  large  volume  the  business  and  enterprise 
of  the  people,  and  may  not  be  destroyed  without  clear  and  abundant 
reason.  That  would  be  true  even  if  the  legislature  should  debate  the 
destruction  of  the  corporate  life  by  a  repeal  of  the  corporate  charter ; 


\U)  PKOPLE  I'.  NORTH    RIVER    ftUGAB    REFINIXU    CO.       (CHAP.   III. 

but  is  iK'yond  dispute  where  the  State  summons  the  offentler  before 
its  judiciul  tribuiuils,  iiml  -  ■  '•mphiiiit  to  theii  fit 

aiKJ  H'view.    Hy  that  pnu"  ^  th«'  burden  «>f  «  hk 

the  charges  which  it  hiis  iiuule,  and  must  show  us  warrant  in  the 
facts  for  the  relief  which  it  st^-ks. 

Two  fiucstioiis,  then-fore,  ojien  lx»fore  us:  first,  has  the  defeiuiant 
cori)oration  exceedetl  or  abus<'<l  its  powers;  and,  second,  does  that 
excess  or  abuse  threaten  or  harm  tlie  puljUc  welfare. 

The  first  question  recjuires  us  to  ascertain  what  the  defendant  cor- 
poration  hiis  done  in  viohition  of  its  duty,  or  omitte<l  to  do  in  |xt- 
forriiaiice  of  its  (hity.  We  find  disclosed  by  the  pr<K)f  that  it  h:Ls  Ixv 
come  an  integral  part  aiul  constituent  elenu'iit  of  a  combination 
which  possesses  over  it  an  al)solute  control,  which  has  al>s*)rlH"<l  most 
of  its  corporate  functions,  an«l  dictates  the  extent  and  manner  and 
terms  of  its  entire  bu.siniHs  activity.  Into  that  combination,  which 
drew  into  its  contn)l  sixtc«*n  other  coriH)rations  engageil  in  the  re- 
fining of  sugar,  the  defendant  Ikis  gone,  in  some  manner  and  by  some 
process,  for  as  an  unquestionable  truth  we  find  it  there.  All  its  stock 
hixs  been  transferre<l  to  the  <'entral  asjMX'iation  of  eleven  individuals 
denominated  a  "Hoanl;"  in  exchange  it  hjis  taken  ami  distribute*!  to 
its  own  stockholders  certificates  of  the  l)oard  carrying  a  pro|H)rtionatc 
interest  in  what  it  descrilx»s  lus  its  capital  stcKk;  the  new  tlirectors  of 
the  defendant  cor|M>ration  have  Ikhmi  chosi'n  by  tl»e  l)oard,  nmde 
eligible  by  its  gift  of  single  shares,  and  liable  to  removal  under  the 
terms  of  their  appointment  at  any  moment  of  independent  action. 
It  has  Kxst  the  power  to  make  a  divideml,  and  is  comiH«lle<l  to  pay 
over  its  net  eaniings  to  the  nuister  whose  ser\'ant  it  has  l)ecome. 
Under  the  orders  of  that  ina.ster  it  has  cea.s<»<l  to  refine  sugar,  and  by 
so  nmch,  has  lessened  the  supply  uix)n  the  market.  It  cannot  stir 
unless  the  master  approves,  and  yet  is  entitled  to  receive  from  the 
earnings  of  the  other  refineri(s,  m:uvs«Ml  as  jirofits  in  the  treji.suryof 
the  board,  its  proportionate  share  for  division  among  its  own  stock- 
holdei-s  holding  the  substitutetl  certificates.  In  return  for  this  ad- 
vantage it  has  l)ecome  liable  to  l)e  mortgaged,  not  for  its  own  cor- 
porate benefit  alone,  but  to  supply  with  funds  the  controlling  board 
when  reaching  out  for  other  and  coveted  refineries.  No  one  can  look 
these  facts  fairly  in  the  face  without  Inking  compelle<l  to  say  that 
the  defendant  is  in  the  combination  and  in  to  stay.  Indee<i,  so 
much  is  with  great  frankness  admitted  on  the  part  of  the  appel- 
lant. Its  counsel  concedes  that  the  stock  was  transferred  "to  the 
board  mentioned  in  the  agreement  and  on  the  teniis  and  for  the 
purposes  mentioned  in  the  agreement;  and  that  this  action  effect- 
ually lodged  the  control  of  the  defendant  company,  so  far  as  such 
control  can  be  secured  by  the  voting  power,  in  that  board." 

But  that  truth  does  not  alone  solve  the  problem  presented.  We 
arc  yet  to  ascertain  whether  the  corporation  became  the  subordinate 


CHAP.  III.]       PEOPLE    V.  NORTH    RIVER    SUGAR    REFINING    CO.  131 

and  servant  of  the  board  by  its  own  voluntary  action,  or  the  will  and 
power  of  others  than  itself;  by  force  of  a  contract  to  which  it  was  in 
reality  a  party,  or  as  the  simple  consequence  of  a  change  of  owners; 
by  its  fault  or  its  misfortune;  by  a  sale  or  by  a  trust.  For,  if  it  has 
done  nothing,  if  what  has  happened,  and  all  that  has  happened,  is 
ascertained  to  be  that  the  stockholders  of  the  defendant,  one  or 
many,  sold  absolutely  to  the  eleven  meji  who  constituted  the  board 
their  entire  stock,  and  the  latter,  by  force  of  their  proprietorship  and 
as  owners,  have  merely  chosen  directors  in  their  own  interest,  and 
are  only  managing  their  property  in  their  owti  way  as  any  absolute 
owners  may;  if  that  is  the  truth,  and  the  entire  and  exact  truth,  it  is 
difficult  to  see  wherein  the  corporation  has  sinned,  or  what  it  has  done 
beyond  merely  omitting  for  a  time  to  carry  on  its  business.  That  is 
the  theory  upon  which  the  appellant  stands,  and  which  it  submits 
to  our  examination. 

On  the  other  hand  it  is  contended  that  there  never  was  a  sale,  but 
a  trust  constituted  by  mutual  agreement;  that  they  who  agreed  were 
the  whole  body  of  stockholders  in  each  corporation  necessarily  rep- 
resenting and  binding  the  corporation  itself;  that  they  transferred 
their  shares  to  the  board  upon  the  trusts  declared  in  the  deed ;  that 
the  certificates  issued  by  the  board  were  the  formal  declaration  of  the 
trust ;  that  the  corporate  stockholders  parted  with  the  legal  title  of 
their  stock  to  the  chosen  trustees  with  the  power  to  vote  upon  it,  but 
retained,  nevertheless,  its  beneficial  ownership  through  the  operation 
of  the  certificates ;  and  so  the  corporations  entered  into  a  partnership 
with  each  other,  vesting  the  partnership  power  in  a  board  of  control. 

I  have  brought  these  two  theories  face  to  face  where  they  may 
confront  each  other,  because,  when  a  choice  is  made  between  them, 
we  have  gone  a  long  distance  towards  the  end  of  the  controversy. 

[The  court  held  that  the  transaction  was  not  a  sale,  but  a  trust 
constituted  by  mutual  agreement.] 

The  combination,  therefore,  framed  by  the  deed  was  a  trust,  and, 
if  created  by  the  corporations,  or  in  any  respect  the  consequence  or 
product  of  their  action,  some  inevitable  results  would  be  certain  to 
follow.  But  here  we  encounter  the  stronghold  of  the  appellant's 
argument  which  is,  that  if  the  corporations  are  in  some  manner  in 
the  combination,  they  are  there  solely  as  the  result  of  a  contract 
other  than  their  own;  are  there  without  corporate  action  on  their 
part ;  and  so  are  sufferers  and  not  sinners.  The  reasoning  leading  to 
that  result  is  so  severely  technical  as  to  have  suggested  a  justification 
almost  reminding  one  of  an  apology.  We  are  called  upon  to  sever 
the  corporation,  the  abstract  legal  entity,  from  the  living  and  acting 
corporators;  as  it  were,  to  separate  in  our  thought  the  soul  from  the 
body,  and  admitting  the  sins  of  the  latter  to  adjudge  that  the  former 
remains  pure.  Let  us  first  recall  the  facts  in  the  order  of  their  occur- 
rence. 


132  PEOPLE    V.  NORTH    RIVER    SUGAR    REFINING    CO.       [cHAP.   III. 

(The  court  here  recapitulated  the  facta;  which  were,  in  substance, 
that  the  stockholders  unanimously  directed  the  secretary  to  sipi  the 
agreement  in  Ix'hulf  of  the  corporation;  that  he  accordingly  did  so 
sign;  that  a  subsequent  vote  to  revoke  this  action  was  ineffective; 
that,  at  a  later  date,  the  stockholders  voted  to  sell  all  the  stock  to 
John  E.  Searles,  Jr.,  for  S32"),0(X);  that  the  stock  was  so  conveyed  to 
Searles;  and  that  iSearles  thereafter  conveyed  all  the  stock  to  the 
board  of  eleven  persons  receiving  therefor  certificates  for  $7()().(K)0; 
deducting  the  15  per  cent  retained  by  the  board.  The  opinion  then 
proceeds:) 

What  Searles  did  with  the  certificates,  we  do  not  know,  nor  is  it 
important  to  ascertain.  We  do  know  that  new  directors  were  chosen 
by  the  vote  of  the  l)oard;  that  Searles  became  President  of  the  cor- 
poration; that  its  share  of  the  regular  dividend  has  been  allotted  to 
it  for  its  certificate  holders,  and  that  it  hiLs  wholly  ceased  to  refine 
sugar.  And  thus  its  baptism  in  the  pool  of  the  board  became  com- 
plete and  final. 

And  yet  it  is  argued  that  the  corporation,  the  legal  entity,  has 
done  nothing;  that  Searles  was  guilty,  but  the  corporate  robe  that 
enveloped  him  was  innocent,  and  so  he  must  be  left  to  wear  it  un- 
disturbed; that  while  all  that  was  human  and  could  act  had  sinned, 
yet  the  impalpable  (>ntity  had  not  acte<l  at  all  and  must  go  free.  I 
Ix'lieve  that  the  history  of  what  occurred,  as  I  have  already  descril)ed 
it,  furnishes  a  sufficient  answer,  assuming  that  stockholders  and 
trustees  acting  together  can  do  a  corporate  act  at  all.  There  was 
corporate  action  in  making  the  combination  agreement  which  bound 
the  defendant.  The  revocation  of  an  executed  authority  left  the  con- 
tract standing.  The  corporation  thus  helped  to  make  the  trust  and 
became  an  element  of  it.  If  there  was  anything  imperfect  in  its  ac- 
tion, the  new  stockholder  and  his  as.sociates  waived  the  imperfection 
In'  acting  upon  the  agreement  of  the  corporation,  and  so  confirming 
it  in  all  particulars. 

But  the  assumption  imrlerljing  the  view  I  have  expressed  is  itself 
contested,  and  a  proposition  asserted  which  denies  the  possibility 
of  any  corporate  action,  except  by  the  trustees  or  directors  acting 
formally  as  such;  a  proposition  which,  if  sound,  dominates  the  whole 
field  of  controversy,  and,  establishing  that  there  has  been  no  cor- 
porate action  at  all,  effectually  shuts  out  every  question  of  illegality 
or  public  injury.  I  cannot  admit  that  proposition.  I  think  there  may 
be  q^'tual  corporate  conduct  which  is  not  formal  corporate  action; 
and  where  that  conduct  is  directed  or  produced  by  the  whole  body, 
both  of  officers  and  stockholders,  by  every  li\'ing  instrumentality 
which  can  possess  and  wield  the  corporate  franchise,  that  conduct  is 
of  a  corporate  character,  and  if  illegal  and  injurious  may  deserve  and 
receive  the  penalty  of  dissolution.  There  always  is,  and  there  always 
must  be,  corporate  conduct  without  formal  corporate  action  where 


CHAP.  III.]       PEOPLE    V.  NORTH    RIVER    SUGAR    REFINING    CO.  133 

the  thing  challenged  is  an  omission  to  act  at  all.  A  corporation  or- 
ganized in  the  public  interest,  with  a  view  to  the  public  welfare,  and 
in  the  expectation  of  benefit  to  the  community,  which  is  the  motive 
of  the  State's  grant,  may  accept  the  francliise  and  hold  it  in  sullen 
silence,  doing  notliing,  resolving  nothing,  furnishing  no  formal  cor- 
porate action  upon  which  the  State  can  put  its  finger  and  say,  this 
the  corporation  has  done  by  the  agency  through  which  it  is  authorized 
to  act.  That  is  corporate  conduct  which  the  State  may  question  and 
punish  without  searching  for  a  formal  corporate  act.  The  directors 
of  a  corporation,  its  authorized  and  active  agency,  may  see  the  stock- 
holders perverting  its  normal  purposes  by  handing  it  over,  bound  and 
helpless,  to  an  irresponsible  and  :^oreign  authority,  and  omit  all  ac- 
tion which  they  ought  to  take,  offer  no  resistance,  make  no  protest, 
but  silently  acquiesce  as  directors  in  the  wrong  which  as  stockholders 
they  have  themselves  helped  to  commit.  That  again  is  corporate 
conduct,  though  there  be  an  utter  absence  of  directors'  resolutions. 
Is  it  asked  what  they  could  have  done  to  prevent  the  organization 
of  the  trust;  how  they  were  negligent  and  unfaithful  as  corporate 
officers  by  their  omission  to  act;  what  good  a  mere  protest  or  objec- 
tion would  have  accomplished;  what  effective  form  their  resistance 
could  have  assumed?  The  answer  is  that  they  could  have  refused  to 
recognize  thb  illegal  trust  transfer  of  the  stock;  they  could  have  de- 
clined to  register  the  new  ownership  upon  their  stock-books;  they 
could  have  said,  and  acted  upon  their  words,  that  the  original^tock- 
holders  remained  not  only  the  beneficial,  but  the  legal  owners  of  the 
stock;  and,  if  the  board  trustees  appealed  to  the  law,  the  resisting 
directors  could  challenge  the  legality  of  the  transfer  as  moulded  by 
the  combination  agreement,  and  might  have  defeated  the  trust  and 
shattered  it  at  the  outset  of  its  career.  So  much  they  could  have  done 
as  corporate  officers;  so  much  it  was  their  duty  to  have  done  as  rep- 
resentatives of  the  corporation;  and  when,  beyond  that  corporate 
neglect,  they  recognized  the  validity  of  the  stock  transfers  in  trust, 
put  the  new  and  unlawful  ownership  upon  their  books,  and  accepted 
its  votes  in  the  choice  of  new  directors  who  were  to  throttle  the  in- 
dependence of  the  corporation  and  chain  it  to  the  will  of  the  trust, 
I  think  we  must  shut  our  eyes  in  wilful  blindness  if  we  fail  to  see  both 
corporate  neglect  and  corporate  action. 

It  is  true,  as  we  are  reminded,  that  the  statute  confers  upon  trus- 
tees and  directors  general  authority  to  manage  the  stock,  property, 
and  concerns  of  manufacturing  corporations;  and  equally  true  that, 
as  a  general  rule  and  as  between  the  companies  and  those  with  whom 
they  deal,  the  corporate  action  must  be  manifested  through  and  by 
the  directors ;  but  other  statutes  indicate  with  equal  plainness  that 
there  are  corporate  acts  which  the  trustees  cannot  perform,  and  which 
affect  and  bind  the  corporation  only  upon  the  condition  that  they 
proceed  from  the  stockholders,  or  from  them  and  the  trustees  acting 


134  PKOI'LE    v.   N'OUTH    RIVER    8UGAR    REFIKIVG    CO,       (cHAP.   III. 

together.  In  iiicreiusing  or  diminishing  the  capital  stock,  the  cor- 
porate lut  is  wholly  that  of  the  eor|)orators,  and  in  eon.solidating  two 
or  more  companie.s  into  one,  there  must  U-  the  joint  action  of  both 
trustees  and  stoekhoklers.  The  trust  of  the  reUneries,  in  suhstance 
and  effect,  approached  very  near  to  these  two  cori)orate  acts,  so  far 
as  the  resultant  consefpiences  affected  the  corporators  acting.  The 
trust  stipulations  i)nictically  (louhUnl  their  coq)orate  stock  through 
the  agency  of  the  certificates  issued,  ami  the  combination  in  its  re- 
sult is  largely  the  e(iuivalent  of  a  substantial  consolidation.  If  tlu^se 
things  had  l)een  done  lawfully,  they  would  have  lx*en  accomplished 
by  the  unite<l  action  of  trustees  and  corporators,  and  U'vond  any 
(juestion  would  have  Ix'en  corporate  acts.  Having  Imm-u  done  unlaw- 
fully, but  by  the  same  uiiitetl  agency  aiming  at  similar  results,  they 
must  still  constitute  corporate  conduct,  unless  the  bare  fact  of  their 
illi'gality  takes  away  their  coqwrate  character.  To  say  that,  would 
disarm  the  State  in  every  cius**  of  misu.s*'  or  ai)use of  chartere<l  i)owers. 

The  abstract  idea  of  a  corjM)ration,  tin*  legal  entity,  the  impalpable 
and  intangil)le  creation  of  human  thought  is  it.self  a  fiction,  and  has 
Ikhmi  appropriately  descril)ed  as  a  figure  of  speech.  It  serves  very 
well  to  designate  in  our  minds  th«'  collc<'tive  action  and  agency  of 
many  individuals  jis  i><'rmitte«l  by  the  law;  anil  the  substantial  in- 
quiry always  is  what  in  a  given  case  has  been  that  collective  action 
and  agency.  As  l)etween  the  corporation  and  those  with  whom  it 
deals,  the  manner  of  its  exercise  usually  is  material,  but  jus  U'tween 
it  and  the  State,  the  .substantial  iiupiiry  is  oidy  what  that  collective 
action  and  agency  htvs  done,  what  it  luus,  in  fact,  accompli.shetl,  what 
is  seen  to  Ix?  its  effective  work,  what  h;us  l)oen  its  conduct.  It  ought 
not  to  Im^  otherwis<\  The  St.ite  gave  the  franchise,  the  charter,  not 
to  the  impalpal)le,  intangil)le,  and  almost  nel)ulous  fiction  of'our 
thought,  but  to  the  corporators,  the  individuals,  the  acting  an<l  liv- 
ing men.  tol)e  used  by  them,  tore<lound  to  their  l>onefit,  to  strengthen 
their  hand,  and  add  energy  to  their  capital.  If  it  is  taken  away,  it  is 
takiMi  from  them  as  indiviiluals  and  corporators,  and  th(^  legal  fiction 
disappears.  The  benefit  is  theirs,  the  punishment  is  theii-s,  and  both 
must  attend  and  depend  upon  their  conduct;  and  when  they  all  act, 
collectively,  as  an  aggregate  bo<ly,  without  the  least  exception,  and 
so  acting,  reach  results  and  accomi)lish  jjurposes  clearly  cori)orate  in 
their  character,  and  affecting  the  vitality,  the  independence,  the 
utility,  of  the  corporation  itself,  we  cannot  hesitate  to  conclude  that 
there  has  l^een  corporate  conduct  which  the  State  may  review,  and 
not  be  tlefeated  by  the  assumed  innocence  of  a  convenient  fiction. 
As  was  said  in  People  ex  rel.  v.  K.  ct  M.  T.  R.  Co.,  23  Wend.  193, 
"though  the  proceeding  by  information  be  against  the  corporate 
body,  it  is  the  acts  or  omissions  of  the  individual  corporators  that 
are  the  subject  of  the  jutlgment  of  the  court." 

It  remains  to  determine  whether  the  conduct  of  the  defendant  in 


CHAP.  III.]       PEOPLE    V.  NORTH    RIVER    SUGAR    REFINING    CO.  135 

participating  in  the  creation  of  the  trust,  and  becoming  an  element 
of  it,  was  illegal  and  tended  to  the  public  inj  ury,  and  we  may  con- 
sider the  two  questions  together  and  without  formal  separation. 

It  is  quite  clear  that  the  effect  of  the  defendant's  action  was  to 
divest  itself  of  the  essential  and  vital  elements  of  its  franchise  by 
placing  them  in  trust;  to  accept  from  the  State  the  gift  of  corporate 
life  only  to  disregard  the  conditions  upon  which  it  was  given;  to  re- 
ceive its  powers  and  privileges  merely  to  put  them  in  pawn;  and  to 
give  away  to  an  irresponsible  board  its  entire  independence  and  self- 
control.  When  it  had  passed  into  the  hands  of  the  trust,  only  a  shell 
of  a  corporation  was  left  standing,  as  a  seeming  obedience  to  the  law, 
but  with  its  internal  structure  destroj^ed  or  removed.  Its  stock- 
holders, retaining  their  beneficial  interest,  have  separated  from  it 
their  voting  power,  and  so  parted  with  the  control  which  the  charter 
gave  them  and  the  State  required  them  to  exercise.  It  has  a  board  of 
directors  nominally  and  formally  in  office,  but  qualified  by  shares 
which  they  do  not  own,  and  owing  their  official  life  to  the  board 
which  can  end  their  power  at  any  moment  of  disobedience.  It  can 
make  no  dividends  whatever  may  be  its  net  earnings,  and  must  en- 
cumber its  property  at  the  command  of  its  master,  and  for  purposes 
wholly  foreign  to  its  own  corporate  interests  and  duties.  At  the 
command  of  that  master  it  has  ceased  to  refine  sugar,  and  without 
any  doubt  for  the  purpose  of  so  far  lessening  the  market  supply  as  to 
prevent  what  is  termed  "over  production."  In  all  these  respects  it 
has  wasted  and  perverted  the  privileges  conferred  by  the  charter, 
abused  its  powers,  and  proved  unfaithful  to  its  duties.  But  gi-aver 
still  is  the  illegal  action  substituted  for  the  conduct  which  the  State 
had  a  right  to  expect  and  require.  It  has  helped  to  create  an  anomal- 
ous trust  which  is,  in  substance  and  effect,  a  partnership  of  twenty 
separate  corporations.  The  State  permits  in  many  ways  an  aggrega- 
tion of  capital,  but  mindful  of  the  possible  dangers  to  the  people, 
over-balancing  the  benefits,  keeps  upon  it  a  restraining  hand,  and 
maintains  over  it  a  prudent  supervision,  where  such  aggi'egation  de- 
pends upon  its  permission  and  grows  out  of  its  corporate  grants.  It 
is  a  violation  of  law  for  corporations  to  enter  into  a  partnership. 
N.Y.  &  S.C.  Co.  V.  F.  Bank,  7  Wend.  412;  Clearwater  v.  Meredith, 
1  Wall.  29;  Whittenton  Mills  v.  Upton,  10  Gray,  596.  The  case  last 
cited  furnishes  the  reasons  with  precision  and  at  length.  It  shows  the 
utter  inconsistency  of  a  double  allegiance  by  those  who  act  for  the 
corporation  to  two  different  principals,  and  demonstrates  that  the 
vital  characteristics  of  the  corporation  are  of  necessity  drowned  in 
the  paramount  authority  of  the  partnership.  That  the  combination 
of  the  refineries  partakes  of  the  nature  of  a  partnership  is  not  denied. 
Indeed,  in  one  of  the  papers  added  to  the  appellant's  brief,  it  is  not 
only  admitted  but  asserted  and  defended.  That  paper  shows  quite 
clearly,  that  by  force  of  the  arrangement,  there  was  a  community  of 


i:i6  PKOPLE    l^.  NORTH    lUVER    SUGAR    RRFI.VING    CO.       (CHAP.   III. 

interest  in  the  fund  creiited  by  the  corporate  eaminRs  before  divisdon, 
mill  that  cmh  iiu'tnlxT of  the  tni       '         !  in  the  pn)!!!        ''  '    'V 

It  is  Huid,  however,  that  a  t-on.s.  of  manufarti. 

tion.s  is  permitted  by  the  hiw,  and  thai  the  trust  or  eonibuiation  or 
partnership,  however  it  may  l)e  ile-scriU'il,  iui»ounts  only  to  a  practi- 
cal consolidation  which  pul>lic  iM)licy  iloes  not  forbid  U'cause  the 
statute  permits  it.    Laws  of  IStu,  <i  ■■    •;  Laws  of  IHS^l.  chap. 

3G7.    The  refineries  did  not  avail  th-  of  that  statute.    They 

chose  to  disrcKard  it,  and  to  reach  its  practical  results  without  sul>- 
jection  to  the  prudential  restraints  with  which  the  State  accom|>anied 
its  jMTmission.  If  there  had  Ixrn  a  consoli«lation  under  the  statute, 
one  single  corjKiration  would  have  taken  thr  place  of  the  others  dis- 
solvetl.  They  would  have  di.s;ip|Hared  utterly,  and  not,  jis  under  the 
trust,  remained  in  apparent  existence  to  threaten  and  menact*  other 
organizations  and  occupy  the  ground  which  otherwisi'  would  1k>  left 
free.  Under  the  statutr  the  resultant  combination  would  itsi-lf  l>e  a 
corporation  deriving  its  existence  from  the  State,  owing  duties  and 
obligations  to  the  State,  and  subject  to  the  control  and  su|)er\-i.sion 
of  the  State,  and  not,  as  Iu'D',  an  unincoqwrated  lM)ard,  a  colossid 
and  gigantic  partnership,  having  no  coriH)rate  functions  arid  owing 
no  e()n><>rate  allegiance.  I'nder  the  statute  the  con.solidated  com- 
pany taking  the  place  of  the  separate  corporations  could  have  as 
capital  stock  only  an  amount  e<pial  to  the  fair  aggregate  value  of  the 
rights  and  franchi.ses  of  the  companies  alworU-d;  and  not  as  here  a 
capital  stock  doul)le  that  value  at  the  outs<'t  and  capable  of  an 
elastic  and  irres|M)nsible  increa.se.  The  difference  is  verj'  gn-at  and 
serves  further  to  indicate  the  inherent  illegality  of  the  trust  combi- 
nation. 

And  here  I  think  we  gain  a  definite  view  of  the  injurious  tend- 
encies develoi)ed  by  its  organization  and  oixTation,  and  of  the  public 
interests  which  arv  menace<l  by  its  action.  As  corporate  grants  are 
always  assumed  to  have  Uvn  made  for  the  public  InMiefit.  any  con- 
duct which  d(»stroys  their  norm:il  functions,  and  maims  and  crip- 
ples their  separate  activity,  and  takes  away  their  free  and  indeix-nd- 
ent  action,  must  so  far  disappoint  the  purpose  of  their  creation  as  to 
affect  unfavorably  the  public  interest;  and  that  to  a  much  greater 
extent  when  In'yond  their  own  several  aggregations  of  capital  they 
compact  them  all  into  one  combination  which  stands  outside  of  the 
wanl  of  the  State,  which  dominates  the  range  of  an  entire  industr>', 
and  puts  upon  the  market  a  capital  stock  proudly  defiant  of  actual 
values,  and  capable  of  an  unlimited  expansion.  It  is  not  a  sufficient 
answer  to  si\y  that  similar  results  may  \yc  lawfully  accomplished; 
that  an  individual  having  the  necessar>'  wealth  might  have  bought 
all  these  refineries,  manned  them  with  his  own  chosen  agents,  and 
managed  them  as  a  group  at  his  sovereign  will ;  for  it  is  one  thing  for 
the  State  to  respect  the  rights  of  ownership  and  protect  them  out  of 


CHAP.  III.]  LINN    TIMBER    CO.  V.  UNITED    STATES.  137 

regard  to  the  business  freedom  of  the  citizen,  and  quite  another  thing 
to  add  to  that  possibihty  a  further  extension  of  those  consequences 
by  creating  artificial  persons  to  aid  in  producing  such  aggregations. 
The  individuals  are  few  who  hold  in  possession  such  enormous 
wealth,  and  fewer  still  who  peril  it  all  in  a  manufacturing  enteiprise ; 
but  if  corporations  can  combine,  and  mass  their  forces  in  a  solid 
trust  or  partnership,  with  little  added  risk  to  the  capital  alreadj^  em- 
barked, without  limit  to  the  magnitude  of  the  aggregation,  a  tempt- 
ing and  easy  road  is  opened  to  enormous  combinations,  vastly  ex- 
ceeding in  number  and  in  strength  and  in  their  power  over  industry 
any  possibilities  of  individual  ownership;  and  the  State  by  the  crea- 
tion of  the  artificial  persons  constituting  the  elements  of  the  com- 
bination, and  failing  to  Hmit  and  restrain  their  powers,  becomes  it- 
self the  responsible  creator,  the  voluntary  cause  of  an  aggregation  of 
capital  which  it  simply  endures  in  the  individual  as  the  product  of 
his  free  agency.  What  it  may  bear  is  one  thing,  what  it  should  cause 
and  create  is  quite  another. 

And  so  we  have  reached  our  conclusion,  and  it  appears  to  us  to 
have  been  established,  that  the  defendant  corporation  has  violated 
its  charter  and  failed  in  the  performance  of  its  corporate  duties,  and 
that  in  respects  so  material  and  important  as  to  justify  a  judgment  of 
dissolution.  Having  reached  that  result,  it  becomes  needless  to  ad- 
vance into  the  wider  discussion  over  monopolies  and  competition  and 
restraint  of  trade  and  the  problems  of  political  economy.  Our  duty 
is  to  leave  them  until  some  proper  emergency  compels  their  consid- 
eration. Without  either  approval  or  disapproval  of  the  views  ex- 
pressed upon  that  branch  of  the  case  by  the  courts  below,  we  are 
enabled  to  decide  that  in  this  State  there  can  be  no  partnerships  of 
separate  and  independent  corporations,  whether  directly,  or  in- 
directly through  the  medium  of  a  trust;  no  substantial  consoUda- 
tions  which  avoid  and  disregard  the  statutory  permissions  and  re- 
straints, but  that  manufacturing  corporations  must  be  and  remain 
several  as  they  were  created,  or  one  under  the  statute. 

The  judgment  appealed  from  should  be  affirmed  with  costs. 

All  concur.  r    7  .    jr-        1 

Judgment  affirmed. 

Note.  —  See,  accord,  State  v.  Standard  Oil  Co.,  49  Oliio  St.  137. 


LINN  TIMBER  CO.   v.   UNITED  STATES. 

236  U.S.  574.     1915. 

Mr.  Justice  Holmes  delivered  the  opinion  of  the  court. 
These  are  suits  in  equity  brought  by  the  United  States  against  the 
appellants  to  annul  patents  issued  under  the  Timber  and  Stone  Act 


138  LINN    TIMBER    CO.  V.  UNITED    STATES.  (CHAP.  III. 

of  Juno  3,  1878,  c.  151,  20  St:it.  81),  on  the  ground  thnt  the  fiitries 
were  fniuilulent.  Botli  of  the  courts  below  have  found  tlmt  the  en- 
tries were  fniudulent,  that  the  defendant  Smith  was  either  a  party  to 
th«'  fraud  or  churKcaMe  with  notice  of  it,  and  that  the  Linn  &  Lane 
TimluT  ('on»i)any  stood  in  lu)  U-tter  jKisition  than  Smith.  The  Cir- 
cuit Court  of  Appeals  made  decrtH's  for  the  United  States  in  re8i>ect 
of  all  the  lands  concerned.  181  Fetl.  Hep.  545.  190  Fed.  Hep.  593; 
IK)  C.C.A.  207.  203  Fed.  Rep.  394;  121  CCA.  498.  The  main 
fjucstion  here  concerns  the  statute  of  limitations:  "suits  to  vacate 
and  annul  pat«'nts  hereafter  issued  shall  only  Ix*  brought  within  six 
years  after  the  date  of  the  issuance  of  such  patents."  Act  of  March 
3,  1891,  c.  501,  §  8;  20Stat.  1095,  1099.  See  .\ct  of  March  3,  1891,  c. 
559;  20  Stat.  1093.  In  No.  40  the  twenty-<'ight  patents  in  contro- 
versy were  i.ssued  on  August  12,  1902.  In  No.  159,  nine  of  the  pat- 
<'nts  were  issuetl  on  Augu.st  12,  1902,  and  eight  on  July  9,  1902.  The 
bills  were  filed  and  subpcenas  were  taken  out  and  delivered  to  the 
Marshal  on  May  25,  1908.  On  July  20  the  Marshal  returned  non  est 
inventus  as  to  Smith.  An  ord»T  of  notice  was  applied  for  on  the  same 
day,  suggesting  that  he  was  residing  in  Minneapolis,  and  w:is  granted 
on  July  27.  Smith  wjus  served  with  pr(H-e.ss  on  .\ugust  11,  1908,  and 
the  corporation  was  made  a  |)arty  on  Novendn'r  Hi,  and  was  siTved 
on  NovemlKT  18,  1908;  so  that  it  will  l)e  .He<»n  that  the  cor|M)ration 
was  not  brought  into  the  suit  until  more  than  si.x  years  hail  run  after 
the  issue  of  all  the  patents  and  that  Smith  was  sorvetl  more  than  six 
yeai-s  after  tin'  issue  of  eight  of  the  pjit«'nts  involved  in  No.  159.  On 
the  other  hantl  the  bills  were  til('<l  within  six  yi-ars. 

The  patented  laiuls  had  been  conveyed  to  various  jx'rsons  in  trust 
for  Smith  in  19(K),  shortly  after  the  making  of  final  pnmf.  In  May, 
19(H),  Smith,  still  having  the  equitable  or  legal  title,  organized  a 
Minnesota  corporation,  tlu'  appellant,  with  1000  shares  of  SKK)  each, 
for  the  purpose  of  receiving  and  hoMing  the  title  to  thes«'  an<l  other 
lands.  lie  took  998  shares,  his  wife  one,  and  his  attorney  one.  He 
then  offered  to  pay  for  the  stock  with  the  land,  and  subsequently 
caus(>d  to  be  execute<l  deeds  purj)<)rting  to  convey  the  lands  to  the 
cori^oration.  i)Ut  he  retaine<l  the  deeds  and  ilid  not  have  them  re- 
corded until  Septeml)er  9,  1908,  after  the  beginning  of  these  suits, 
and  more  than  six  years  after  the  issue  of  the  patents.  It  is  found,  it 
would  seem  reiusoiiably,  that  one  pur])ose  of  Smith  was  to  keep  the 
titles  concealed  until  the  .statute  of  limitations  should  have  run. 
The  United  States  was  ignorant  of  the  transaction.  But  a  month 
from  the  recording  of  the  conveyances  to  the  corporation  Smith  and 
other  defendants  pleatled  it  in  al)atement,  and  in  Noveml>er,  as  we 
have  said,  the  United  States  filed  amenfled  bills. 

Upon  the  facts  as  found  by  the  two  courts  below  we  must  take  it 
that  the  coi-poration  was  the  mere  tool  of  Smith,  that  his  knowledge 
was  its  knowledge,  McCaskill  Co.  v.  United  States,  210  U.S.  504,  and 


CHAP,  ni.]  LINN    TIMBER    CO.  V.  UNITED    STATES.  139 

that  it  was  party  to  an  effort  to  keep  the  title  concealed  until  it  was 
too  late  for  the  United  States  to  complain.  It  even  is  open  to  some 
doubt  whether  the  deeds  ever  were  delivered  until  they  were  re- 
corded, and  it  seems  open  to  none  that,  as  was  said  by  the  Circuit 
Court  of  Appeals,  recording  the  deeds  was  the  first  business  the  cor- 
poration did.  This  being  so,  the  difference  in  legal  personality  be- 
tween Smith  and  the  corporation  gives  the  corporation  no  greater 
rights  than  Smith.  It  cannot  be  privy  to  a  fraud  and  on  the  ground 
of  its  success  set  up  a  title  of  which,  if  that  be  material,  Smith  is  to 
have  substantially  the  whole  advantage,  and  thus  defeat  the  adju- 
dication against  Smith  that  otherwise  would  undo  the  fraud.  There 
is  no  question  of  creditors'  rights  and  the  only  ground  for  hesitation 
is  that  before  the  bill  was  filed  some  of  the  shares  had  been  pledged 
by  Smith,  and  fifteen  shares  had  been  transferred  to  one  Johnson 
and  also  pledged  for  Smith's  debt.  But  we  are  of  opinion  with  the 
findings  that  the  position  was  not  changed  as  between  the  United 
States,  Smith  and  the  corporation  in  such  a  way  as  to  give  the  last 
a  better  standing  in  this  case.  Those  who  took  the  stock  as  security 
did  not  deal  with  the  corporation  as  outsiders,  but  became  a  part  of  it 
while  it  still  was  under  the  manifest  domination  of  Smith  and  charged 
with  participation  in  Smith's  fraud.  The  corporation  cannot  derive 
any  new  right  from  them.  Wilson  Coal  Co.  v.  United  States,  110 
CCA.  343;  188  Fed.  Rep.  545.  Whether  they  have  a  remedy  is 
not  a  question  here. 

We  now  are  not  considering  the  effect  of  a  fraudulent  conceal- 
ment of  a  cause  of  action.  We  are  considering  whether  a  man  who 
knows  that  his  title  is  bad  and  will  be  attacked  can  call  into  being 
a  corporation  which  he  owns,  in  order  to  save  the  property,  make  a 
deed  to  it,  put  the  deed  into  his  pocket,  leave  it  unrecorded  and, 
without  the  need  of  trusting  even  an  accomplice,  can  keep  it  with 
perfect  security  until  the  statute  has  run,  and  then  set  up  that  his 
creature  owns  the  land.  We  are  deciding  that  if  a  secret  transfer  of 
wrongfully  held  land  is  made  in  this  way  for  the  purpose  of  busying 
the  United  States  with  the  wrong  person  until  the  title  shall  be  made 
good  by  time,  service  on  the  man  thus  put  forward  is  sufficient  to 
avoid  the  statute  and  the  trick  must  fail. 

The  bills  were  filed  and  subpoenas  were  taken  out  and  delivered 
to  the  Marshal  for  service  before  the  statute  had  run,  reasonable  dili- 
gence was  shown  in  getting  service  and  therefore  the  rights  of  the 
United  States  against  all  the  patents  were  saved.  For  when  so  fol- 
lowed up  the  rule  is  pretty  well  established  that  the  statute  is  inter- 
rupted by  the  filing  of  the  bill.  Coy-pin  v.  Gray,  1  Y.  &  C,  CC.  205, 
207.  Purcell  v.  Blennerhassett,  3  Jo.  &  Lat.  24,  45.  Foster  v.  Thomp- 
son, 4  Dr.  &  Warr.  303,  318.  Hele  v.  Lord  Bexleij,  20  Beav.  127. 
Hayden  v.  Bucklin,  9  Paige  (N.Y.),  512.  Aston  v.  Galloway,  38  No. 
Car.   126.    Dilworth  v.  Mayfield,  36  Mississippi,  40,  52.     United 


140  IfOORE    k    HA?n>LEY   CO.  V.  TOWERS    IIDW.  CO.      (aiAP.  Ill, 

Stiitfs  V.  American  Lumber  Co.,  85  Fed.  Rep.  827,  830.  i'niUd 
.StattJi  V.  Miller,  lO-l  Foil.  Ui'i).  444. 

There  wjus  nu  attempt  niatle  in  argument  to  reofx'n  the  c|ueHtionfl 
of  fa(;t  upon  which  the  two  courts  Im'Iovv  >«n 

to  (h'|)art  from  the  common  rule  and  ii  t  to 

any  of  thos<'  matters.  It  also  was  arKuecl  that  the  (le<'i.sum  of  the 
Secretary  of  the  Interior  tliat  the  patent:^  .should  Ik*  i.ssue<l  in  eon- 
elusive.  Hut  the  decision  w:is  obtained  by  Huch  frauds  that  the 
matter  was  ojM'n  for  reconsideration  by  the  eourts.     Wojihington 

Striirifiiw  Cn.  v.   I  'nilid  Sditi  s,  '2'.)\  I'S.  TJi. 

Ihcrtes  affirmed. 

Note.  —  See  also  Rickey  iMtxd  it  Cattle  Co.  v.  .Ui7/<t,  218  U.S. 
2o8. 

As  to  the  criminal  liability  of  a  jx'rson  who  controls  a  corjwration, 
for  the  mi.sjipplication  of  money  entrusttnl  in  fonn  to  the  eor|K)nition 
sec  Milbrath  v.  State,  1.38  \Vi.M.  \i'A,King  v.  Cftubb,  [1915]  2  K.B.  683. 


MOORE  &    II.VXDLFY  CO.  r.  TOWEItS   HAUDW.VUF  CO. 

87  Ala.  200.     IMMM. 

TiiK  bill  in  this  ea.se  wjus  file<l  on  the  3<1  Decemlier,  1888.  by  the 
Towers  H.inlw;in*  ('omi)any,  a  private  cor{K>ration.  against  the 
Moon*  A:  Handley  Hardware  Company,  another  private  corpora- 
tion; and  sought  an  injunction  to  restn^n  the  defendant  from  sellinK 
"plow-stocks  and  plow-bIad«'s,"  in  violation  of  a  contract  made  \^c~ 
tween  the  complainant  and  a  partnership  doing  busin«*sM  un<ler  the 
name  of  Moon\  M«K)r»'  ^  Handley.  which  was  comiM>s«'<l  of  .lames 
I).  Moore.  Henj.  F.  .Moon\  and  William  .\.  Handley.  who,  as  the  bill 
alleged,  afterwanis  fornnH|  the  defendant  corporation.  The  com- 
plainant was  incoqM)nite<l.  under  the  general  statut<>s,  on  the  1st 
February,  1SS7,  and  the  defendant  on  the  12th  Mareh,  1S88;  each 
having  its  principal  place  of  bu.sinesN  in  Binningham,  and  8<'lling 
hardware  throughout  the  northern  counties  of  the  State  mostly  on 
orders  effected  through  their  travelling  s:iU^men.  The  partnership  of 
Moore,  Moore  it  Handliv  had  lxM>n  engaged  in  the  sjime  business, 
and  on  the  27th  May,  IS87.  they  sokl  out  their  entire  stock  of  plow- 
stocks  and  plow-blades,  at  the  price  of  $728  paid  in  cash,  to  the  com- 
plainant ;  signing  an  agreement,  which  was  written  at  the  foot  of  the 
memorandum,  or  bill  of  sale,  in  these  wonls:  "In  consideration  of 
above  sale,  we  agree  not  to  handle  any  more  plow-stocks  or  plow- 
blades,  except  railroad  plows."  The  bill  alleged  that  the  price  paitl 
was  about  SI  GO  more  than  the  market  value  of  the  articles,  and  that 
complainant  was  induced  to  make  said  purchase  "solely  by  said 


CHAP.  III.]       MOORE    &    HANDLEY    CO.  V.  TOWERS    HDW.  CO.  141 

written  promise  and  undertaking  of  said  Moore,  Moore  &  Handley." 
By  the  terms  of  defendant's  articles  of  incorporation,  its  capital 
stock  was  $100,000,  of  which  said  partners  each  subscribed  $25,000, 
and  one  Thos.  P.  Wimberly  $25,000;  but  the  bill  alleged  that,  "if 
said  Wimberly  ever  really  had  any  interest  in  said  corporation,  or  the 
capital  stock  thereof,  by  virtue  of  having  paid  anything  on  his  sub- 
scription, he  no  longer  has  any  interest  therein,  nor  has  had  since 
before  (to-wit)  August  8th,  1888;"  also,  on  information  and  belief, 
that  said  Moores  and  Handley  "are  the  sole  owners  of  the  capital 
stock  of  said  corporation,  and  have  been  since  August  10th,  1888," 
J.  D.  Moore  being  president,  Handley  \dce-president,  and  B.  F, 
Moore  secretary,  ever  since  its  organization ;  that  the  defendant  cor- 
poration was  organized  for  the  purpose  of  carrying  on  the  same  busi- 
ness which  the  partnership  had  carried  on;  that  its  capital  stock 
"was  paid  for  wholly  and  entirely  in  the  stock  of  goods  and  assets 
of  said  partnership;"  that  it  "succeeded  to  all  the  property  rights 
and  assets  of  said  partnership,  as  well  as  all  the  liabilities  thereof;" 
that  said  defendant  corporation  "  is  none  other  than  said  J.  D.  Moore, 
B.  F.  Moore  and  Wm.  A.  Handley,  who  constituted  said  partnership, 
and  now  constitute  said  corporation.  Your  orator  can  not  say 
whether  or  not  said  ]\Ioores  and  Handley  organized  said  corporation 
for  the  purpose  of  evading  the  force  and  effect  of  their  said  agree- 
ment with  your  orator,  but  does  say  and  charge  that  the  effect  of 
their  doing  so  would  be  to  perpetrate  a  fraud  on  your  orator,  if  they 
should  be  allowed  to  handle  plow-blades  and  plow-stocks;  that  the 
defendant's  business,  as  now  conducted,  is  identically  the  same  as 
that  conducted  by  said  Moores  and  Handley,  is  conducted  by  the 
same  persons,  and  in  substantially  the  same  manner  as  before,  and 
that  the  only  change  in  fact  has  been  in  the  name  of  the  concern. 
And  your  orator  alleges  that  said  Moores  and  Handley,  in  making 
said  agreement  with  your  orator,  thereby  meant  and  intended,  and 
such  was  your  orator's  intention,  that  they  would  not  again  engage 
in  selling  or  handling  plow-blades  or  plow-stocks  in  connection  with 
their  said  business  in  the  city  of  Birmingham,  so  long  as  your  orator 
was  engaged  in  the  like  business." 

The  defendant  answered  the  bill,  admitting  its  allegations  as  to 
the  contract  between  the  complainant  and  Moore,  Moore  &  Handle}'', 
and  the  nature  of  the  business  carried  on  by  the  several  parties;  deny- 
ing that  it  assumed,  or  in  any  manner  became  liable  for,  the  obli- 
gations of  said  partnership,  or  of  its  indi\'idual  partners,  or  that  it 
acquired  any  interest  in  the  outstanding  notes  and  accounts  due  to 
said  partnership,  or  the  real  estate  owned  by  the  partners,  which 
was  more  than  sufficient  to  pay  all  their  outstanding  debts  and  lia- 
bilities; alleging  that  Wimberly  owmed  a  one-fourth  interest  in  the 
corporation  at  its  organization,  and  for  some  time  acted  as  its  treas- 
urer, but  admitting  that  the  Moores  and  Handley  had  since  bought 


142  MOORE    &  .ILWDLEY    CO.  V.  TOWERS    IIDW.  CO.       [cHAP.  III. 

out  his  interest;  insisting  that  said  contract  was  illegal  and  void,  be- 
cause in  restraint  of  trade,  and,  if  valid,  was  not  binding  on  the  de- 
fendant; and  tleinurring  to  the  bill  for  want  of  equity. 

After  answer  filed,  the  defendant  submitted  a  motion  to  di.s.solve 
the  temporary  injunction,  and  to  di.smiss  the  bill;  and  this  appeal  is 
taken  from  the  decree  of  the  chancellor  overruling  and  refusing  these 
motions. 

McClellan,  J.  The  eijuity  of  the  bill,  so  far  as  the  injunction 
is  concerned,  and  the  sufficiency  of  those  of  its  allegations  which  are 
not  denicnl  by  the  answer  to  sustain  th(>  injunction,  depend  primarily 
on  two  questions:  Jirtit,  whether  the  contract  relied  on  is  void,  as 
being  in  unrea.sonable  restraint  of  trade;  and,  second,  whether  a  nega- 
tive undertaking  enteretl  into  by  persons  who  subsequently  or- 
ganize, and  for  the  time  constitute,  a  corporation  for  the  prosecu- 
tion of  the  business  with  respect  to  which  the  contract  was  made, 
can  l)e  enforced  by  injunction  against  the  corporation. 

[The  contract  was  held  to  be  valid.] 

The  general  doctrine  is  well  estal)lished,  and  obtains  both  at  law 
and  in  eciuily,  that  a  corporation  is  a  distinct  entity,  to  be  considered 
separate  and  apart  from  the  imlividuals  who  compose  it,  and  is  not 
to  be  affected  by  the  pei-sonal  rights,  obligations  and  transactions  of 
its  stockholders;  and  this,  whether  said  rights  accrued,  or  obUgations 
were  incurred,  before  or  subsequent  to  incorporation.  Morawetz  on 
Priv.  Corp.  227-234,  547-549;  Morrison  v.  Gold  Mt.  G.  M.  Co.,  52 
Cal.  309;  Hawkins  v.  Mansfield  G.  M.  Co.,  lb.  515;  Gent  v.  M.  A 
Mut  Ins.  Co.  107  111.  658;  Caledonian  R.  Co.  v.  Helensburgh,  2 
Macg.  39l;Penn.  Mat.  Co.  v.  Hapgood,  141  Ma.ss.  147. 

There  is  a  class  of  contracts,  however,  which  are  entered  into  be- 
tween the  promoters  or  prospectors  of  a  contemplated  corporation 
and  third  persons,  on  the  faith  of  the  corporation,  intended  to  enure 
to  its  benefit,  and  which  in  point  of  fact  do  enure  to  its  benefit,  on 
which  the  corporation  will  be  charged,  even  in  the  absence  of  an  ex- 
press promise  to  perform,  or  ratification  on  the  part  of  the  company 
after  it  is  in  esse;  on  "  the  familiar  principle,  that  one  who  accepts  the 
benefit  of  a  contract,  which  another  volunteers  to  perform  in  his 
name,  and  on  his  behalf,  is  bound  to  take  the  burden  with  the  ben- 
efit." Rcdficld  on  Railways  (5th  ed.),  18;  Edwards  v.  Grand  June. 
R.,  1  M.  &  Cr.  650;  Staideij  v.  Birkenhead  R.,  9  Sim.  264;  L.  R.  & 
Fet.  S.  R.  Co.  v.  Perry,  37  Ark.  164;  Perry  v.  L.  R.  &  Fet.  S.  R.  Co., 
44  Ark.  383;  Bommer  v.  Am.  Spiral  Co.,  81  N.Y.  468. 

And  in  those  cases  where  "associates  combine  together  to  create 
a  paper  corporation,  to  cover  a  partnership  or  joint  venture,  and 
where  the  stockholders  are  partners  in  intention,"  and  have  resorted 
to  the  fiction  of  separate  corporate  entity  to  free  themselves  from 
individual  obligations  which  had  attached  to  them,  with  respect  to 
the  business  they  propose  to  carry  on,  prior  to  the  organization  of 


CHAP.  III.]       MOORE    &    HANDLEY    CO.  V.  TOWERS    HDW.   CO.  143 

the  company,  courts  of  equity,  when  the  ends  of  justice  require  it, 
will  disregard  and  look  beyond  the  fiction  of  corporate  entity,  and 
hold  the  corporation  to  a  discharge  of  the  liabihties  resting  on  its 
members;  and  this  may  be  done,  although  some  of  the  shareholders 
had  not  originally  incurred  the  obligation  sought  to  be  enforced, 
provided  they  had  notice  of  it  before  entering  the  corporation,  and 
participated  in  the  effort  to  avoid  it.  Davis  Imp.  Wrought  Iron  W. 
W.  Co.  V.  Davis  Wrought  Iron  W.  Co.,  20  Fed.  Rep.  700;  Beal  v. 
Chase,  31  Mich.  490,  495,  532. 

The  contract  of  Moore,  Moore  &  Handley,  sought  to  be  enforced 
against  the  Moore  &  Handley  Hardware  Company,  was  not  an  un- 
dertaking between  promoters  of  the  company  and  third  parties,  nor 
made  on  the  faith  of  the  corporation,  nor  intended  to  enure  to  its 
benefit,  nor  did  it  enure,  in  point  of  fact,  to  the  benefit  of  the  corpora- 
tion. It  is  not  of  that  class  of  contracts  which  courts  enforce  against 
corporations,  on  the  ground  that  they  were  made  in  the  corporate 
name  by  anticipation,  and  that  the  corporation  received  and  ac- 
cepted the  benefits  resulting  from  them. 

There  is  no  allegation  of  fraud  made  against  the  corporation,  or 
its  shareholders,  and  the  implication  of  the  fraudulent  effect  of  the 
corporate  action  complained  of  is  denied.  It  is  not  shown  that  tliis 
is  a  mere  "paper  corporation,"  to  cover  a  joint  venture,  in  which  the 
corporators  are  partners  in  intention,  and  have  resorted  to  this  form 
for  the  purpose  of  evading  and  avoiding  obligations  which  they  had 
taken  upon  themselves  as  indi\'iduals,  or  for  the  purpose  of  evading 
the  promise  relied  on  here.  If  these  things  had  appeared  in  the  case, 
we  should  not  hesitate  to  hold  the  corporation  answerable  for  the 
individual  obligation.  But,  in  the  absence  of  fraud,  "no  authorities 
have  gone  the  length  of  holding  that  any  contract  made  with  indi- 
\'iduals,  exclusively  upon  indi\'idual  credit,  will  become  the  contract 
of  any  future  corporation  that  may  be  formed  for  the  more  con- 
venient management  and  use  of  the  benefits  of  it."  L.  R.  &  Ft.  S. 
R.  Co.  Cases,  supra. 

If  the  case  of  Beal  v.  Chase,  supra,  goes  beyond  this  doctrine,  we 
can  not  indorse  it.  We  do  not  think  it  does.  In  that  case,  the  cor- 
poration had  been  formed  for  the  purpose  of  violating  a  contract  not 
to  engage  in  a  certain  business.  All  the  corporators  were  held  to  have 
participated  in  this  purpose.  The  business  was  to  be  conducted  by 
the  corporation,  in  connection  with  the  promisor  in  his  individual 
capacity.  He  had  an  interest  in  it,  both  individually  and  as  the 
principal  shareholder  of  the  company;  and  the  court  enjoined  the 
corporation,  not  generally,  but  from  carrjdng  on  the  business  with  or 
for  the  individual  contracting  party.  To  put  the  case  at  bar  in  line 
with  that  case,  it  would  have  to  appear,  not  only  that  the  corporators 
organized  for  the  purpose,  and  with  the  intention  of  evading  their 
contract,  through  the  separate  entity  of  corporate  existence,  but  also 


144  MOORE    &    HAXDLEY    CO.  V.  TOWERS    HDW.  CO.       [CIIAP.  III. 

that  they  reserved  an  interest  in  the  business  distinct  from  their 
interests  tus  stockhoUlors.  None  of  these  facts  are  shown.  The  cfTrct 
of  allowing  the  injunction  in  this  case  to  continue,  would  net  ts- 
sarily  ho  to  hold  all  future  shaifholdcrs  in  the  corporation  to  the  per- 
formance of  a  contract  which  neither  they  nor  the  corporation  had 
ever  entered  into,  and  of  which  they  may  not  even  have  had  notice. 
Such  a  result  could  only  Ik'  juf^tified  on  the  f^round  of  had  faith  in  the 
creation  of  the  coinpatiy.  To  thus  hainjM'r  a  bona  Jide  corporation, 
would  \)0  inefiuitahle,  and  have  the  effect  of  establi.sJiinK  a  doctrine 
frausht  with  much  danger  to  corporate  riKhts,  powers  and  property. 

The  allegations  Roiun  to  show  a  ratification,  by  the  corporation, 
of  this  contract  of  Moore,  Mof)re  <fc  Ilaiulley,  are  denied  l)v  the  an- 
swer, and  hence  can  not  be  considere<l  in  pas-sing  on  the  decree  over- 
ruling the  motion  to  di.ssolve  the  injunction.  Those  alieRations  of 
the  bill  which  are  not  denied,  were  not  sufficient  to  authorize  a  con- 
tiiuiance  of  the  injunction,  and  the  decree  on  that  point  was  errone- 
ous, and  is  reversed. 

The  contract  relied  on  here  is  such  a  one  as  the  respontlent  cor- 
poration could  have  made  under  its  charter.  It  is,  therefore,  one 
which,  l)eing  already  in  existence  between  complainant  an<l  the  in- 
dividuals composing  the  defendant  company,  the  corporation  h:id 
the  power  to  ratify  and  adopt.  The  bill,  in  our  judgment,  sufficiently 
avers  such  ratification  or  adoption.  These  allegations  give  equity  to 
the  bill,  and  the  tlecree  overruling  the  demurrer  is  affirmed. 

The  cause  will  ))e  remand«Ml,  with  instructions  to  the  chancellor  to 
dissolve  the  injunction,  uidess  the  comphiinant  amends  its  bill  so  as 
to  entitle  it  to  a  continuance  of  the  writ ,  under  the  principles  we  have 
announced. 

Reversed  and  remanded. 

Note.  —  Ikal  v.  Chase,  ol  Mich.  41)0.  Chase  contracted  not  to 
engage  in  a  certain  business.  He  thereafter,  with  other  persons  who 
knew  of  his  contract,  formofl  a  corporation  of  which  he  was  a  large 
shareholder  and  the  president,  which  engaged  in  the  bu.siness.  It 
was  formed  for  that  purpose.  The  corporation  was  enjoined  "from 
doing  said  business  with  or  for  Chase,  directly  or  indirectly."  See 
also  GormuUy  Co.  v.  Bretz,  64  Fed.  612. 

Hagy  v.  McGuire,  147  Pa.  187.  Defendants  contracted  not  to  sell 
certain  products  except  to  the  plaintiffs.  They  formed  a  corporation 
which  dealt  in  such  products  and  sold  them  to  pei-sons  other  than  the 
plaintiffs.   This  was  held  to  be  a  breach  of  the  defendants'  contract. 

Kramer  v.  Old,  119  X.C.  1.  A,  B,  and  C  covenanted  not  to  en- 
gage in  a  business.  They  subsequently  organized  a  corporation, 
to  engage  in  the  business,  and  became  the  principal  stockliolders  and 
the  managing  officers  of  such  corporation.  There  were  other  stock- 
holders who  knew  of  the  covenant  by  A,  B,  and  C  before  they  put 


CHAP.  III.]    hall's  safe  CO.  V.  HERRING-HALL-MARVIN  SAFE  CO.    145 

any  money  into  the  corporation.  The  court  enjoined  A,  B,  and  C 
from  taking  stock  or  assisting  in  the  organization  of  a  corporation 
formed  with'  the  purpose  of  carrying  on  such  business,  but  it  refused 
to  enjoin  X  from  engaging  in  such  business.  See  also  Iowa  Wire  Co. 
V.  Southern  Wire  Co.,  30  Fed.  123. 


HALL'S  SAFE  CO.   v.   HERRING-HALL-MARVIN 
SAFE  CO. 

146  Fed.  37.     1906. 

Severens,  Circuit  Judge.  From  about  the  year  1847  to  1867,  one 
Joseph  L.  Hall  had,  in  successive  co-partnerships  with  other  persons, 
been  engaged  at  Cincinnati,  Ohio,  in  the  manufacture  and  sale  of 
fire  and  burglar  proof  safes.  In  tliis  business  he  had  been  the  prin- 
cipal and  managing  member  of  his  firms.  In  the  latter  year  (1867) 
he  with  other  persons  organized  a  corporation  under  the  laws  of  Ohio 
by  the  name  of  ''Hall's  Safe  &  Lock  Company,"  for  the  purpose  of 
carrying  on  the  same  business.  Its  factory  and  principal  office  were 
located  at  Cincinnati,  and  its  business  of  selling  safes  extended 
throughout  the  United  States  and  into  foreign  countries.  Its  safes 
were  known  as  "Hall's  Safes"  and  "Hall's  Standard  Safes,"  and 
certain  styles  of  them  were  marked  "Hall's  Standard  Safes,"  and 
the  safes  had  a  good  reputation.  In  March,  1889,  the  said  Joseph  L. 
Hall,  who  was  at  that  time  the  principal  stockholder  in  the  corpora- 
tion last  mentioned,  died.  His  sons,  Edward  C,  William  H.,  and 
Charles  O.  Hall,  were  also  stockholders.  The  first  two  became,  suc- 
cessively, presidents  of  the  corporation.  The  stock  of  Joseph  L.  Hall 
continued  part  of  his  estate,  and  the  business  went  on  as  before  until 
May  4,  1892,  when  the  corporation  sold  to  the  Herring-Hall-Marvin 
Company,  a  New  Jersey  corporation,  all  its  "real  estate  and  lease- 
hold interests,  tools,  machinery,  fixtures,  merchandise,  trade-marks 
and  good  will,"  and  the  Hall's  Safe  &  Lock  Company  covenanted  and 
agreed  that  it  would  close  up  its  affairs  and  be  dissolved  and  would 
not  in  the  future  engage  or  continue  in  said  business.  This  sale  and 
agreement  was  assented  to  by  the  above-named  sons  of  Joseph  L. 
Hall,  who  are  the  individuals  made  defendants  in  tliis  cause.  Ed- 
ward C.  Hall  and  William  H.  Hall  at  or  about  the  date  of  the  transfer 
became  stockholders  (as  we  must  suppose),  directors,  and,  respec- 
tively, president  and  treasurer,  of  the  Herring-Hall-Marvin  Com- 
pany, at  stated  salaries  agreed  upon  at  the  time  of  said  transfer.  But 
in  1895  these  persons  were  deposed  from  their  offices,  and  their  sala- 
ries reduced,  and  on  August  1,  1896,  they  resigned  their  offices  as 
directors.  Their  resignations  were  accepted,  and  they  withdrew  from 
the  company.   At  the  time  when  these  parties  became  associated 


146    hall's  safe  CO.  v.  HERRIXG-HALL-MARVIN  safe  CO.    [chap.  III. 

with  the  Herring-Hall-Marvin  Company,  a  written  agreement  with 
that  company  was  entered  into  by  each  of  them,  wliich,  after  sta- 
ting the  terms  of  their  employment,  contained  tlie  following  stipula- 
tion :  — 

"And  in  consideration  as  aforesaid,  I,  the  said  Edward  C.  Hall 
(in  the  other  contract,  William  H.  Hall),  do  hereby  covenant, 
promise,  and  agree  that  I  will  not,  so  long  as  the  Herring-Hull- 
Marvin  Company  may  desire  to  retain  my  services  as  al>ove,  en- 
gage, either  in  the  state  of  Ohio,  or  in  the  state  of  New  Jersey,  or  in 
any  of  the  states  east  of  the  Mississippi  river,  in  the  business  of  man- 
ufacturing, selling,  buying,  or  dealing  in  fire  or  burglar  proof  vaults 
anil  safes,  or  in  any  business  or  occupation  such  as  the  said  corpora- 
tion known  as  the  Hall's  Safe  <fe  Lock  Company  has  heretofore  been 
'engaged  in,  or  such  as  the  Herring-Hall-Marvin  Company  is  au- 
thorized or  impowered  to  engage  in,  or  in  any  other  business  which 
will  or  may  compete  or  interfere  in  any  manner  with  the  business  of 
the  said  Hcrriug-Hall-Marvin  Company." 

In  September,  18UG,  Edward  C.  Hall,  William  H.  Hall,  Charles 
O.  Hall,  and  other  persons  organized  a  corporation  under  the  laws 
of  Ohio  by  the  name  of  the  "Hall's  Safe  Company,"  the  corporate 
defendant  herein,  and  this  company  shortly  thereafter  went  into  the 
business  of  manufacturing  and  selling  safes. 

[Counsel  for  comjilainant  contended  that  the  contract  of  Hall's 
Safe  &  Lock  Companv  bound  the  individuals  Edward  C,  William 
H.,  and  Charles  O.  Hall.] 

Upon  this  contention  it  i)ecomes  important  to  determine  what 
were  and  are  the  relations  between  the  complainant  and  its  prede- 
ces.sor  in  title  and  the  several  defendants.  Undoubtedly  the  Herring- 
Hall-Marvin  Company  acquired  by  its  contract  of  purcha.se  with 
the  Hall  Safe  &  Lock  Company  all  its  physical  properties  and  the 
good  will  which  it  had  acquired  in  its  business,  as  well  as  the  right  to 
use  such  trade-names  as  had  been  customarily  used  to  identify  its 
products.  It  acquired  also  the  right  to  require  that  the  Hall's  Safe 
&  Lock  Company  should  go  out  of  business,  or,  in  substance,  that 
it  should  not  longer  engage  in  business  of  the  kind  which  it  sold  to  the 
Herring-Hall-Marvin  Company.  But  it  is  contended  that  the  con- 
tract reaches  beyond  the  corporation,  the  Hall  Safe  &  Lock  Company, 
and  binds  the  defendants  who  were  stockholders  and  officers  of  the 
corporation,  and  prevents  them  and  any  corporation  of  which  they 
may  become  stockholders  and  managers  from  doing  what  the  Hall 
Safe  &  Lock  Company  could  not  do;  and  the  principal  reason  for  this 
contention  is  the  fact  that  these  individual  defendants  participated 
in  the  sale,  and  as  stockholders  received  its  benefits.  We  are  of  opin- 
ion that  this  proposition  cannot  be  sustained.  The  contract  which 
the  Herring-Hall-Marvin  Company  had  was  with  the  corporation 
only,  and  not  with  its  stockholders  or  oflBcers.  The  officers  who  con- 


CHAP.  III.]     hall's  safe  CO.  V.  HERRING-HALL-MARVIN  SAFE  CO.    147 

ducted  the  business  of  the  selling  company  were  not  parties  to  the 
contract.  It  is  a  familiar  rule  that  an  agent,  who,  having  lawful  au- 
thority, makes  a  contract  with  another  for  a  known  principal,  does 
not  bind  himself,  but  his  principal  only  (Story  on  Agency,  §  261; 
Mechem  on  Agency,  §  555;  Whitney  v.  Wyman,  101  U.S.  392,  25 
L.  Ed.  1050) ;  and  the  officers  of  a  private  corporation,  in  respect  to 
their  liability  on  contracts  entered  into  by  them  in  behalf  of  the  cor- 
poration, stand  upon  the  same  footing  as  agents  of  private  individ- 
uals (21  Am.  &  Eng.  Ency.  of  Law  [2d  Ed.]  879;  TVhitney  v.  Wyman, 
supra).  If  the  purchaser  desired  to  make  the  officers  and  agents  of 
the  selling  corporation  subject  to  the  stipulations  of  the  company  in 
the  contract  of  sale,  it  should  have  required  their  personal  agreement 
to  that  effect. 

The  cases  cited  by  counsel  for  the  complainant  to  support  their 
contention  that  the  court  may  look  through  the  form  of  a  corporate 
organization,  and  fasten  upon  the  stockholders  a  liability  for  the  acts 
of  the  corporation,  do  not  support  such  a  doctrine  as  applicable  to 
contract  relations.  These  are  State  v.  Standard  Oil  Co.,  49  Ohio  St. 
137,  30  N.E.  279,  15  L.R.A.  145,  34  Am.  St.  Rep.  541;  McKinley  v. 
Wheeler,  130  U.S.  630,  9  Sup.  Ct.  638,  32  L.  Ed.  1048;  and  Anthony 
V.  American  Glucose  Co.,  146  N.Y.  407,  41  N.E.  23.  They  were  all 
cases  where,  for  special  purposes  and  in  special  circumstances,  the 
court  held  that  it  was  competent  and  proper  to  regard  the  rights  and 
duties  of  stockholders  in  corporations.  None  of  them  impugns  the 
general  rule  above  stated  that  in  matters  of  contract  the  officers  and 
agents  of  a  corporation  are  not  bound  personally  by  stipulations  made 
by  them  in  behalf  of  their  principal.  This  rule  is  not  affected  by  the 
circumstance  that  they  are  indirectly  interested  as  stockholders  in 
the  contracts  of  their  corporation.  If  it  were  so,  it  would  break  down 
all  distinction  between  the  corporate  entity  and  its  component  parts. 

Note.  —  In  Donnell  v.  Herring-Hall-Marvin  Safe  Co.,  208  U.S. 
267,  Mr.  Justice  Holmes  said  (p.  273) :  "  But  it  was  said  that  if  a 
partnership  had  sold  out  by  a  conveyance  in  like  terms  the  members 
would  have  given  up  the  right  to  use  their  own  names  if  they  appeared 
in  the  firm  name,  that  in  this  case  the  Halls  received  the  consideration 
for  the  good  will  they  had  attached  to  their  name,  that  they  ratified 
the  sale  and  necessarily  assented  to  it,  since  otherwise  the  cprpora- 
tion  could  not  have  sold  its  property  or  have  carried  out  its  agree- 
ment to  dissolve,  and  that  under  such  circumstances  a  court  ought 
to  look  through  the  corporation  to  the  men  behind  it. 

"Philosophy  may  have  gained  by  the  attempts  in  recent  years  to 
look  through  the  fiction  to  the  fact  and  to  generalize  corporations, 
partnerships  and  other  groups  into  a  single  conception.  But  to  gen- 
eralize is  to  omit,  and  in  this  instance  to  omit  one  characteristic  of 
the  complete  corporation,  as  called  into  being  under  modern  statutes, 


148  BRODERIP    V.  SALOMON.  [cHAP.  III. 

that  is  most  important  in  business  and  law.  A  leading  purpose  of 
such  sttitutos  iind  of  those  wlio  act  under  them  is  to  interpose  a  non- 
conductor, throuji;ii  which  in  muttei-s  of  contract  it  is  inipossiljje  to 
see  the  men  behintl.  However  it  mi^ht  he  with  a  partnei-ship,  liutuna 
Cement  Co.  v.  Le  Page,  147  Massachusetts,  200,  211,  when  this  cor- 
poration sold  its  rights  everybody  had  notice  and  knew  in  fact  that 
it  was  not  selling  the  rifihts  personal  to  its  membei-s,  even  if,  lus  al- 
ways, they  really  received  the  consideration,  or,  as  usual,  they  all 
assented  to  its  act.  That  it  contracted  for  such  a.ss(Mit,  if  it  tlitl,  by 
its  undertaking  to  dissolve,  does  not  make  the  contract  theirs.  But 
the  case  does  not  stop  there.  The  purchtusing  company  had  the 
possibility  of  competition  from  the  Hulls  Ix'fore  its  mind  ami  gave 
the  measure  of  its  expectations  and  demands  by  the  pei-sonal  con- 
tracts that  it  required.  Those  contracts  were  limited  in  time  and 
scope  and  have  been  discharged." 


BRODERIP  V.  SALOMON. 

[1893.)     2  Ch.  323. 

SALOMON   V.   SALOMON   &   CO.,   LTD. 

11897.]     A.C.  22. 

In  1892  Aron  Salomon  was  carrying  on  business  as  a  leather  mer- 
chant, etc.,  and  was  solvent.  On  July  28,  18'.)2,  a  limited  company 
was  registered  under  the  Companies  Act  of  18G2.  The  memorandum 
of  association  was  subscribed  by  Aron  Salomon  and  his  wife  and 
daughter  and  four  sons,  each  subseril)ing  for  one  share. 

The  Companies  Act  provided  (§  0)  that  "any  seven  or  more  per- 
sons, associatetl  for  a  lawful  purpose  may,  by  subscribing  their  names 
to  a  memorandum  of  association,  and  otherwise  complying  with  the 
provisions  of  the  act  in  respect  of  registration,  form  a  company  with 
or  without  limited  liability."  "  No  subscriber  shall  take  less  than  one 
share"  (§  8).  The  act  prescribed  no  minimum  value  for  shares,  and 
hence  the  shares  might  be  of  as  small  a  value  as  those  who  formed  the 
company  pleased.  Nor  clid  the  Act  impose  any  limit  upon  the  num- 
ber of  shares  which  a  single  member  might  subscribe  for.  §  30  pro- 
vitled  that  no  notice  of  any  trust  should  be  entered  on  the  register. 
Upon  the  registration  of  the  memorandum  of  association,  and  of  the 
articles  (where  required),  the  registrar  was  required  to  certify  that 
the  company  was  incorporated.  ''The  subscribers  of  the  memoran- 
dum of  association,  together  with  such  other  persons  as  may  from 
time  to  time  become  members  of  the  company,  shall  thereupon  be  a 
body  corporate  by  the  name  contained  in  the  memorandum  of  as- 
sociation, capable  forthwith  of  exercising  all  the  functions  of  an  in- 


CHAP.  III.]  BRODERIP    V.  SALOMON.  149 

corporated  company,  and  having  perpetual  succession  and  a  com- 
mon seal,  with  power  to  hold  lands."  .  .  .  (§  18.) 

Salomon  conveyed  his  business  to  this  company,  and  the  com- 
pany issued  to  him  debentures  and  shares.  The  net  result  was  that 
the  company  had  the  business,  and  Salomon  had  certain  debentures, 
and  20,001  shares  out  of  a  total  of  the  20,007  issued.  The  total 
number  of  shares  authorized  was  40,000,  but  the  remaining  19,993 
were  not  issued,  nor  offered  to  the  public.  Nor  were  any  of  the 
20,007  shares  offered  to  the  public. 

The  company  became  insolvent.  The  assets  which  remained  after 
paying  one  Broderip,  whose  right  to  be  paid  in  priority  to  the  un- 
secured creditors  was  not  questioned,  were  not  sufficient  to  pay  the 
debentures  held  by  Salomon.  If  these  remaining  assets  were  applied 
on  the  debentures  held  by  Salomon,  the  unsecured  creditors  of  the 
company  would  receive  nothing.  The  unsecured  creditors,  other 
than  Salomon  himself,  had  claims  for  7733L  8s.  Sd. 

The  matter  came  before  Vaughan  Williams,  J.,  and  the  follow- 
ing is  an  abridgment  of  his  opinion :  — 

There  was  no  fraud  on  the  shareholders,  inasmuch  as  they  were  all 
perfectly  cognizant  of  the  conditions  under  which  the  company  was 
formed,  and  as  there  was  no  intention  to  allot  further  shares  at  a 
later  period  to  outsiders.  But  the  company  was  a  mere  nominee  of 
Salomon's;  and  the  case  is  to  be  dealt  with  as  if  the  nominee,  in- 
stead of  being  the  comjoany,  had  been  some  individual  agent  of 
Salomon's  to  whom  he  had  purported  to  sell  this  business.  In  that 
case  the  trustee  in  bankruptcy  of  the  agent  would  have  had  a  right 
to  make  Salomon  indemnify  the  agent  against  the  debts  that  he  had 
contracted  by  the  direction  of  his  principal.  The  right  of  the  h- 
quidator  in  the  present  case  is  precisely  the  same,  notwithstanding 
the  debentures  which  were  a  mere  form,  intended  to  give  an  ap- 
pearance of  reality  to  a  sale  which,  in  fact,  was  no  sale  at  all,  be- 
cause it  was  a  sale  by  a  man  to  an  agent  for  his  own  profit.  This  busi- 
ness was  Salomon's  business,  and  no  one  else's.  The  creditors  of  the 
company  could,  in  my  opinion,  have  sued  Salomon.  Their  right  to 
do  so  would  depend  on  the  circumstances  of  the  case,  whether  the 
company  was  a  mere  alias  of  the  founder  or  not.  The  relationship 
of  principal  and  agent  existed  between  Salomon  and  the  company. 
The  moment  the  creditors  succeed  in  establishing  the  identity  of 
Salomon  with  the  company,  the  creditors  of  the  company  thereupon 
are  shown  to  be  the  creditors  of  Salomon;  and  although  it  is  neces- 
sary, in  order  to  get  rid  of  the  priority  given  to  Salomon  by  these  de- 
bentures, that  one  should  fall  back  upon  the  lien  of  the  company  as 
his  agent,  whom  he  was  bound  to  indemnify,  I  do  not  mean  to  ex- 
clude from  my  judgment  that  the  debentures  were  given  to  Salo- 
mon by  his  agent,  the  company,  and  that  the  necessary  effect  of 
Salomon  as  principal,  taking  these  debentures  from  his  agent,  the 


150  BRODERIP    V.  SALOMON.  [cHAP.  III. 

company,  was  that  his  creditors  —  for,  according  to  my  view,  the 
creditors  of  the  company  were  his  creditors  —  were  defeated  and 
delayed  by  the  debentures. 

His  Lordship  made  the  following  order :  — 

Declare  that  the  plaintiffs,  A.  Salomon  &  Co.  Limited,  or  the  liqui- 
dator thereof  are,  or  is  entitled  to  be  indemnihed  by  the  defontlant 
A.  Salomon  against  the  sum  of  7733/.  Ss.  3rf.  .  .  . 

Order  and  adjudge  that  the  plaintiffs,  A.  Salomon  &  Co.  Limited, 
do  recover  against  defendant  A.  Salomon  the  said  sum  of  7733/. 
8s.  3d. 

Declare  that  plaintiffs,  A.  Salomon  &  Co.  Limited,  are  entitled  to 
a  Hen  for  the  said  sum  of  7733/.  &?.  3c/.,  upon  all  sums  which  would 
be  payable  to  defendant  A.  Salomon  out  of  the  a.ssets  of  the  plain- 
tiffs A.  Salomon  &  Co.  Limited. 

LiNDLEY,  L.J.  This  is  an  appeal  by  Mr.  Aron  Salomon  against 
an  order  made  by  Vaughan  Williams,  J.,  and  which,  in  effect, 
directs  Mr.  A.  Salomon  to  indemnify  a  limited  company  formed  by 
him  against  the  unsecured  debts  and  liabilities  incurred  by  or  in  the 
name  of  the  company  whilst  it  carried  on  business. 

The  appeal  raises  a  question  of  very  great  importance,  not  only  to 
the  persons  innnediately  affected  by  the  decision,  but  also  to  a  large 
number  of  persons  who  form  what  are  called  "one-man  companies." 
Such  companies  were  unheard  of  until  a  comparatively  recent  period, 
but  have  IxH'ome  very  common  of  late  years. 

There  can  be  no  doubt  that  in  this  case  an  attempt  has  been  made 
to  use  the  machinery  of  the  Companies  Act,  18G2,  for  a  purpose  for 
which  it  never  was  intended.  The  legislature  contemplated  the  en- 
couragement of  trade  by  enabling  a  comparatively  small  number  of 
l^ersons  —  namelj',  not  less  than  seven  —  to  carry  on  business  with 
a  limited  joint  stock  or  capital,  and  without  the  risk  of  liability  be- 
yond the  loss  of  such  joint  stock  or  capital.  But  the  legislature  never 
contemplated  an  extension  of  limited  liability  to  sole  traders  or  to  a 
fewer  number  than  seven.  In  truth,  the  legislature  clearly  intended 
to  prevent  anything  of  the  kind,  for  §  48  takes  away  the  privilege 
conferred  by  the  Act  from  those  members  of  limited  companies  who 
allow  such  companies  to  carry  on  business  with  less  than  seven  mem- 
bers; and  by  §  79  the  reduction  of  the  number  of  members  below 
seven  is  a  ground  for  winding  up  the  company.  Although  in  the 
present  case  there  were,  and  are,  seven  members,  yet  it  is  manifest 
that  six  of  them  are  members  simply  in  order  to  enable  the  seventh 
himself  to  carry  on  business  with  limited  liability.  The  object  of  the 
whole  arrangement  is  to  do  the  very  thing  which  the  legislature  in- 
tended not  to  be  done;  and,  ingenious  as  the  scheme  is,  it  cannot 
have  the  effect  desired  so  long  as  the  law  remains  unaltered.  This 
was  evidently  the  view  taken  by  Vaughan  Williams,  J. 

The  incorporation  of  the  company  cannot  be  disputed.   (See  §  18 


CHAP.  III.]  BRODERIP    V.  SALOMON.  151 

of  the  Companies  Act,  1862.)  Whether  by  any  proceeding  in  the 
nature  of  a  scire  facias  the  Court  could  set  aside  the  certificate  of 
incorporation  is  a  question  which  has  never  been  considered,  and  on 
which  I  express  no  opinion;  but,  be  that  as  it  may,  in  such  an  action 
as  this  the  vaUdity  of  the  certificate  cannot  be  impeached.  The  com- 
pany must,  therefore,  be  regarded  as  a  corporation,  but  as  a  corpo- 
ration created  for  an  illegitimate  purpose.  Moreover,  there  having 
always  been  seven  members,  although  six  of  them  hold  only  one  11. 
share  each,  Mr.  Aron  Salomon  cannot  be  reached  under  §  48,  to 
which  I  have  already  alluded.  As  the  company  must  be  recognized 
as  a  corporation,  I  feel  a  difficulty  in  saying  that  the  company  did 
not  carry  on  business  as  a  principal,  and  that  the  debts  and  liabili- 
ties contracted  in  its  name  are  not  enforceable  against  it  in  its  cor- 
porate capacity.  But  it  does  not  follow  that  the  order  made  by 
Vaughan  Williams,  J.,  is  wrong.  A  person  may  carry  on  business  as 
a  principal  and  incur  debts  and  liabilities  as  such,  and  yet  be  entitled 
to  be  indemnified  against  those  debts  and  liabilities  by  the  person 
for  whose  benefit  he  carries  on  the  business.  The  company  in  this  case 
has  been  regarded  by  Vaughan  Williams,  J.,  as  the  agent  of  Ai-on 
Salomon.  I  should  rather  liken  the  company  to  a  trustee  for  him  — 
a  trustee  improperly  brought  into  existence  by  him  to  enable  him 
to  do  what  the  statute  prohibits.  It  is  manifest  that  the  other  mem- 
bers of  the  company  have  practically  no  interest  in  it,  and  their 
names  have  merely  been  used  by  Mr.  Aron  Salomon  to  enable  him  to 
form  a  company,  and  to  use  its  name  in  order  to  screen  himself  from 
liability.  This  view  of  the  case  is  quite  consistent  with  In  re  George 
Newman  &  Co.,  [1895]  1  Ch.  674.  In  a  strict  legal  sense  the  business 
may  have  to  be  regarded  as  the  business  of  the  company;  but  if  any 
jury  were  asked.  Whose  business  was  it?  they  would  say  Aron  Sal- 
omon's, and  they  would  be  right,  if  they  meant  that  the  beneficial 
interest  in  the  business  was  his.  I  do  not  go  so  far  as  to  say  that  the 
creditors  of  the  company  could  sue  him.  In  my  opinion,  they  can 
only  reach  him  through  the  company.  Moreover,  Mr.  Aron  Salo- 
mon's liability  to  indemnify  the  company  in  this  case  is,  in  my  view, 
the  legal  consequence  of  the  formation  of  the  company  in  order  to 
attain  a  result  not  permitted  by  law.  The  liability  does  not  arise 
simply  from  the  fact  that  he  holds  nearly  all  the  shares  in  the  com- 
pan3'.  A  man  may  do  that  and  yet  be  under  no  such  liability  as  Mr. 
Aron  Salomon  has  come  under.  His  liabilit}^  rests  on  the  purpose  for 
which  he  formed  the  company,  on  the  way  he  formed  it,  and  on  the 
use  which  he  made  of  it.  There  are  many  small  companies  which  will 
be  quite  unaffected  by  this  decision.  But  there  may  possibly  be  some 
which,  like  this,  are  mere  devices  to  enable  a  man  to  carry  on  trade 
with  limited  liability,  to  incur  debts  in  the  name  of  a  registered  com- 
pany, and  to  sweep  off  the  company's  assets  by  means  of  debentures 
which  he  has  caused  to  be  issued  to  himself  in  order  to  defeat  the 


152  BRODERIP    V.  SALOMON.  [ciIAP.   III. 

claims  of  those  who  have  been  incautious  enough  to  trade  with  the 
company  without  perceiving  the  trap  which  he  has  hiid  for  them. 

It  is  idle  to  say  that  pei-sons  dealing  with  companies  are  protected 
by  §  43  of  the  Companies  Act,  18(32,  which  requires  mortgages  of 
limited  companies  to  be  registered,  and  entitles  creditoi-s  to  insi>ect 
tiic  register.  It  is  only  when  a  creditor  begins  to  fear  he  may  not  be 
paitl  that  he  thinks  of  looking  at  the  register;  antl  until  a  person  is  a 
creditor  he  has  no  right  of  in.spection.  As  a  matter  of  fact,  persons 
do  not  ask  to  see  mortgage  registei-s  before  they  deal  with  limiteti 
companies;  and  this  is  perfectly  well  known  to  every  one  acfiuainted 
with  the  actual  working  of  the  Companies  Acts  and  the  habits  of 
business  men.  Mr.  Aron  Salomon  and  his  advisers,  who  were  evi- 
dently very  shrewd  people,  were  fully  alive  to  this  circumstance. 

If  the  legislature  thinks  it  right  to  extend  the  principle  of  limited 
lialiility  to  sole  traders  it  will  no  doubt  do  so,  with  such  safeguards, 
if  any,  as  it  may  think  necessary.  But  until  the  law  is  changed  such 
attempts  as  these  ought  to  be  defeated  whenever  they  are  brought 
to  light.  They  do  infinite  mischief;  they  bring  into  disrepute  one  of 
the  most  useful  statutes  of  modern  times,  by  perverting  its  legitimate 
use,  and  by  making  it  an  instrument  for  cheating  honest  creditors. 

Mr.  Aron  Salomon's  scheme  is  a  device  to  defraud  creditors. 

Agreeing  as  I  do  in  substance  with  Vaughan  Williams,  J.,  I  do 
not  think  it  necessary  to  investigate  the  question  whether  the  so- 
called  sale  of  the  business  to  the  company  ought  to  be  set  aside.  The 
only  object  of  setting  it  aside  is  to  obtain  assets  wherewith  to  pay  the 
creditoi-s,  and  this  object  can  be  attained  on  sound  legal  principles 
l)y  the  order  which  he  has  made.  In  the  event,  however,  of  this 
case  going  further,  I  will  add  that  I  regard  the  so-calletl  sale  of  the 
business  to  the  company  as  a  mere  sham,  and  that  in  my  opinion  it 
might,  if  necessary,  lie  set  aside  by  Hie  company  in  the  interest  of  its 
creditors,  although  all  the  shareholders,  such  as  they  were, .knew  of 
and  assented  to  the  arrangement.  They  were  simply  assisting  Mr. 
Aron  Salomon  to  carry  out  his  scheme.  I  cannot  regard  In  re  Brit- 
ish Scaiyiless  Paper  Box  Co.,  17  Ch.D.  467,  as  an  authority  against 
a  rescission  of  such  a  transaction  as  this. 

We  have  carefully  considererl  the  proper  form  of  order  to  be  made 
on  this  appeal,  and  the  order  of  the  Court  will  be  as  follows:  The 
Court,  being  of  opinion  that  the  formation  of  the  company,  the 
agreement  of  August,  1892,  and  the  issue  of  debentures  to  Aron 
Salomon  pursuant  to  such  agreement,  were  a  mere  scheme  to  en- 
able him  to  carry  on  business  in  the  name  of  the  company  \nth 
limited  liabiUty,  contrary  to  the  true  intent  and  meaning  of  the 
Companies  Act,  1862,  and,  further,  to  enable  him  to  obtain  a  prefer- 
ence over  other  creditors  of  the  company  by  procuring  a  first  charge 
on  the  assets  of  the  company  by  means  of  such  debentures,  dismiss 
the  appeal  of  Aron  Salomon  with  costs;  and,  it  being  unnecessary  to 


CHAP.  III.]  BRODERIP    V.  SALOMON.  153 

make  any  order  on  the  liquidators'  cross-notice  of  appeal,  discharge 
the  order  directing  the  Hquidator  to  pay  costs  of  the  counter-claim, 
and  give^him  those  costs. 

Lopes,  L.J.  Tliis  is  a  case  of  very  great  importance,  and  I  wish 
shortly  to  state  my  reasons  for  concurring  in  the  judgment  just  de- 
livered. I  do  not  propose  to  restate  the  facts  so  fully  and  clearly  de- 
tailed by  LiNDLEY,  L.J. :  I  shall  content  mj^self  with  shortly-  stating 
the  impression  they  have  produced  on  m}^  mind.  The  incorpora- 
tion of  the  company  was  perfect  —  the  machinery  by  wliich  it  was 
formed  was  in  every  respect  perfect,  every  detail  had  been  observed ; 
but,  notwithstanding,  the  business  was,  in  truth  and  in  fact,  the 
business  of  Aron  Salomon;  he  had  the  beneficial  interest  in  it;  the 
company  was  a  mere  nominis  umbra,  under  cover  of  which  he  car- 
ried on  his  business  as  before,  securing  himself  against  loss  by  a 
Hmited  liability  of  11.  per  share,  all  of  which  shares  be  practically 
possessed,  and  obtaining  a  prioritj^  over  the  unsecured  creditors  of 
the  company  by  the  debentm-es  of  which  he  had  constituted  liimself 
the  holder. 

It  would  be  lamentable  if  a  scheme  hke  this  could  not  be  defeated. 
If  we  were  to  permit  it  to  succeed,  we  should  be  authorizing  a  per- 
version of  the  Joint  Stock  Companies  Acts.  We  should  be  giving 
\dtality  to  that  which  is  a  mj-th  and  a  fiction.  The  transaction  is  a 
device  to  apply  the  machinery  of  the  Joint  Stock  Companies  Act 
to  a  state  of  things  never  contemplated  by  that  Act  —  an  ingenious 
device  to  obtain  the  protection  of  that  Act  in  a  way  and  for  objects 
not  authorized  by  that  Act,  and  in  my  judgment  in  a  way  inconsis- 
tent with  and  opposed  to  its  poHcy  and  provisions.  It  never  was 
intended  that  the  company  to  be  constituted  should  consist  of  one 
substantial  person  and  six  mere  dummies,  the  nominees  of  that  per- 
son, without  any  real  interest  in  the  compan3^  The  Act  contemplated 
the  incorporation  of  seven  independent  bona  fide  members,  who  had 
a  mind  and  a  will  of  their  own,  and  were  not  the  mere  puppets  of  an 
individual  who,  adopting  the  machinery  of  the  Act,  carried  on  his 
old  business  in  the  same  way  as  before,  when  he  was  a  sole  trader. 
To  legalize  such  a  transaction  would  be  a  scandal. 

But  to  what  relief  is  the  liquidator  entitled?  In  the  circumstances 
of  this  case  it  is,  in  my  opinion,  competent  for  the  Court  to  set  aside 
the  sale  as  being  a  sale  from  Aron  Salomon  to  himself  —  a  sale  which 
had  none  of  the  incidents  of  a  sale,  was  a  fiction,  and  therefore  in- 
vahd;  or  to  declare  the  company  to  be  a  trustee  for  Aron  Salomon, 
whom  Aron  Salomon,  the  cestui  que  trust,  was  bound  to  indemnify; 
or  to  declare  the  formation  of  the  company,  the  agreement  of  Aug- 
ust, 1892,  and  the  issue  of  the  debentures  to  Aron  Salomon  pureuant 
to  such  agreement,  to  be  merely  de\^ces  to  enable  him  to  carry  on 
business  in  the  name  of  the  company  with  limited  liability,  contrary 
to  the  true  intent  and  meaning  of  the  Companies  Act,  1862,  and 


154  BRODERIP    V.  SALOMON.  [CHAP.  III. 

further,  to  enable  him  to  obtain  a  preference  over  other  creditors  of 
the  company  by  obtaining  a  first  charj^e  on  the  assets  of  the  com- 
pany by  means  of  such  debentures.  I  wish  to  add  that  I  am  in- 
clined to  think  that  a  scire  facias  would  go  to  repeal  the  certificate 
of  incorporation ;  but  I  express  no  decided  opinion  on  the  point.  The 
appeal  will  be  (hsmissed  with  costs. 

[Kay,  L.J.,  delivered  a  concurring  opinif)n.] 

From  the  above  decision,  Salomon  appealed  to  the  House  of 
Lords.  His  appeal  was  brought  in  forma  pauperis. 

Lord  Herschell.  [After  stating  the  facts,  and  reciting  the  pre- 
vious proceedings.] 

It  is  to  be  observeil  that  both  courts  treated  the  company  as  a 
legal  entity  distinct  from  iSalomon  and  the  then  members  who  com- 
posed it,  and  therefore  as  a  validly  constituted  corporation.  This  is, 
intleed,  necessarily  involved  in  the  judgment  which  declared  that  the 
company  wa.s  entitled  to  certain  rights  as  against  Salomon.  Under 
these  circumstances,  I  am  at  loss  to  understand  what  is  meant  by 
saying  that  .\.  Salomon  and  Company  Limited  is  but  an  alias  for  A. 
Salomon.  It  is  not  another  name  for  the  same  person;  the  company 
is  ex  hypothesi  a  distinct  legal  persona.  As  little  am  I  able  to  adopt 
the  view  that  the  company  was  the  agent  of  Salomon  to  carry  on  his 
business  for  him.  In  a  ixj{)ular  sense  a  company  may  in  every  ciise 
be  said  to  carry  on  business  for  and  on  behalf  of  its  shareholdei-s,  but 
this  certainly  does  not  in  point  of  law  constitute  the  relation  of  prin- 
cipal and  agent  between  them  or  render  the  shareholders  liable  to 
indemnify  the  company  against  the  debts  which  it  incurs.  Here,  it  is 
true,  Salomon  owned  all  the  shares  except  six,  so  that  if  the  business 
were  profitable  he  wouKl  be  entitled  substantially  to  the  whole  of 
the  profits.  The  other  shareholders,  too,  are  said  to  have  been 
"dummies,"  the  nominees  of  Salomon.  But  when  once  it  is  conceded 
that  they  were  indiviilual  members  of  the  company  distinct  from 
Salomon,  and  sufficiently  so  to  bring  into  existence  in  conjunction 
with  him  a  validly  constituted  coiporation,  I  am  unable  to  see  how 
the  facts  to  which  I  have  just  referred  can  affect  the  legal  position  of 
the  company,  or  give  it  rights  as  against  its  members  which  it  would 
not  otherwise  possess. 

The  Court  of  Appeal  based  their  judgment  on  the  proposition  that 
the  formation  of  the  company,  and  all  that  followed  it,  was  a  mere 
scheme  to  enable  the  appellant  to  carry  on  business  in  the  name  of 
the  company,  with  limited  liability,  contrary  to  the  true  intent  and 
meaning  of  the  Companies  Act  1862.  The  conclusion  which  they 
drew  from  this  premiss  was,  that  the  company  was  a  trustee  and 
Salomon  their  cestui  que  trust.  I  cannot  think  that  the  conclusion  fol- 
lows even  if  the  premiss  be  sound.  It  seems  to  me  that  the  logical 
result  would  be  that  the  company  had  not  been  vaUdly  constituted, 


CHAP.  III.]  BRODERIP    V.  SALOMON.  155 

and  therefore  had  no  legal  existence.  But,  apart  from  this,  it  is  neces- 
sary to  examine  the  proposition  on  which  the  court  have  rested  their 
judgment,  as  its  effect  would  be  far  reaching.  Many  industrial  and 
banking  concerns  of  the  highest  standing  and  credit  have,  in  recent 
years,  been,  to  use  a  common  expression,  converted  into  joint-stock 
companies,  and  often  into  what  are  called  "private"  companies, 
where  the  whole  of  the  shares  are  held  by  the  former  partners.  It 
appears  to  me  that  all  these  might  be  pronounced  "schemes  to  en- 
able" them  "tO' carry  on  business  in  the  name  of  the  company,  with 
limited  liability,"  in  the  very  sense  in  which  those  words  are  used  in 
the  judgment  of  the  Court  of  Appeal.  The  profits  of  the  concern 
carried  on  by  the  company  will  go  to  the  persons  whose  business  it 
was  before  the  transfer,  and  in  the  same  proportions  as  before,  the 
only  difference  being  that  the  liability  of  those  who  take  the  profits 
will  no  longer  be  unlimited.  The  very  object  of  the  creation  of  the 
company,  and  the  transfer  to  it  of  the  business,  is  that,  whereas  the 
liability  of  the  partners  for  debts  incurred  was  without  limit,  the 
liability  of  the  members  for  the  debts  incurred  by  the  company  shall 
be  limited.  In  no  other  respect  is  it  intended  that  there  shall  be  any 
difference;  the  conduct  of  the  business  and  the  division  of  the  profits 
are  intended  to  be  the  same  as  before.  If  the  judgment  of  the  Court 
of  Appeal  be  pushed  to  its  logical  conclusion  all  these  companies 
must,  I  think,  be  held  to  be  trustees  for  the  partners  who  transferred 
the  business  to  them,  and  those  partners  must  be  declared  liable, 
without  limit,  to  discharge  the  debts  of  the  company.  For  this  is 
the  effect  of  the  judgment  as  regards  the  respondent  company.  The 
position  of  the  members  of  a  company  is  just  the  same  whether  they 
are  declared  liable  to  pay  the  debts  incurred  by  the  company,  or  by 
way  of  indemnity  to  furnish  the  company  with  the  means  of  pajdng 
them.  I  do  not  think  that  the  learned  judges  in  the  court  below  have 
contemplated  the  application  of  their  judgment  to  such  cases  as  I 
have  been  considering,  but  I  can  see  no  solid  distinction  between 
those  cases  and  the  present  one. 

It  is  said  that  the  respondent  company  is  a  "one-man"  company, 
and  that  in  this  respect  it  differs  from  such  companies  as  those  to 
which  I  have  referred.  But  it  has  often  happened  that  a  business 
transferred  to  a  joint-stock  company  has  been  the  property  of  three 
or  four  persons  only,  and  that  the  other  subscribers  of  the  memo- 
randum have  been  clerks  or  other  persons  who  possessed  little  or  no 
interest  in  the  concern.  I  am  unable  to  see  how  it  can  be  lawful  for 
three  or  four  or  six  persons  to  form  a  company  for  the  purpose  of 
employing  their  capital  in  trading,  with  the  benefit  of  limited  lia- 
bility, and  not  for  one  person  to  do  so,  provided  in  each  case  the 
requirements  of  the  statute  have  been  complied  with,  and  the  com- 
pany has  been  validly  constituted.  How  does  it  concern  the  creditor 
whether  the  capital  of  the  company  is  owned  by  seven  persons  in 


156  BRODERIP    V.  SALOMON  [cHAP.  III. 

equal  shares,  with  the  right  to  an  equal  share  of  the  profits,  or  whether 
it  is  almost  entirely  owned  by  one  person  who  i)raetically  takes  the 
whole  of  the  profits?  "i'he  ere(htor  luus  notice  that  hv  is  dealing  with 
a  company  the  liability  of  the  meml)ers  of  which  is  limited,  and  the 
rej^ister  of  shareholdei-s  informs  him  how  the  shares  are  held,  and 
that  they  are  substantially  in  the  hands  of  one  person,  if  tliis  Ix?  the 
fact.  The  creditoi-s  in  the  present  case  paVe  credit  to  and  contracted 
with  a  Hmited  company;  the  effect  of  the  decision  is  to  jj;ive  them  the 
benefit  as  regards  one  of  the  shareholders,  of  unlimited  liability.  I 
have  said  that  the  liability  of  persons  carr>'inK  on  business  can  only 
be  limited  provideil  the  requirements  of  the  statute  be  complied 
with,  and  this  leads  naturally  to  the  inquiry  what  arc  those  require- 
ments? 

The  Court  of  Appeal  has  declared  that  the  formation  of  the  re- 
spondent company  and  the  agieement  to  take  over  the  business  of 
the  a[)p(Hant,  were  a  scheme  "contrary  to  the  true  intent  antl  mean- 
ing of  th(>  ( 'ompanies  Act."  I  know  of  no  means  of  ascertaining  what 
is  the  intent  and  meaning  of  the  Companies  Act  except  by  examin- 
ing its  provisions  and  finding  what  regulations  it  hjxs  imposed  as  a 
condition  of  trading  with  linnted  liability.  The  memorandum  must 
state  the  amount  of  the  capital  of  the  com[)any  and  the  numlxT  of 
shares  into  which  it  is  divided,  and  no  subscril)er  is  to  take  less  than 
one  share.  The  shares  may,  however,  l>c  of  as  small  a  nominal  value 
as  those  who  form  the  company  please;  the  statute  prescriUrs  no 
minimum,  and  though  there  must  l)e  seven  shareholders,  it  is  enough 
if  each  of  them  IkjUIs  one  share,  however  small  its  denomination. 
The  Legislature  therefore  clearly  sanctions  a  scheme  by  which  all 
the  shares,  excej^t  six,  are  owne(l  by  a  single  individual,  and  these 
six  are  of  a  value  little  more  than  nominal. 

It  was  said  that  in  the  present  ciusc  the  six  shareholders  other  than 
the  appellant  were  mere  dummies,  his  nominees,  and  held  their 
shares  in  trust  for  him.  I  will  assume  that  this  was  so.  In  my  opinion 
it  makes  no  difference.  The  statute  forbids  the  entry  in  the  register 
of  any  trust,  and  it  certainly  contains  no  enactment  that  each  of  the 
seven  persons  subscribing  the  memorandum  must  ho  beneficially  en- 
titled to  the  share  or  shares  for  which  he  subscribes.  The  persons  who 
subscribe  the  memorandum  or  who  have  agreetl  to  become  members 
of  the  company,  and  whose  names  are  on  the  register,  are  alone  re- 
garded as,  and,  in  fact,  are,  the  sharehoklere.  They  are  subject  to. 
all  the  liabilitj'  which  attaches  to  the  holding  of  the  share.  They  can 
be  compelled  to  make  any  payment  which  the  ownership  of  a  share 
involves.  Whether  they  are  beneficial  owners  or  bare  trustees  is  a 
matter  with  which  neither  the  company  nor  creditors  have  anything 
to  do;  it  concerns  only  them  and  their  cestui  que  trust  if  they  have 
any.  If,  then,  in  the  present  case  all  the  requirements  of  the  statute 
were  complied  with,  and  a  company  was  effectually  constituted,  and 


CIL\P.  III.]  CONTINENTAL    TYRE    CO.  V.  DAIMLER    CO.  157 

this  is  the  hypothesis  of  the  judgment  appealed  from,  what  warrant 
is  there  for  saying  that  what  was  done  was  contrary  to  the  true  in- 
tent and  meaning  of  the  Companies  Act? 

It  may  be  that  a  company  constituted  like  that  under  considera- 
tion was  not  in  the  contemplation  of  the  Legislature  at  the  time  when 
the  Act  authorizing  limited  liability  was  passed ;  that  if  what  is  pos- 
sible under  the  enactments  as  they  stand  had  been  foreseen,  a  mini- 
mum sum  would  have  been  fixed  as  the  least  denomination  of  share 
permissible,  and  it  would  have  been  made  a  condition  that  each  of 
the  seven  persons  should  have  a  substantial  interest  in  the  com- 
pany. But  we  have  to  interpret  the  law,  not  to  make  it;  and  it  must 
be  remembered  that  no  one  need  trust  a  limited  liability  company 
unless  he  so  please,  and  that  before  he  does  so  he  can  ascertain,  if  he 
so  please,  what  is  the  capital  of  the  company,  and  how  it  is  held. 
In  the  original  appeal,  order  appealed  from  reversed. 
In  the  cross  appeal,  order  appealed  from  affirmed. 

Note.  —  Booth  v.  Helliwell,  [1914]  3  K.B.  252.  Booth  formed  a 
company  of  which  he  was  practically  the  only  shareholder.  The 
company  carried  on  a  business,  in  the  course  of  which  a  sale  of  butter 
was  made  by  an  assistant  in  the  shop  which  was  a  violation  of  the 
Sale  of  Food  and  Drugs  Act,  1875.  Held,  that  the  assistant  was  the 
servant  of  the  company,  and  not  of  Booth. 

Cf.  Cuppens  Wooden  Ware  Co.  v.  Illinois  Mfg.  Co.,  51  La.  Ann. 
64. 


CONTINENTAL  TYRE  &  RUBBER  CO.  LTD.  v. 
DAIMLER  CO.,  LTD. 

[1915.]     1  K.B.  893. 

Lord  Reading,  J.C.  These  two  actions  are  brought  for  the  pur- 
pose of  determining  whether  during  the  war  payment  of  a  debt  can 
be  enforced  by  a  company  of  which  all  the  shareholders  and  di- 
rectors are  alien  eneinies.  In  the  first  action  Scrutton,  J.,  affirmed 
the  order  of  the  Master  giving  leave  to  sign  final  judgment  under 
Order  xiv.  In  the  second,  the  action  was  tried  before  Lush,  J.,  who 
decided  in  favour  of  the  plaintiff  company.  The  present  appeals  are 
against  both  judgments  and  by  consent  were  heard  together.  They 
have  been  ably  and  elaborately  argued  and  raise  points  of  consider- 
able importance. 

The  plaintiffs  are  a  limited  liability  company  incorporated  under 
the  Companies  Acts.  They  carry  on  business  in  London  at  the  regis- 
tered office  of  the  company  and  have  a  number  of  agencies  through- 
out the  United  Kingdom.  The  company  was  formed  in  1905  with  a 


158  CONTINENTAL    TV'RE    CO.  V.  DAIMLER    CO.         (cHAP.   III. 

capital  of  10,000/.,  increased  in  1008  to  25,000/.,  to  trade  in  motor  car 
tyres  made  in  (leriniiny  by  u  company  incorporated  under  CJermun 
law.  The  (lerinun  comijriny  formed  a  numlwr  of  subsidiary  com- 
panies in  various  parts  of  the  world  for  the  sale  of  these  tyres.  The 
plaintiff  company  w:is  formed  for  the  pur|M)se  of  selling  such  tyres 
in  the  United  Kingdom.  At  the  date  of  the  writ  the  (ierman  com- 
pany held  2;j,:il)8  shares  in  tlu'  plaintiff  company,  and  the  remaining 
shares  (except  one)  are  now  held  in'  subjects  of  the  (Icrnian  Kmpire 
residing  in  (lermany.  The  one  share  is  registere<l  in  the  name  of  the 
.secretary  of  the  company,  who  was  lx)rn  in  Clermany,  resided  in 
London,  and  in  January,  1910,  l)ecame  a  naturalize«l  subject  of  the 
Crown.  The  directors  are  subjects  of  the  (Ierman  Kmpire  and  arc 
resident  in  Germany.  The  business  is  managed  accortling  to  the 
evidence  of  the  secretary  by  two  managers  anil  himself,  all  three 
being  resident  in  this  country. 

In  the  fii-st  c:us(>  the  plaintiff  company  is  the  drawer  and  holder 
of  bills  accepted  by  the  defendants  for  goo«ls  supplied  U'fore  the 
tleclaration  of  war.  The  bills  matured  for  payment  and  were  pre- 
sentetl  after  the  declaration  of  war.  In  the  second  case  the  plaintiffs' 
claim  is  for  a  balance  (jf  a<'count  for  goo<ls  supplied  iM'fore  the  war.  It 
is  admitted  by  both  defendants  (except  lus  to  a  small  anlount  in  the 
second  action)  that  the  go<xls  have  l)ecn  delivercfl  and  that  payment 
for  them  is  due,  but  both  defendants  have  resisted  payment  on  the 
ground  that  in  the  circumstances  above  statcil  the  plaintiff  company 
w;is  not  entitled  to  receive  and  could  not  enforce  payment  of  the 
debt.  The  appellants  contend  that  the  plaintitT  company  must  l)e 
regarded  tus  an  alien  enemy  notwithstanding  that  it  is  a  limited  lia- 
bility company,  and  that  as  commercial  intercourse  l>etween  p<>r- 
sons  under  the  protection  of  the  Crown  and  pei-sons  who  are  alien 
enemies  is  illegal,  payment  to  the  plaintiff  company  must  Ik?  illegal. 
They  further  contend  that  the  Court  should  look  at  the  substance 
and  not  the  technicalities  of  the  matter.  If  the  plaintiff  company  is 
to  be  regarded  as  an  alien  enemy  the  payment  would  !)<>  illegal  under 
the  common  law  and  also  under  paragraph  5,  sub-paragraph  I,  of 
the  Royal  Proclamation  relating  to  Trading  with  the  Enemy  issued 
on  September  9,  1914.  which  forbids  payment  to  or  for  the  l)enefit 
of  an  alien  enemy,  and  is  a  Proclamation  in  force  within  s.  1,  sul)-s. 
2,  of  the  Trading  with  the  Enemy  .\ct,  1914.  The  appellants  further 
contend  that  the  directors,  having  become  alien  enemies  at  the  out- 
break of  the  war,  ceased  to  be  directors  of  the  company,  and  that  as 
no  other  directors  had  been  appointed  no  authority  had  been  or 
could  be  given  to  bring  these  actions.  These  contentions  recjuire 
careful  consideration. 

It  cannot  be  disputed  that  the  plaintiff  company  is  an  entity 
created  by  statute.  It  is  a  company  incorporated  under  the  Com- 
panies Acts  and  therefore  is  a  thing  brought  into  existence  by  virtue 


CHAP.  III.]  CONTINENTAL   TYRE    CO.  V.  DAIMLER    CO.  159 

of  statutory  enactment.  At  the  outbreak  of  war  it  was  carrying  on 
business  in  the  United  Kingdom ;  it  had  contracted  to  supply  goods, 
it  dehvered  them,  and  until  the  outbreak  of  the  war  it  was  admittedly 
entitled  to  receive  payment  at  the  due  dates.  Has  the  character  of 
the  company  changed  because  on  the  outbreak  of  war  all  the  share- 
holders and  directors  resided  in  an  enemy  country  and  therefore 
became  alien  enemies?  Admittedly  it  was  an  English  company  before 
the  war.  An  English  company  cannot  by  reason  of  these  facts  cease 
to  be  an  English  company.  It  remains  an  English  company  regardless 
of  the  residence  of  its  shareholders  or  directors  either  before  or  after 
the  declaration  of  war.  Indeed  it  was  not  argued  by  Mr.  Gore- 
Browne  that  the  company  ceased  to  be  an  entity  created  under 
English  law,  but  it  was  argued  that  the  law  in  time  of  war  and  in 
reference  to  trading  with  the  enemy  should  sweep  aside  this  "techni- 
cality" as  the  entity  was  described  and  should  treat  the  company 
not  as  an  English  company  but  as  a  German  company  and  therefore 
as  an  alien  enemy.  If  the  creation  and  existence  of  the  company 
could  be  treated  as  a  mere  technicality,  there  would  be  considerable 
force  in  this  argument.  It  is  undoubtedly  the  policy  of  the  law  as 
.administered  in  our  courts  of  justice  to  regard  substance  and  to  dis- 
regard form.  Justice  should  not  be  hindered  by  mere  technicality, 
but  substance  must  not  be  treated  as  form  or  swept  aside  as  tech- 
nicality because  that  course  might  appear  convenient  in  a  particular 
case.  The  fallacy  of  the  appellants'  contention  lies  in  the  suggestion 
that  the  entity  created  by  statute  is  or  can  be  treated  during  the  war 
as  a  mere  form  or  technicality  by  reason  of  the  enemy  character  of 
its  shareholders  and  directors.  A  company  formed  and  registered 
under  the  Companies  Acts  has  a  real  existence  with  rights  and  lia- 
bihties  as  a  separate  legal  entity.  It  is  a  different  person  altogether 
from  the  subscribers  to  the  memorandum  or  the  shareholders  on  the 
register  (per  Lord  Macnaghten  in  Salomon  v.  Salomon  &  Co.,  [1897] 
A.C.  22,  at  p.  51.  It  cannot  be  technically  an  English  company  and 
substantially  a  German  company  except  by  the  use  of  inaccm-ate 
and  misleading  language.  Once  it  is  vaHdly  constituted  as  an  Eng- 
lish company  it  is  an  artificial  creation  of  the  Legislature  and  it  re- 
tains its  existence  for  all  intents  and  purposes.  It  is  a  li\dng  thing 
with  a  separate  existence  which  camiot  be  swept  aside  as  a  technical- 
ity. It  is  not  a  mere  name  or  mask  or  cloak  or  device  to  conceal  the 
identity  of  persons  and  it  is  not  suggested  that  the  company  was 
formed  for  any  dishonest  or  fraudulent  purpose.  It  is  a  legal  body 
clothed  with  the  form  prescribed  by  the  Legislature. 

In  determining  whether  a  company  is  an  English  or  foreign  cor- 
poration no  inquiry  is  made  into  the  share  register  for  the  purpose 
of  ascertaining  whether  the  members  of  the  company  are  English  or 
foreign.  Once  a  corporation  has  been  created  in  accordance  with  the 
requirements  of  the  law  it  is  an  English  company  notwithstanding 


IGO  CONTINENTAL    TYRE    CO.  V.  DAIMLER    CO.  [cHAP.  III. 

that  all  its  shareholders  may  be  foreign.  Just  as  a  foreign  corpora- 
tion does  not  become  British  und  cease  to  be  foreign  if  all  its  imciu- 
bers  are  subjects  of  the  British  Crown  (per  Lonl  Mac\a(;hten,  IjuxI 
Brampto.v,  and  Lord  Lindley  in  Janson  v.  Driefuntein  Consul itlated 
Mines,  [1902]  A.C.  484,  at  pp.  497,  501,  and  505).  For  the  appellants' 
contention  to  succeed  payment  to  the  company  must  be  treated  as 
payment  to  the  shareholders  of  the  company,  but  a  debt  due  to  a 
company  is  not  a  debt  due  to  all  or  any  of  its  shareholders:  Salomon 
V.  Salomon  &  Co.,  [1897]  A.C.  22.  The  company  and  the  company 
alone  is  the  creditor  entitled  to  enforce  payment  of  the  debt  and 
empowered  to  give  to  the  debtor  a  good  and  valid  discharge.  Once 
this  conclusion  is  reached  it  follows  that  jiayment  to  the  ))laintiff 
comjiany  is  not  payment  to  the  alien  enemy  shareholdei-s  or  for  their 
benefit. 

The  same  result  is  an-ived  at  under  paragi'aph  3  of  the  above  men- 
tioned Proclamation.  It  defines  "enemy"  in  paragraph  3.  "The  ex- 
pres.sion  'enemy'  in  this  Proclamation  means  any  pei-son  or  boily 
of  persons  of  whatever  nationality  resident  or  carrying  on  business 
in  the  enemy  country,  but  does  not  include  persons  of  enemy  na- 
tionality who  are  neither  resident  nor  carrying  on  business  in  the 
enemy  country.  In  the  case  of  incorporated  bodies,  enemy  char- 
acter attaches  only  to  those  incor|)orated  in  an  enemy  country." 

Therefore  although  paj'ment  is  forbidden  "to  or  for  the  Ixmefit 
of  an  enemy"  this  prohil)ition  does  not  ajjply  when  payment  is  made 
to  a  company  incorporated  in  this  country.  Under  this  Proclama- 
tion it  appears  clear  that  the  test  of  resilience  or  jilace  of  carrying 
on  business  to  determine  whether  an  incorporated  body  was  enemy 
or  not  is  not  to  be  applied.  The  company  only  becomes  enemy  if  in- 
corporated in  the  enemy  country,  and  as  the  plaintiff  company  was 
not  incorporated  in  the  enemy  country,  enemy  character  does  not 
attach  to  it.  Further  it  is  provided  by  §  1,  sub-section  2,  of  the 
Trading  with  the  Enemy  Act,  1914,  that  any  transaction  permitted 
by  or  under  any  Proclamation  issued  by  His  Majesty  dealing  with 
trading  with  the  enemy  shall  not  be  deemed  to  be  trading  with  the 
enemy.  As  by  the  Proclamation  enemy  character  attaches  only  to 
those  incorporated  in  a  foreign  country  it  follows  that  payment  to  a 
company  incoiporated  in  this  country  is  not  only  not  forbidden,  but 
is  in  our  opinion  impliedly  permitted.  (Both  in  the  Proclamation  and 
the  statutes  relating  to  trading  with  the  enemy  the  adjective  "alien" 
is  not  used,  doubtless  because  it  was  thought  superfluous  when  once 
"enemy"  had  been  defined.) 

It  must,  however,  be  clearly  understood  that  any  person  who  on 
behalf  of  the  plaintiff  company  paid  money  to  shareholders  resident 
or  carr^-ing  on  business  in  Germany  or  to  a  company  incorporated  in 
Germany  would  be  acting  in  defiance  of  the  law,  and  none  the  less  be- 
cause payment  is  made  in  the  name  of  the  company.  That  would  be 


CHAP.  III.]  CONTINENTAL    TYRE    CO.  V.  DAIMLER    CO.  161 

a  criminal  offence  and  would  be  within  the  express  prohibition  of 
paragraph  5,  sub-paragraph  1,  as  defined  by  paragraph  3.  The  plain- 
tiff company  has  never  claimed  any  such  right  and  has  explicitly 
disclaimed  any  such  intention.  According  to  the  evidence  money  re- 
ceived is  paid  into  the  plaintiffs'  banking  account  and  9000/.  per 
month  is  drawn  out  and  paid  into  another  account  of  the  plaintiff 
company  at  the  bank  for  the  purpose  of  meeting  expenses  and  estab- 
lishment charges  throughout  the  United  Kingdom;  the  remainder 
of  the  money  received  is  left  to  accumulate  in  the  bank. 

It  is  to  be  observed  that  if  payment  to  a  company  would  be  pay- 
ment 'Ho  or  for  the  benefit  of  an  enemy"  because  all  the  share- 
holders are  enemies  and  because  pajnnent  to  the  company  must  be 
regarded  as  payment  to  the  shareholders  it  would  seem  to  follow 
that  payment  of  a  debt  to  a  company  which  had  some  enemy  share- 
holders would  equally  come  within  the  forbidden  area.  The  appel- 
lants' answer  is  that  their  contention  extends  at  most  to  those  com- 
panies in  which  enemy  shareholders  are  in  the  majority  and  in  such 
circumstances  as  would  lead  to  the  conclusion  of  fact  that  substan- 
tially the  company  is  enemy.  Further  if  this  contention  were  re- 
jected it  is  urged  that  when  as  in  the  present  case  all  the  shareholders 
and  directors  are  enemies  there  is  no  room  for  doubt  as  to  the  fact 
and  a  decision  in  the  appellants'  favour  could  be  confined  to  the 
special  facts.  There  does  not  appear  to  be  any  logical  ground  for 
these  distinctions.  If  it  were  perixiissible  to  look  behind  the  exist- 
ence of  the  entity  and  to  regard  the  character  of  the  individual  share- 
holders in  order  to  determine  whether  or  not  the  payment  is  'Ho  or 
for  the  benefit  of  an  enemy"  the  suggested  fine  of  demarcation  would 
be  wholly  arbitrary.  If  payment  to  a  company  with  a  majority  of 
enemy  shareholders  is  to  be  regarded  as  pa;^'ment  to  an  enemy  com- 
pany, what  is  the  position  of  the  other  shareholders?  Can  it  be  sug- 
gested that  the  minority  consisting  of  British  or  neutral  shareholders 
cease  to  be  shareholders  in  an  English  company  and  become  members 
of  an  enemy  corporation? 

There  is  no  judicial  authority  for  the  proposition  of  the  appellants 
and  indeed  there  is  a  weight  of  judicial  opinion  against  it.  See  Salo- 
mon V.  Salomon  &  Co.,  [1897]  A.C.  22,  and  Janson  v.  Brief ontein 
Consolidated  Mines,  [1902]  A.C.  484.  Gramophone  and  Typewriter 
V.  Stanleij,  [1908]  2  K.B.  89,  is  a  recent  instance  of  the  refusal  of  the 
court  to  treat  the  entity  of  a  company  as  a  mere  form  or  technicality. 
The  Commissioners  of  Inland  Revenue  sought  to  make  the  Gramo- 
phone Company,  which  was  an  English  company,  liable  to  pay  in- 
come tax  in  respect  of  profits  made  by  a  German  company  in  which 
the  English  company  held  all  the  shares.  None  of  such  profits  had 
l)een  received  by  the  English  company  in  this  country,  but  it  was 
sought  to  treat  the  profits  of  the  German  company  for  the  purpose 
of  income  tax  as  if  they  were  the  profits  of  the  English  company.  The 


162  CONTINENTAL   T'i'RE    CO.  I'.  DAIMLER    CO.  (ciL\P.  III. 

Court  of  Appeal  was  of  opinion  that  the  business  of  the  German  com- 
pany had  not  l)ocoine  the  business  of  the  English  company.  Not- 
withstanding that  the  Enj^Ush  company  lu-Kl  all  the  shares  in  the? 
German  company,  the  English  company  coukl  not  l>e  treated  as  hav- 
ing any  right  to  the  undistributed  profits  of  the  German  company. 
A  fortiori  it  could  not  havt;  any  right  to  the  payment  of  a  debt  due 
to  the  German  company.  See  also  Kodak  v.  Clark,  [1902J  2  K.B.  450; 
[1903]  1  K.B.  505. 

The  argument  of  the  appellants  that,  although  the  plaintiff  com- 
pany was  an  English  company  in  times  of  peace,  it  could  not  be  so 
regarded  in  time  of  war  was  further  supportetl  by  Mr.  Leslie  Scott 
on  the  ground  that  the  plaintiff  company  could  not  be  regarded  as 
a  subject  of  the  Crown.  He  said  the  company  coultl  not  l>c  a  subject, 
it  had  no  mind,  it  could  not  be  loyal  or  disloyal  to  the  State.  He 
urged  that  alone  the  character  of  the  shareholders  must  determine 
whose  subject  the  plaintiff  company  is,  and  that  when  all  the  share- 
holders are  enemy  the  plaintiff  company  is  enemy.  This  point  was 
discussed  in  Janson  v.  Dricfontcin  Consolidated  Mines,  [1902]  A.C. 
484.  The  litigation  arose  out  of  the  South  .Vfrican  war.  The  re- 
spondent corporation  was  formed  and  registered  in  the  Transvaal 
Republic;  most  of  the  .shareholders  were  resident  out.side  the  Repub- 
Uc,  and  were  not  subjects  of  it.  The  appellant,  an  underwriter  and 
aBritish  subject,  objected  that  the  corporation  was  alien  enemy  and 
could  not  sue.  It  was  argued  for  the  respondents  that  the  corpora- 
tion should  not  be  regarded  as  subject  to  the  laws  of  the  Transvaal 
and  as  alien  enemy.  None  of  their  Lordships  favoured  that  view. 
Some  of  their  Lordships  a.ssumed  for  the  purpose  of  the  ca.se,  but  did 
not  decide,  that  the  comjiany  remained  an  alien  enemy  notwith- 
stantling  that  most  of  the  shareholders  were  not  alien  enemies  (see 
Lord  Halsbury,  p.  490,  Lord  Macnaghten,  p.  497,  and  possibly 
Lord  DAVf:Y  only  a.ssumed  it,  p.  498).  Lord  Lindley  (p.  505)  was 
of  opinion  that  the  company  nmst  be  regarded  as  resident  and  carry- 
ing on  business  in  the  Transvaal  and  subject  to  the  laws  of  that 
country,  and  he  added:  "When  war  broke  out  the  company  became 
an  alien  enemy  of  this  country:  see  the  American  case  of  Society  for 
the  Propagation  of  the  Gospel  v.  Wheeler,  2  Gallison  (U.S.)  105.  If  it 
becomes  material  to  attribute  nationality  to  the  company  it  would, 
in  my  opinion,  be  correct  to  say  that  the  company  was  a  Transvaal 
company  and  a  subject  of  the  Transvaal  Government,  although  al- 
most all  its  shareholders  were  foreigners  resident  elsewhere  and  sub- 
jects of  other  countries."  Lord  Brampton,  at  p.  501,  said:  "The 
company  clearly  must  be  treated  as  a  subject  of  the  Republic,  not- 
withstanding the  nationaUty  of  its  shareholders."  These  opinions 
are  not  to  be  taken  as  part  of  the  actual  decision,  nevertheless  they 
are  opinions  of  great  weight.  In  Daniel  v.  The  Award  of  the  Coju- 
missioners  for  Liquidating  British  Claims  on  France,  2  Knapp,  P.C. 


CHAP.  III.]  CONTINENTAL   TYRE    CO.  z;.  DAIMLER    CO.  163 

23,  and  in  Long  v.  the  Same,  2  Knapp,  P.C.  51,  it  was  held  by  the 
Privy  Council  that  a  corporation  of  British  subjects  existing  in  a 
foreign  country  and  under  control  of  a  foreign  Government  must  be 
considered  as  a  foreign  corporation,  and  was,  therefore,  not  entitled 
to  claim  compensation  under  a  treaty  giving  this  right  to  British 
subjects.  The  corporation  was  the  subject  of  the  foreign  State,  and 
not  of  the  British  Crown.  Even  in  reference  to  the  ownership  of  a 
ship  it  was  held  in  The  Queen  on  the  Prosecution  of  the  Pacific  Steam 
Navigation  Company  v.  Arnaud  and  Powell,  (1846)  16  L.J.  (Q.B.) 
50,  that,  notwithstanding  that  some  of  the  members  of  the  corpora- 
tion were  not  British  subjects  but  foreigners,  the  British  corporation 
was  the  sole  owner  of  the  ship  and  a  British  subject.  None  of  these 
authorities  lend  support  to  the  appellants'  argument;  they  tend 
rather  to  assist  the  plaintiff's  case. 

There  remains,  however,  the  case  decided  in  1809,  Bank  of  the 
United  States  v.  Deveaux,  5  Cranch,  61,  upon  which  much  reliance 
was  placed  by  Mr.  Leslie  Scott.  The  Supreme  Court  of  the  United 
States  there  decided  that  the  Court  could  look  beyond  the  corpo- 
rate name  and  notice  the  character  of  the  individuals  who  composed 
the  corporation  and  treat  them  substantially  as  parties  to  the  con- 
troversy. The  question  at  issue  arose  from  a  pecuHarity  of  the  Con- 
stitution of  the  United  States.  The  State  Courts  alone  have  juris- 
diction to  try  all  civil  actions  except  in  certain  cases  reserved  by  the 
Constitution  and  the  Judiciary  Law  to  the  Federal  Courts.  One  of 
these  reserved  cases  is  where  a  citizen  of  one  State  sues  a  citizen  of 
another.  A  suit  having  been  brought  in  the  Federal  Court  in  the  cor- 
porate name  of  the  bank,  it  was  held  by  the  Supreme  Court  that  a 
corporation  aggregate  cannot  in  its  corporate  capacity  be  a  citizen, 
and,  therefore,  had  no  right  of  access  to  the  Federal  Court,  though  it 
was  incorporated  in  and  by  one  State  and  was  suing  the  citizen  of 
another  State.  However,  Marshall,  C.J.,  who  delivered  the  opinion 
of  the  Court,  held  that,  although  the  corporation  could  not  be  a 
citizen,  the  Court  could  look  behind  the  corporate  name  to  ascertain 
the  individuals  composing  it,  so  as  to  determine  whether  they  were 
citizens  of  one  State  suing  the  citizens  of  another.  The  learned  Chief 
Justice  based  his  judgment  upon  City  of  London  v.  Wood,  (1701) 
12  Mod.  669,  which  he  treated  as  an  authority  for  his  decision  that 
the  Court  could  look  behind  the  corporate  name.  Upon  an  examina- 
tion of  that  case,  and  notwithstanding  the  high  authority  of  the 
learned  Chief  Justice,  it  does  not  support  so  sweeping  a  proposition. 
It  was  a  case  of  a  very  special  character.  An  action  was  brought  by 
the  Mayor  and  Commonalty  of  the  City  of  London  in  the  Court  of 
the  Mayor  and  Aldermen  of  London.  Objection  was  taken  that  the 
Mayor,  who  was  the  head  of  the  City,  without  whom  the  City  had 
no  abihty  or  capacity  to  sue,  was  also  the  very  person  before  whom 
the  action  was  brought  for  trial.  The  Court  of  Kmg's  Bench  natur- 


164  CONTINENTAL    TYRE    CO.  I'.  DAIMLER    CO.         [cHAP.   III. 

ally  shrank  from  uj)hoklinK  a  judgment  given  under  such  circum- 
stances, and  held  that  the  objection  was  fatal,  upon  the  principle 
that  a  judge  must  not  be  an  interested  party  in  the  suit  before  him. 
A  person  cannot  i)e  l)oth  party  and  judge  in  the  same  suit.  The 
familiar  instance  is  that  of  a  judge  who  is  a  sharehokh'r  in  a  railway 
company  suetl  for  damages.  It  is  the  judge's  duty  to  declare  his 
interest  to  the  parties,  and  unless  they  agree  to  waive  any  objection 
he  cannot  try  the  case.  The  ai)sence  of  such  declaration  and  a.ssent 
of  the  parties  is  the  explanation  of  this  ca.se.  It  is  to  be  observed 
that  in  the  decisions  of  our  Courts  this  case  has  not  been  relied  upon, 
and  certainly  has  not  been  foUoweil,  lus  an  authority  for  any  such 
proposition  jus  was  argued  l)cfore  us. 

Since  the  argument  an  examination  of  American  authorities  has 
disclosed  that  the  C!i.se  of  Hank  of  the  i'nitid  States  v.  Dcvcaux,  5 
Cranch,  61,  has  not  since  its  decision  found  favour  in  the  Supreme 
Court  of  the  United  States.  In  1844,  in  the  case  of  Louisi'illc  Rail- 
road Co.  v.  Letson,  (1844)  2  Howard  407,  at  p.  55.5,  the  Supreme 
('ourt  thought  that  that  c:use  had  gone  too  far  and  held  that  "a 
corporation  created  by  a  State  to  perform  its  functions  under  the 
authority  of  that  State  and  only  suable  there,  though  it  may  have 
memlxM-s  out  of  the  State,  s(M>ms  to  us  to  be  a  person,  though  an 
artificial  one.  inhabiting  and  l)elonging  to  that  State,  and  therefore 
entitled,  for  the  purpo.sc  of  suing  and  l)eing  sued,  to  be  deemed  a 
citizen  of  that  State.  We  remark  too  that  the  cases  of  Strawbridge 
and  Curtis  and  the  Bank  and  Deveaux  have  never  been  satisfactory 
to  the  Bar,  and  that  they  were  not.  especially  the  last,  entirely  satis- 
factory to  the  Court  that  maile  them.  They  have  l)een  followed  al- 
ways most  reluctantly  and  with  dissati.sfaction.  By  no  one  was  the 
conectness  of  them  more  fjucstioned  than  by  the  late  Chief  Justice 
who  gave  them.  It  is  within  the  knowledge  of  .several  of  us  that  he 
repeatedly  expressed  regret  that  those  decisions  had  l)een  made, 
adding,  whenever  the  subject  was  mentioned,  that  if  the  point  of 
jurisdiction  was  an  original  one,  the  conclusion  would  be  different. 
We  think  we  may  .safely  a.ssert  that  a  majority  of  the  members  of 
this  Court  have  at  all  times  partaken  of  the  .same  regret,  and  that 
whenever  a  case  has  occurred  on  the  circuit  involving  the  application 
of  the  ca.se  of  the  Bank  and  Deveaux  it  was  yielded  to,  because  the 
decision  had  been  made,  and  not  because  it  was  thought  to  be  right." 
In  1895,  in  the  case  of  St.  Louis  and  San  Fra;)c/.sco  Railway  v.  James, 
(1896)  161  U.S.  545,  the  Supreme  Court  again  approved  the  view 
that  the  Bank  and  Deveaux  had  gone  too  far,  and  held  that  there 
was  an  indisputable  legal  presumption  that  a  corporation  is  com- 
posed of  citizens  of  the  State  which  created  it  and  that  presumption 
of  citizenship  is  one  of  law  not  to  be  defeated  by  evidence  to  the  con- 
trary. Although  not  binding  upon  us,  the  decision  of  Mar.shall,  C.  J., 
and  of  the  Supreme  Court  is  entitled  to  our  very  high  respect,  and 


CHAP.  III.]  CONTINENTAL    TYRE    CO.  V.  DAIMLER    CO.  165 

this  has  caused  us  to  give  our  most  careful  consideration  to  this 
judgment.  It  is  satisfactory  to  find  in  the  result  that  the  law  of  the 
United  States  is  that  the  corporation  is  regarded  as  a  citizen  of  the 
State  in  which  it  is  created,  and  is,  therefore,  not  in  conflict  but  in 
harmony  with  our  law. 

It  was  further  contended  on  behalf  of  the  appellants  that  such 
technicalities  have  not  been  allowed  to  bind  the  decisions  of  the 
Prize  Court,  and  the  case  of  The  Tommi,  [1914]  P.  251,  was  cited. 
The  President  there  said:  ''The  decision  as  to  when  property  passes 
is  often  very  difficult  when  dealing  with  municipal  law.  It  depends 
upon  fine  technicalities;  but  the  Uke  technicalities  have  not  been 
allowed  to  bind  the  decisions  of  the  Prize  Courts  when  transfers  of 
property  are  attempted  when  war  is  actual  or  imminent.  They  have 
been  treated  as  gossamer,  which  can  be  wiped  entirely  aside,  be- 
cause the  Prize  Court  regards  the  essential  qualities  of  a  transac- 
tion, and  tries  to  arrive  at  the  realities  of  the  case.  ..."  It  is  suffi- 
cient for  the  purpose  of  this  case  to  say  that  in  this  Court  we  are 
administering  the  municipal  law  and  must  follow  it.  In  the  later  case 
of  The  Roumanian,  [1915]  P.  26,  decided  on  December  7,  1914,  a 
point  more  closely  resembling  that  in  these  appeals  came  before  the 
President.  It  was  a  claim  to  resist  condemnation  of  the  cargo  ex  the 
vessel  on  the  ground  that  the  owner  of  the  cargo,  the  Europaische 
Petroleum  Union,  though  a  company  incorporated  at  Bremen  un- 
der the  laws  of  the  Empire  of  Germany,  was  in  substance  and  reality 
a  company  owned  and  controlled  by  companies  or  firms  in  allied  or 
neutral  countries.  In  fact  only  10  per  cent,  of  the  shareholders  of 
the  company  were  alien  enemies,  the  other  90  per  cent,  being  allies 
or  neutrals.  The  learned  President  in  giving  judgment  says:  "Neu- 
tral bodies  and  subjects  are  shareholders  to  a  considerable  extent  in 
this  company.  It  is  a  corporate  body  duly  incorporated  under  the 
laws  of  Germany  and  as  such  entered  an  appearance  in  these  pro- 
ceedings. There  was  some  discussion  in  argument  as  to  its  constitu- 
tion, but  it  was  not  really  denied  that  it  was  a  German  company. 
It  clearly  is."  The  owner  of  the  cargo  of  oil  being  therefore  an  enemy 
company,  the  decree  for  condemnation  was  made  and  the  German 
company's  claim  failed.  The  decision  in  The  Roumanian,  [1915]  P. 
26,  shows  that  the  character  of  the  entity  and  not  of  the  shareholders- 
was  regarded.  That  is  in  accordance  with  the  municipal  law  and  is 
unfavourable  to  the  appellants'  argument  before  us. 

Lastly  we  were  invited  to  decide  against  the  plaintiff  company 
on  the  ground  that  to  allow  it  to  recover  debts  during  the  war  would 
be  against  pubHc  policy.  A  somewhat  similar  argument  was  ad- 
dressed to  the  House  of  Lords  in  Janson  v.  Driefontein  Consoli- 
dated Mines,  [1902]  A.C.  484,  but  it  found  no  favour  with  any  of  their 
Lordships.  If  the  law  on  this  subject  had  hitherto  been  in  doubt, 
which  it  was  not,  it  was  firmly  and  finally  settled  in  that  case.  Noth- 


166  CON'TINENTAL   Ti-RE    CO.  I'.  DAIMLER    CO.         [cHAP.  III. 

ing  would  more  oiisily  tend  to  create  uncertainty  and  confu.sion  in 
our  law  tlian  to  allow  considerations  of  public  policy  as  distingui.shed 
from  law  based  upon  jiublic  policy  to  Ik?  a  pround  of  judicial  de- 
cision: .see  Jansan  v.  Driefontein  ('(nisitlitlaUd  Mines,  [1902]  A.C.  at 
p.  490.  The  law  is  admirably  laitl  down  by  Pauke,  H.,  in  tUjerton  v. 
L(rrd  Brownlow  and  Others,  (1853)  4  H.L.C.  1,  at  p.  123,  ant!  quoted 
by  Lord  Halsbury  in  Janson's  Case,  [1902]  A.C.  at  p.  490.  *'  It  is  the 
I)rovince  of  the  statesman,  and  not  the  lawyer,  to  discuss,  and  of  the 
Legislature  to  determine,  what  is  the  best  for  the  public  pood,  and  to 
provide  for  it  by  proper  enactments.  It  is  the  province  of  the  judge 
to  expound  the  law  only ;  the  written  from  the  sttitutes:  the  unwritten 
or  connnon  law  from  the  decisions  of  our  prcclccessors  and  of  our  ex- 
isting ("ourts,  from  text-writers  of  acknowledged  authority,  and  ujx)n 
the  principles  to  \)c  clearly  deduced  from  them  by  .sound  rejison  and 
ju.st  inference;  not  to  speculate  upon  what  is  the  Ix^st,  in  his  opinion, 
for  the  advantage  of  the  community.  Some  of  these  decisions  may 
have  no  doubt  been  founded  upon  the  prevailing  and  just  opinions  of 
the  public  good;  for  instance,  the  illegality  of  covenants  in  restraint 
of  marriage  or  trade.  They  have  l>ecome  a  part  of  the  recognised 
law,  and  we  are  therefore  hound  by  them,  but  we  are  not  thereby 
authorised  to  establish  ;us  law  everything  which  we  may  think  for 
the  public  good,  and  prohibit  everything  which  we  think  otherwise." 

These  weighty  and  well  chosen  words  uttered  by  a  miuster  of  the 
common  law  and  approved  in  1902  by  the  House  of  Lords  are  a  con- 
clusive answer  to  the  argument  addres.sed  to  us  on  public  policy. 

[The  court  then  considered  the  (juestion  whether  there  was  author- 
ity in  the  solicitor  to  issue  a  writ  or  to  continue  the  action  in  behalf 
of  the  i)laintitT  company;  and  held  that  there  wius  such  authority.] 

In  our  opinion  both  appeals  must  l)e  dismissed  with  costs.  This 
is  the  judgment  of  all  th(^  memi)ers  of  the  Court  except  Buckley, 
L.J.  The  late  Ke.wkdv.  L.J.,  had  read  the  judgment  I  have  just 
delivered  and  approved  it  Ix^fore  his  death. 

Buckley,  L.J.  I  regret  that  I  am  unable  to  concur  in  the  judg- 
ment just  delivered.  I  regard  the  question  jus  so  momentous  that  I 
make  no  apology  for  stating  as  clearly  as  I  am  able  my  reasons  for 
arriving  at  a  contrary'  conclusion. 

The  artificial  legal  entity  created  by  incorporation  under  the  Com- 
panies Acts  is  a  legal  person  existing  apart  from  its  corporators. 
This  proposition  is  true  without  exception,  and  nothing  in  this  judg- 
ment questions  the  proposition  in  any  way.  If  there  be  twelve 
corporators  one  of  them  is  not  a  twelfth  or  any  other  part  of  the 
corporation.  The  total  number  of  twelve  do  not  in  the  aggregate 
constitute  the  corporation.  On  the  other  hand  the  corporation  can- 
not exist  without  corporators.  If  there  are  no  corporatore  there  can 
be  no  corporation.  Corporators  are  essential  to  the  existence  of 
but  form  no  part  of  the  corporation. 


CHAP.  III.]  CONTINENTAL   TYRE    CO.  V.  DAIMLER    CO.  167 

The  artificial  legal  person  called  the  corporation  has  no  physical 
existence.  It  exists  only  in  contemplation  of  law.  It  has  neither 
body,  parts,  nor  passions.  It  cannot  wear  weapons  nor  serve  in  the 
wars.  It  can  be  neither  loyal  nor  disloyal.  It  cannot  compass  treason. 
It  can  be  neither  friend  nor  enemy.  Apart  from  its  corporators  it  can 
have  neither  thoughts,  wishes,  nor  intentions,  for  it  has  no  mind 
other  than  the  minds  of  the  corporators.  These  considerations  seem 
to  me  essential  to  bear  in  mind  in  determining  the  present  case. 

The  corporation  if  it  be  a  British  corporation  stands  in  the  same 
position  for  most  purposes  as  a  British  subject.  For  instance  as  re- 
gards rights  of  ownership  of  property  and  the  right  to  protection  and 
assistance  by  the  law.  But  while  it  stands  for  most  purposes  in  the 
position  of  a  British  subject  it  cannot,  I  think,  be  correctly  described 
as  a  British  subject.  A  subject  must,  I  conceive,  be  one  who  can 
owe  and  pay  allegiance  to  the  King,  who  can  serve  the  King  physi- 
cally, for  instance  if  he  be  a  male  by  wearing  weapons  and  serving 
in  the  wars,  who  has  a  mind  and  can  be  either  loyal  or  disloyal  to  the 
King.  None  of  these  can  be  predicated  of  the  abstract  legal  entity. 
It  has  no  existence  at  all  except  in  contemplation  of  law.  If  these 
propositions  be  true,  as  I  think  they  are,  they  seem  to  me  to  go  to 
the  root  of  the  question  which  has  in  this  case  to  be  determined. 

This  corporation  is  one  which  as  a  corporation  certainly  has  in 
law  an  independent  legal  existence  and  that  legal  person  is  British. 
But  on  the  other  hand  all  its  directors  are  Germans  resident  in  Ger- 
many. The  holders  of  all  its  25,000  shares  except  one  share  are  Ger- 
mans resident  in  Germany.  The  artificial  legal  thing  is  British,  resi- 
dent in  England.  But  all  its  corporators  who  can  have  thoughts, 
wishes,  or  intentions  are  Germans  resident  in  Germany. 

The  question  for  determination  is  whether  when  all  the  natural 
persons  who  express  and  give  effect  to  their  wishes  through  the  cor- 
poration as  a  legal  abstraction  are  Germans  resident  in  Germany  the 
corporation  can  sue  in  this  country  because  those  persons  who  could 
not  sue  are  as  matter  of  law  absorbed  in  a  separate  legal  person 
which  is  British  and  which  (regarding  the  corporation  as  a  legal 
person  existing  apart  from  and  irrespective  of  its  corporators)  can 
sue. 

The  contractual  relations  constituted  by  membership  in  a  cor- 
poration under  the  Companies  Acts  are  singular.  The  relation  be- 
tween each  corporator  and  the  corporation  is  a  contractual  relation 
governed  by  the  statute,  involving  rights  within  the  corporation, 
rights  against  the  corporation,  and  liabilities  towards  the  corporation. 
Where  the  corporator  is  an  alien  enemy  these  relations  may  be  vitalty 
affected  by  a  state  of  war.  The  motive  power  of  the  corporation 
(which  in  itself  apart  from  its  corporators,  or  its  agents  —  ap- 
pointed and  authorized  through  acts  done  by  the  corporators  —  has 
no  life  and  no  power  of  action)  may  become  paralysed  and  suspended 


168  '  CONTINENTAL    TYRE    CO.  V.  DAIMLER    CO.  [ciIAP.   III. 

by  the  existence  of  war  in  a  ca.se  where  every  corporator  is  as  an 
alien  enemy  under  di.sability  jus  such. 

Suppose  the  case  of  a  corporation  sole.  A  private  company  may 
be  formed  consisting  of  only  two  persons.  It  was  much  debated  a  few 
years  ago  whether  the  law  should  not  be  .so  altered  ;us  to  allow  a  sole 
person  to  incoi'porate  himself  lus  a  company  with  limited  liability. 
Suppose  that  were  the  law,  and  an  individual  German  resident  in 
Germany,  an  alien  enemy  in  fact,  became  incorporated  here  Jts  a 
British  company,  could  it  be  seriously  contended  that  in  time  of  war 
that  aUen  enemy  becau.se  he  had  ac(|uired  a  legal  corporate  name  and 
had  an  artificial  legal  existence  in  this  country  wtus  conseciuently  for 
the  present  purpcse  not  an  alien  enemy?  Does  it  make  any  difTerCnce 
that  there  must  be  two  persons,  or  again  does  it  make  a  difference 
that  the  number  is  seven  or  ten?  The  niunber  of  corporatoi-s  in  the 
present  company  is  six. 

The  immen.se  importance  of  the  question  whether  it  is  impossii)le 
for  any  purpose  to  look  l)ehind  the  corporation  at  the  person  of  the 
corporator  may  l)e  illustrated  by  the  c;usc  of  merchant  shipjMng. 
Under  §  1  ((/)  of  the  Merchant  Shipping  Act,  1S94,  ships  ownccl  l)y 
a  shipping  company  incorporated  in  this  country  are  British  ships. 
The  individual  members  of  that  body  corporate  may  be  aliens.  If  the 
pei"sonality  of  the  coi-porators  can  for  no  purpo.se  be  regarded  there 
is  nothing  to  prevent  alien  enemies  from  owning  and  sailing  British 
ships  under  the  British  flag.  If  this  judgment  l)e  (as  having  regard  to 
the  judgment  of  the  other  members  of  the  Court  I  mu.st  a.ssume  that 
it  is)  wrong,  the  matter  is  one  which  calls  urgently  for  legislation. 

Th(>  proposition  that  an  alien  enemy  cannot  sue  rests,  I  conceive, 
upon  the  proposition  that  such  an  one  cannot  approach  the  King,  has 
no  resort  to  the  King,  and  cannot  invoke  the  a.ssistance  of  the  King. 
The  Court  is  the  King's  Court.  The  alien  enemy  cannot  come  into 
that  Court  or  have  the  a.ssistance  of  that  Court  because  the  Court  is 
for  judicial  purpo.ses  the  King  sitting  in  his  Court  and  the  alien 
enemy  cannot  approach  him.  Take  the  assumed  case  of  the  sole 
person  incorporated  as  I  have  supposed ;  can  that  sole  person  be  en- 
titled to  access  to  the  King  and  assistance  from  the  King  because 
in  contemplation  of  law  he  is  entitlefl  to  clothe  and  has  clothed  him- 
self in  a  British  dress  and  notionally  but  not  in  fact  is  British?  Take 
the  case  of  two  Germans  who  had  formed  a  private  company;  can 
they  approach  the  King?  Take  the  present  case  of  six  Germans;  can 
they  approach  the  King?  To  say  that  they  can  because  it  is  not  they 
but  the  British  corporation  which  approaches  the  King  seems  to  me 
to  be  unsound.  The  proposition  that  it  is  the  Briti.sh  corporation 
and  not  the  corporator  which  as  matter  of  legal  intendment  comes 
into  Court  is  true,  but  for  the  relevant  purpose  it  is  not  true.  The 
artificial  legal  entity  has  no  independent  power  of  motion.  It  is 
moved  by  the  corporators.  It  is  the  German  corporator  who,  under 


CHAP.  III.]         CONTINENTAL   TYRE    CO.  V.  DAIMLER   CO.  169 

the  corporate  name  but  still  German  for  the  relevant  purpose  of 
friendliness  or  enmity,  is  the  person  who  comes.  He  is  German  in 
fact  although  British  in  form. 

The  question  is  not  wholly  without  authority  which  may  be  a 
guide.  In  City  of  Londo7i  v.  Wood,  12  Mod.  669,  the  City  of  London 
])rought  a  suit  against  Wood  by  their  corporate  name  in  the  Mayor's 
Court.  Objection  was  taken  that  the  Court  had  no  jurisdiction  by 
reason  of  the  fact  that  the  Court  was  held  before  the  Mayor  and 
Aldermen  and  the  action  brought  in  the  names  of  the  Mayor  and 
Commonalty  and  that  it  is  against  all  law  that  the  same  person 
should  be  party  and  judge  in  the  same  cause.  The  objection  rested 
therefore  upon  the  character  of  the  individuals  who  were  members 
of  the  Corporation.  The  judges  were  unanimous  in  holding  that  they 
could  look  beyond  the  corporate  name  and  notice  the  character  of 
the  individual.  In  Bank  of  the  United  States  v.  Deveaux,  5  Cranch, 
61,  the  principle  of  that  case  was  followed  in  the  United  States  in  the 
case  of  a  suit  brought  by  a  corporation  aggregate  composed  of  citi- 
zens of  one  State  against  the  citizens  of  another  State  in  the  Circuit 
Court  of  the  United  States.  The  j  urisdiction  of  that  Court  was  limited 
to  controversies  between  citizens  of  different  States.  The  Court 
affirmed  (see  p.  86)  that  the  artificial  legal  entity,  the  corporation 
aggregate,  was  not  a  citizen  and  could  not  sue  unless  the  rights  of 
the  members  in  this  respect  could  be  exercised  in  their  corporate 
name,  and  that  the  Court  had  consequently  no  jurisdiction  unless  it 
could  regard  the  rights  of  the  members  in  the  corporation,  for  they 
were  citizens.  The  view  the  Court  took  was  (see  p.  91)  that  the  con- 
troversy was  substantially  between  aliens  suing  by  a  corporate  name 
and  a  citizen;  or  between  citizens  of  one  State  suing  by  a  corporate 
name  and  those  of  another  State.  "That  name,"  said  Marshall, 
C.J.,  at  p.  87  (meaning  the  corporation  by  the  corporate  name), 
"cannot  be  an  alien  or  a  citizen;  but  the  persons  whom  it  represents 
may  be  the  one  or  the  other;  and  the  controversy  is,  in  fact  and  in 
law,  between  those  persons  suing  in  their  corporate  character,  by 
their  corporate  name,  for  a  corporate  right,  and  the  individual  against 
whom  the  suit  may  be  instituted."  The  Court  accordingly  upheld 
the  jurisdiction.  Referring  to  this  case,  Story,  J.,  in  gi\ang  judg- 
ment in  Society  for  the  Propagation  of  the  Gospel  v.  Wheeler,  2  Gallison, 
105,  at  p.  133,  said:  "But  in  the  character  of  its  members,  as  aliens, 
we  have  incontestable  authority  to  enforce  the  corporate  rights;  and 
it  has  been  solemnly  settled  by  the  Supreme  Court,  that  for  this 
purpose  the  Court  will  go  behind  the  corporate  name,  and  see  who 
are  the  parties  really  interested.  And  if,  for  this  purpose,  the  Court 
will  ascertain  who  the  corporators  are,  it  seems  to  follow,  that  the 
character  of  the  corporators  may  be  averred,  not  only  to  sustain, 
but  also  to  bar,  an  action  brought  in  the  name  of  the  corporation. 
It  might  therefore  have  been  pleaded  in  this  case,  even  if  the  cor- 


170  CONTINENTAL   TYRK    CO.  V.  DAIMLER    CO.  [cHAP.  III. 

poration  had  been  established  in  a  neutral  country,  tiiat  all  its  mem- 
bere  were  alien  enemies;  and  upon  such  a  plea,  with  proi)er  aver- 
ments, it  would  have  tleserved  j:;i*eat  considenition,  whether  it  was 
not,  pendente  hello,  an  effectual  bar."  In  my  opinion  the  principles 
laid  down  in  those  ca.ses  are  correct,  and  none  the  less  Ix'cau.^  they 
have,  as  the  Lord  Chief  Justice  has  pointeil  out,  been  subsetjuently 
observed  upon  in  the  I'nited  States. 

In  Janson  v.  Driefontein  Conmlidaled  Mines,  [1902]  A.C  484, 
I  do  not  find  any  decision  to  the  contrary.  The  decision  there  was 
against  the  underwriter.  The  objection  that  the  company  w:is  an 
alien  enemy  was  in  his  favour.  The  House  made  the  a-ssumption 
in  his  favour  and  nevertheless  d«»ci(led  against  him.  It  was  therefore 
unnecessary  to  decide  the  point,  and  what  wius  said  by  the  noble  and 
learned  Lords  was  only  dictum.  Lord  Hal-sq^ury  (p.  490),  Lord 
Macnaohten  (p.  497),  and  Lord  Davp:y  (:is  I  read  his  judgment)  at 
j>.  498  in  fact  a.ssumed  it,  as  distinguished  from  deci(Hng  it.  Ix)rd 
Brampton  (p.  .501)  may  l)e  read  lus  deciding  it,  and  Lord  Lindley 
(p.  .505)  perhaps  even  more  plainly  so.  But  it  cannot  Ik>  said  that  the 
House  decided  it  when  it  did  not  arise  for  decision,  and  .some  at  any 
rate  of  its  memln^rs  j)lainly  :ibstaine<l  from  deciding  it  and  stated 
that  they  tvssumed  it  for  the  purj)o.se  of  the  decision. 

An  argument  has  been  atlvanceil  that  some  language  in  the  Act 
of  1914  and  the  Proclamation  made  under  it  l)oai-s  upon  the  c|uestion 
—  I  tiiink  not. 

I  find  in  §  2,  sub-section  2  (6),  of  the  Trading  with  the  Knemy  Act, 
1914,  neither  licence  nor  recognition  relevant  in  the  matter.  The 
subjects  of  the  enemy  State  there  spoken  of  may  Ix?  subjects  resident 
in  f  Jreat  Britain  and  consequently  not  alien  enemies.  They  may  be 
British  sul)jects  resident  or  carrying  on  business  in  the  foreign  State 
and  thus  alien  enemies  by  residence  and  not  by  nationality.  There 
are  many  ca.ses  to  which  the  sub-section  may  relate  without  making 
the  assumption  that  it  relates  to  a  company  in  which  all  the  cor- 
poratoi-s  are  subjects  of  the  enemy  State  residing  in  the  enemy 
State.  To  operate  sis  a  licence  or  recognition  the  words  of  the  statute 
ought,  I  apprehend,  to  be  plain.  So  far  from  their  being  plain  it 
seems  to  me  that  it  is  only  b}'  a  strained  construction  that  the  words 
can  be  made  relevant  to  the  subject-matter  at  all. 

The  definition  of  enemy  in  the  Proclamation  of  September  9,  1914, 
has  in  my  opinion  no  bearing  upon  the  matter.  A  Proclamation  can 
neither  make  nor  declare  the  law,  and  even  if  it  could  that  definition 
does  not  affect  so  to  do.  It  does  no  more  than  attribute  a  meaning 
to  a  particular  word  in  a  particular  document.  The  la.st  words  of 
the  article  upon  which  the  question  arises  seem  to  me,  moreover, 
very  obscure.  Strictly  read  it  would  seem  that  according  to  the  de- 
finition enemy  character  would  not  attach  to  a  British  corporation 
resident  (as  it  may  be)  or  carrjdng  on  business  (as  it  may  do)  in  the 


CHAP.  III.]  CONTINENTAL    TYRE    CO.  V.  DAIMLER    CO.  171 

enemy  country  when  it  does  attach  to  a  natural  person  so  resident 

or  carrying  on  business.   The  reason  of  the  difference  is  far  to  seek. 

For  the  above  reasons  I  am  of  opinion  that  the  Continental  Tyre 

Company  stand  for  the  present  purpose  in  the  position  of  aUen 

enemies,  for  that,  to  use  the  language  of  Bank  of  the  United  States 

V.  Deveaux,  5  Cranch,  at  p.  91,  the  action  is  by  "aliens  suing  by  a 

corporate  name."  I  therefore  think  that  these  appeals  should  be 

allowed.  The  right  form  of  order  I  think  would  be  to  set  aside  the 

service  of  the  writ  and  to  order  the  plaintiffs  to  pay  the  costs  of 

the  action.    •  >i         7    j-      •     j 

Appeals  dismissed. 

Note.  —  Peoples  Pleasure  Co.  v.  Rohleder,  109  Va.  439.  A  re- 
striction in  the  conveyance  of  land  to  the  effect  that  "the  title  of  this 
land  is  never  to  rest  in  a  person  or  persons  of  African  descent,"  or 
"colored  persons"  is  not  violated  by  a  subsequent  conveyance  of  the 
land  to  a  corporation,  organized  "to  establish  and  develop  a  pleasure 
park  for  the  amusement  of  colored  people,"  and  composed  exclu- 
sively of  colored  persons. 

Rex  V.  London  County  Council,  [1915]  2  K.B.  466.  The  London 
County  Council  refused  to  grant  to  the  London  and  Provincial  Elec- 
tric Theatres,  Limited,  the  renewal  of  licences  for  the  exhibition  of 
inflammable  cinematograph  films  and  for  the  performance  of  music 
at  three  theatres.  The  Council,  in  taking  this  action,  was  influenced 
by  the  fact  that  a  majority  of  the  shares  of  the  company  were  held  by 
ahen  enemies.  On  an  appHcation  for  the  issue  of  a  writ  of  mandamus 
to  compel  the  Council  to  grant  such  renewals,  the  Court  of  Appeal, 
by  Reading,  C.J.,  said  (p.  475) :  "The  second  and  more  serious  con- 
tention is  that  the  Council  have  not  exercised  their  discretion  in  a 
judicial  spirit  in  the  sense  that  they  have  allowed  extraneous  con- 
siderations to  affect  their  decisions.  If  they  have  allowed  themselves 
to  take  into  consideration  matters  which  had  no  bearing  upon  the 
merits  of  the  case  before  them,  but  which  nevertheless  influenced 
their  minds  in  arriving  at  their  decision,  they  have  not  exercised  their 
discretion  properly  and  have  not  heard  and  determined  the  case  ac- 
cording to  law:  see  Reg.  v.  Bowman,  [1898]  1  Q.B.  at  p.  666,  per 
Wills,  J.  The  discretion  vested  in  the  Council  must  be  exercised 
within  regular  hmits ;  in  particular,  regard  should  be  had  only  to  the 
merits  of  the  matter  before  the  Council.  Although  the  Council  does 
not  sit  as  a  court  of  law,  they  must  exercise  their  discretion  in  a 
judicial  spirit:  see  Sharp  v.  Wakefield,  [1891]  A.C.  at  p.  179,  per  Lord 
Halsbury.  The  difficulty  lies  in  the  application  of  these  principles 
to  the  present  case.  The  Council  came  to  the  conclusion  that  a  com- 
pany whose  directorate  and  shareholding  were  constituted  as  the 
directorate  and  shareholding  of  the  London  and  Provincial  Electric 
Theatres,  Limited,  was  not  a  suitable  company  to  which  or  to  whose 
representative  in  their  discretion  and  opinion  licences  should  be 


172  CONTINENTAL    TYRE    CO.  V.  DAIMLER    CO.  [CHAP.   III. 

fjjanted.  It  must  be  borne  in  iniiid  that  this  Court,  in  determining; 
whether  or  not  the  mundanms  should  issue,  is  not  exercisinp;  appel- 
late jurisdiction.  We  are  not  entitled  to  decitle  according  to  the  view 
we  should  have  taken  in  the  firet  instance  had  the  matter  come  before 
us.  We  should  only  order  the  mandamus  to  issue  if  we  came  to  the 
conclusion  that  the  Council,  by  takiug  into  consideration  the  '-nemy 
character  of  the  constitution  of  the  company,  had  allowed  their 
minds  to  be  influenced  by  extraneous  considerations.  The  Council 
in  these  matters  are  the  guardians  of  the  public  interest  and  welfare. 
If  the  Council  are  of  opinion  that  the  exhibition  of  cinematograph 
films  accompanied  by  music  should  not  be  entrusted  to  a  company 
so  largely  composed  of  persons  whose  interest  or  whose  desire  at  the 
present  time  is  or  may  be  to  inflict  injury  upon  this  country,  can  it 
be  held  as  a  matter  of  law  that  the  Council  have  travelled  beyond 
the  limits  allowed  to  them?  I  think  not.  I  cannot  hold  that  such 
considerations  are  extraneous  or  extra-judicial.  These  exhibitions 
exercise  a  powerful  influence,  often  too  powerful  an  influence,  upon 
the  minds  of  the  young;  sometimes  also  upon  the  minds  of  others. 
I  cannot  think  that  a  Court  of  law  would  be  justified  in  treating 
such  considerations  as  beyond  the  limits  to  which  a  man  could  look 
who  was  desirous  of  discharging  his  duty  honestly  to  the  best  of  his 
ability  and  with  his  mind  directed  solely  to  the  public  interest  of 
the  realm  at  a  critical  period  of  its  history.  At  such  a  time  suspicion 
as  to  the  po.ssible  action  or  influence,  direct  or  indirect,  of  enemies  is 
naturally  very  rife,  and  an  honest  man  might  well  think  it  wise  to 
run  no  risk  and  to  take  precautions  to  guard  against  even  the  remote 
possibility  of  injur>'  being  caused  to  this  country's  interests  which  to 
others  might  appear  wholly  unnecessary  and  even  unwise,  perhaps 
unjust.  If  the  majority  of  the  members  of  the  Council  came  to  the 
conclusion  that  it  was  not  suitable  that  such  a  company  should  at 
such  a  time  be  licenced  to  carry  on  such  exhibitions,  it  cannot,  in  my 
opinion,  be  said  to  be  an  arbitrary  exercise  of  discretion  or  to  be 
based  upon  extraneous  considerations. 

"  The  case  of  Continental  Tyre  and  Rubber  Co.  v.  Daimler  Co.,  [1915] 
1  K.B.  893,  recently  decided  by  the  full  Court  of  Appeal,  has  been 
to  some  extent  relied  upon  in  support  of  the  company's  contention. 
That  decision  has  only  a  remote  bearing,  if  any,  upon  the  present 
case.  In  that  case  the  Court  held  that  a  company  formed  under  our 
laws  and  carrjdng  on  business  in  this  country  could  recover  a  debt  due 
to  the  company  notwithstanding  that  its  directors  and  shareholders 
were  alien  enemies,  on  the  ground  that  the  entity  alone  could  be  re- 
garded and  that  in  no  circumstances  could  the  debt  be  treated  as  a 
debt  to  the  individual  shareholders.  The  Court  was  pronouncing 
upon  the  legal  right  of  the  company  to  sue  and  enforce  its  claims  for 
payment  of  a  debt.  No  question  of  the  exercise  of  discretion  by  the 
Court  arose  or  could  arise  in  such  a  case." 

See  also  Robson  v.  Premier  Oil  Co.  Ltd.,  [1915]  2  Ch.  124. 


BOOK  II. 
THE  PROMOTION  OF   CORPORATIONS. 


CHAPTER   I. 

SUBSCRIPTIONS  TO  STOCK  OF  A  CORPORATION 
TO  BE   FORMED. 


ATHOL  MUSIC  HALL   COMPANY  v.   CAREY. 

116  Mass.  471.     1875. 

Contract  on  the  following  agreement: 

''We,  the  undersigned,  severally  promise  and  agi-ee  to  and  with 
each  other  that  we  will  associate  ourselves  into  a  corporation,  the 
name  whereof  shall  be  determined  by  the  members  thereof,  and 
pay  to  the  treasurer  of  said  corporation  the  amount  of  the  several 
shares  set  against  our  respective  names,  for  the  purpose  of  purchasing 
the  homestead  of  Washington  H.  Amsden,  in  Athol,  on  Main  Street, 
and  erecting  a  public  hall  thereon.  The  amount  of  the  capital  stock 
of  said  corporation  to  be  not  less  than  twenty  thousand  dollars. 
Names.  No.  of  shares.  Amount 

John  Carey,  One,  $100." 

The  declaration  alleged  that  the  defendant  entered  into  and 
signed  the  above  contract,  (a  copy  whereof  was  annexed,)  and 
thereby  agreed,  in  consideration  of  other  parties  signing  similar 
agreements,  to  pay  to  the  treasurer  of  the  Athol  Music  Hall  Com- 
pany, the  sum  of  $100,  for  one  share  in  the  capital  stock  of  said  cor- 
poration when  it  should  be  organized.  It  then  alleged  the  organiza- 
tion, the  purchase  of  the  homestead  of  Amsden,  the  building  of  a 
public  hall  thereon,  a  demand  for  the  $100,  readiness  to  deliver  the 
stock,  and  the  refusal  of  the  defendant  to  pay. 

At  the  trial  in  the  Central  District  Court  of  Worcester,  the  de- 
fendant asked  the  judge  to  rule  that  the  action  could  not  be  main- 
tained on  the  pleadings.  This  request  was  refused.  It  appeared  in 
evidence  that  the  action  was  commenced  August  11,  1873,  under  the 
instructions  of  the  treasurer,  by  George  W.  Horr.  The  only  au- 
thority therefor  was  the  following  votes  of  the  board  of  directore : 

"May  15,  1873.  Voted  that  the- treasurer  be  authorized  and  in- 
structed to  obtain  the  assistance  of  George  W.  Horr,  Esq.,  in  mak- 
ing collections  of  unpaid  subscriptions  to  the  capital  stock." 


174  ATHOL    MUSIC    HALL    COMPANY    V.  CAIIEY.  [cHAP.  I. 

"June  10,  1872.  Voted  that  the  treiusuier  l^e  authorized  and  in- 
structed to  obtain  such  legal  counsel  as  he  may  see  fit  as  to  the  proi)er 
legal  manner  to  be  pursued  to  collect  unpaid  iisscssments  to  the 
capital  stock,  and  also  as  to  the  legal  status  of  tlie  cor|)oration." 
The  defendant,  at  the  close  of  the  evidence,  moved  to  dismiss  on 
the  grountl  that  the  suit  was  not  authorized  by  a  vote  of  the  directors 
of  said  company,  or  by  any  legal  authority.  This  motion  wjis  over- 
ruled by  the  judge. 

There  was  evidence  tending  to  show  that  in  December,  1870,  the 
defendant  signed  the  agreement  declared  upon;  that  the  act  of  in- 
corporation was  pjissed  on  March  3,  1871;  that  the  corporation  was 
duly  organized  on  March  18,  1871,  and  that  the  name  of  the  de- 
fendant wa.s  entered  on  the  books  of  the  corporation  lus  a. stockholder 
and  notices  were  issued  and  directed  to  him  of  all  the  meetings. 

The  defendant  then  asked  the  judge  to  instruct  the  jury  that  if 
they  were  satisfied  upon  the  evidence  that  the  defendant  never  at- 
tended any  meeting  of  the  corporation  at  the  time  of  its  organiza- 
tion, or  after  its  organization,  the  action  could  not  be  maintained, 
although  the  corporation  still  retained  his  name  upon  its  books,  and 
sent  him  notices  of  the  meetings;  that  it  was  not  enough  for  the 
j)laiiitifY  to  show  that  it  retained  Carey's  name  ujion  its  books,  and 
otherwise  considered  him  :is  entitled  to  a  share  in  the  capital  stock, 
unless  they  are  also  satisfied  that  Carey  did  some  act  after  its  organi- 
zation in  ratification  of  his  agreement. 

The  judge  refused  to  give  these  instructions,  but  instructed  the 
jury  that  if  the  plaintifT  entered  the  defendant's  name  on  the  i)Ooks 
of  the  corporation,  as  a  stockholder,  issued  and  directed  notices  to 
him  of  all  its  meetings,  and  gave  him  the  same  opportunities  to  at- 
tend the  meetings  and  participate  in  the  proceedings  thereof  as  were 
given  to  other  stockholdei-s,  they  were  authorizetl  to  find  that  the 
defendant's  offer  was  accepted,  and  that  he  was  received  as  a  mem- 
ber of  the  corporation.  The  jury  found  for  the  plaintiff,  and  the 
defendant  alleged  exceptions. 

Wells,  J.  In  agreements  of  this  nature,  entered  into  before  the 
organization  is  formed,  or  the  agent  constituted  to  receive  the 
amounts  subscribed,  the  difficulty  is  to  ascertain  the  promisee,  in 
whose  name  alone  suit  can  be  brought.  The  promise  of  each  sub- 
scriber, "to  and  with  each  other,"  is  not  a  contract  capable  of  being 
enforced,  or  intended  to  operate  literally  as  a  contract  to  be  en- 
forced between  each  su])scriber  and  each  other  who  may  have  signed 
previously,  or  who  should  sign  afterwards,  nor  between  each  sub- 
scriber and  all  the  others  collectively  as  individuals.  The  undertak- 
ing is  inchoate  and  incomplete  as  a  contract  until  the  contemplated 
organization  is  effected,  or  the  mutual  agent  constituted  to  represent 
the  association  of  individual  rights  in  accepting  and  acting  upon  the 
propositions  offered  by  the  several  subscriptions.    When  thus  ac- 


CHAP.  I.]  ATHOL    MUSIC    HALL    COMPANY    V.  CAREY.  175 

cepted,  the  promise  may  be  construed  to  have  legal  effect  accordmg 
to  its  pm-pose  and  intent,  and  the  practical  necessity  of  the  case;  to 
wit,  as  a  contract  with  the  common  representative  of  the  several  as- 
sociates. 

In  Thompson  v.  Page,  1  Met.  565,  and  Ives  v.  Sterling,  6  Met. 
310,  individuals  subsequently  selected  by  voluntary  associations  to 
receive  and  expend  subscriptions,  in  accordance  with  the  terms  of 
the  agreement  of  association,  were  allowed  to  maintain  actions 
against  individual  subscribers  for  the  amount  of  their  several  sub- 
scriptions. Being  thus  constituted  the  payees,  they  were  construed 
to  have  become  also  the  promisees  under  the  written  agreement.  The 
same  principle  applies  where  the  agreement  contemplates  the  or- 
ganization of  a  corporation,  and  refers  the  payment  of  the  sub- 
scriptions to  the  proper  officers  of  such  corporation.  See  People's 
Ferry  Co.  v.  Balch,  8  Gray,  303,  311. 

In  this  agreement  the  treasurer  of  the  corporation  to  be  estab- 
lished is  expressly  made  payee.  The  corporation  is  the  aggregate 
of  the  several  individuals  entering  into  the  agreement,  one  of  whose 
terms  was  that  they  should  thus  associate  and  confer  their  indi- 
vidual rights  upon  the  corporation.  We  are  of  opinion  that  the  cor- 
poration, and  the  corporation  alone,  is  the  proper  party  to  bring  an 
action  upon  such  an  agreement. 

The  corresponding  agreements  of  the  other  subscribers,  the  or- 
ganization of  the  corporation,  and  the  allotment  to  the  defendant 
of  the  shares  for  which  he  subscribed,  furnish  sufficient  considera- 
tion for  his  promise  to  take  and  pay  for  those  shares.  Although  his 
promise  was  originally  voluntary,  or  in  the  nature  of  a  mere  open 
proposition,  yet  having  been  accepted  and  acted  on  by  the  party 
authorized  so  to  do,  before  he  attempted  to  retract  it,  he  has  lost 
the  right  to  revoke.  His  proposition  has  become  an  accepted  mutual 
contract,  and  is  binding  upon  him  as  well  as  upon  the  corporation. 
The  votes  of  the  corporation  indicate  sufficient  authority  for  the 
institution  of  this  suit  in  the  corporate  name  and  behalf. 

These  considerations  dispose  of  all  the  objections,  taken  in  vari- 
ous forms,  to  the  maintenance  of  the  action. 

Exceptions  overruled. 

Note.  —  See,  in  accord  as  to  the  result,  Planters  &  Merchants  Co. 
V.  Webb,  144  Ala.  666;  Horseshoe  Pier  Co.  v.  Sibley,  157  Cal.  442 
(promise  to  subscribe  made  to  a  trustee;  corporation,  when  formed, 
may  maintain  action  thereon  as  real  party  in  interest);  Richelieu 
Hotel  Co.  V.  International  Encampment  Co.,  140  111.  248  (cf.  Thrasher 
V.  Pike  County  R.R.  Co.,  25  111.  393);  Hughes  v.  Antietam  Mfg.  Co., 
34  Md.  316;  International  Fair  Association  v.  Walker,  83  Mich.  386; 
Yonkers  Gazette  Co.  v.  Taijlor,  30  N.Y.  App.  Div.  334  (cf.  Avon 
Springs  Sanitarium  Co.  v.  Weed,  189  N.Y.  557,  reversing  119  App. 


170  BRYANr's    POND    STEAM    MILL    CO.  I'.  FELT.  [cHAP.   I. 

Div.  560,  on  the  dissenting  opinion  of  McLennan,  P.J.);  Greater 
Pittsburgh  Hail  Estate  Co.  v.  Riley,  210  Pii.  283  (incorporator  held 
to  his  statements  in  a  certificate  for  charter);  Steely  v.  Texas  Im- 
provement Co.,  55  Te.x.  Civ.  App.  403.  Cf.  Coppage  v.  HiUton,  124 
Ind.  401;  Mt.  Sterling  Coal  Road  Co.  v.  Little,  14  Bush  (Ky.)  429. 

If  the  (lef(Mi(hint  simply  agreeil  with  a  promoter  to  apjiiy  for  a 
certain  proportion  of  the  shares  of  a  new  company  not  taken  by  the 
publi(!,  he  m:iy  refuse  to  become  a  member  of  the  company,  merely 
exposing  himself  to  liability  for  any  damages  which  the  promoter 
may  have  sustained  from  such  breach  of  contract.  Electric  Welding 
Co.  V.  Prince,  195  Mass.  242,  254. 


BRYANT'S   POND   STKAM   MILL  CO.   v.   FELT. 

87  Me.  234.    1S95. 
On  RKPOKT. 

This  was  an  action  of  assumpsit  brought  to  recover  of  the  defend- 
ant the  sum  of  two  hundred  dollars  as  ai)peared  by  his  alleged  sub- 
scription upon  an  original  subscription  book,  and  upon  the  outer 
cover  of  which  wtis  the  following  writing,  "Subscription  for  a  steam 
mill  to  be  erected  at  or  near  Bryant's  Pond."  The  original  agree- 
ment was  as  follows: 

*'We,  the  undersigned,  hereby  agree  to  pay  for  the  number  of 
.shares  set  opposite  our  names,  said  shares  to  Ik?  ten  dollars  each,  and 
non-as.sessal)le.  for  the  purpose  of  erecting  suitable  buildings,  with 
steam  power,  for  the  manufacturing  of  the  various  kinds  of  wood  to 
be  used  in  the  contract  of  one  C.  H.  Adams,  he  paying  three  per 
cent  annually  as  rent  on  all  money  so  paid,  said  monies  to  be  paid 
when  needed  for  the  purpo.se  al)Ove  named,  providing  the  town  will 
al)ato  taxes  on  said  buildings  and  stock  for  the  term  of  ten  years." 

Walton,  J.  The  only  question  we  find  it  necessary  to  consider 
is  whether  a  subscriber  to  the  capital  stock  of  an  unorganized  cor- 
poration has  a  right  to  withdraw  from  the  enterprise,  provided  he 
exercises  the  right  before  the  corporation  is  organized  and  his  sub- 
scription is  accepted.  We  think  he  has.  Such  a  sub.scription  is  not  a 
completed  contract.  It  takes  two  parties  to  make  a  contract.  A 
non-existing  corporation  can  no  more  make  a  contract  for  the  sale  of 
its  stock  than  an  unbegotten  child  can  make  a  contract  for  the  pur- 
chase of  it. 

The  right  of  subscribers  to  the  capital  stock  of  a  proposed  cor- 
poration to  withdraw  their  subscriptions  at  any  time  before  the 
organization  of  the  corporation  is  completed  has  been  affirmed  in 
several  recent  and  well  considered  opinions.  The  right  rests  upon 
the  impregnable  ground  of  the  legal  impossibility  of  completing  a 


CHAP.  I.]        Bryant's  pond  steam  mill  co.  v.  felt.  177 

contract  between  two  parties  only  one  of  which  is  in  existence.  There 
can  be  no  meeting  of  the  minds  of  the  parties.  There  can  be  no  ac- 
ceptance of  the  subscriber's  proposition  to  become  a  stockholder. 
There  can  be  no  mutuality  of  rights  or  obligations.  There  can  be  no 
consideration  for  the  subscriber's  promise.  As  said  in  one  of  our  own 
decisions,  it  is  a  mere  nudum  pactum,  —  a  promise  without  a  prom- 
isee, —  a  contractor  without  a  contractee.  In  fact,  every  element  of  a 
binding  contract  is  wanting.  If  the  subscriber's  promise  to  take  and 
pay  for  shares  remains  unrevoked  till  the  organization  of  the  pro- 
posed corporation  is  effected,  and  his  promise  has  been  accepted, 
then  we  have  all  the  elements  of  a  valid  contract.  Competent  parties. 
Mutuahty  of  duties  and  obligations.  A  vahd  consideration,  the 
promise  of  one  party  being  a  sufficient  consideration  for  the  promise 
of  the  other.  A  promisee  as  well  as  a  promisor.  A  contractee  as  well 
as  a  contractor.  In  fact,  all  the  elements  of  a  valid  contract  are  pres- 
ent, and  the  subscription  has  become  binding  upon  both  of  the 
parties.  But,  till  the  corporation  has  come  into  existence,  all  these 
elements  are  necessarily  wanting,  and  the  subscriber's  promise 
amounts  to  no  more  than  an  offer,  which,  hke  all  mere  offers,  may 
be  withdrawn  at  any  time  before  acceptance.  When  accepted,  it 
becomes  binding.  Till  accepted,  it  remains  revocable.  This  con- 
clusion is  sustained  by  reason  and  authority. 

In  Starr ett  v.  Rockland  Co.,  65  Maine,  374,  the  plaintiff  sought  to 
recover  a  portion  of  the  dividends  of  a  successful  insurance  company. 
He  had  subscribed  for  five  shares  of  the  stock  before  the  organiza- 
tion of  the  company  was  effected ;  but  the  evidence  of  acceptance  of 
liis  subscription  by  the  corporation  after  its  organization  was  not 
satisfactory;  and  the  court  held  that  without  such  acceptance  there 
was  no  completed  or  binding  contract ;  that  the  minds  of  the  parties 
never  met;  that  the  plaintiff's  subscription,  being  made  before  the 
corporation  came  into  existence,  amounted  to  no  more  than  a  pro- 
posal to  take  so  many  shares,  —  a  mere  nudum  pactum,  —  imposing 
no  obligations  and  securing  no  rights. 

And  in  Carr  v.  Bartlett,  72  Maine,  120,  the  right  of  subscribers  to 
withdraw  from  such  undertakings  while  they  remain  inchoate  and 
incomplete  is  recognized  and  affirmed. 

.  In  Muncy  Traction  Engine  Co.  v.  Green,  143  Pa.  St.,  269;  13  At. 
Rep.  747,  decided  in  1888,  the  defendant  had  been  active  in  procur- 
ing subscribers  to  the  capital  stock  of  a  proposed  corporation,  and 
had  himself  subscribed  for  twenty  shares :  but  he  wrote  to  the  chair- 
man of  the  meeting  for  the  organization  of  the  corporation  that,  for 
reasons  satisfactory  to  himself,  he  withdrew  his  subscription.  The 
court  ruled  that  the  defendant  had  a  right  to  withdraw  his  subscrip- 
tion at  any  time  before  the  organization  of  the  corporation  was  com- 
pleted; and  the  jury  having  found  as  a  matter  of  fact  that  the  with- 
drawal was  before  the  organization  of  the  corporation  was  completed. 


178  Bryant's  pond  steam  mill  co.  v.  felt.        [chap.  i. 

a  verdict  for  the  defendant  was  affirmed,  and  judgment  rendered 
thereon. 

In  Hudson  Real  Estate  Co.  v.  Tmver,  156  Miuss.  82  (1892),  the  action 
was  founded  on  a  subscription  to^the  capital  stock  of  an  unorganized 
corporation,  and  the  defense  was  Ixused  on  an  alleged  withdrawal  of 
the  subscription.  The  right  to  withdraw  was  controverted.  The 
court  held  that  at  the  time  when  the  defendant  signed  the  sub.scrip- 
tion  paper  declared  on,  it  was  not  a  contract,  for  want  of  a  contract- 
ing party  on  the  other  side;  that  while  such  a  subscription  may  be- 
come a  contract  after  the  corporation  has  been  organized,  still,  until 
the  organization  is  effected,  and  the  subscription  is  accepted,  it  is  a 
mere  proposition  or  offer,  which  may  be  withdrawn,  like  any  other 
unaccepted  proposition  or  offer. 

It  is  urged  by  the  counsel  for  the  plaintiff  corporation  that  such 
subscriptions  create  binding  and  enforceable  contracts  between  the 
subscribei-s  them.selves,  and  are  therefore  irrevocable,  e.vcept  with 
the  consent  of  all  the  subscribers;  and  some  of  the  authorities  cited 
by  him  seem  to  su.stain  that  view.  But  we  find,  on  examination,  that 
such  views,  when  expressed,  are  in  most  cius(\s  mere  dicta,  and  that 
the  ciises  are  very  few  in  which  such  a  doctrine  luus  lx?en  acted  upon. 
Reason  and  the  weight  of  authority  are  opposed  to  such  &  view.  Of 
course,  subscription  papei-s  may  l)e  so  worded  as  to  create  binding 
contracts  between  the  subst-ribei-s  themselves.  But  we  are  not  now 
speaking  of  such  subscriptions;  or  of  voluntary  and  gratuitous  sub- 
scriptions to  pubUc  or  charitable  objects,  which,  when  accepted  and 
acted  upon,  become  binding.  We  are  now  sfx^aking  only  of  subscrip- 
tions to  the  capital  stock  of  proposed  })usiness  corporations.  With 
regard  to  such  sul)scriptions,  we  regard  it  lus  .settle(l  law  that  they 
do  not  become  biniling  upon  the  subscribers  till  the  cori)orations 
have  been  organized  and  the  subscriptions  accepted;  and  that,  till 
then,  the  subscribers  have  a  right  to  revoke  their  subscriptions.  And, 
in  view  of  the  fact  that  such  sub.scriptions  are  often  obtained  by 
over  persuasion,  and  upon  sudden  and  hasty  impulses,  we  are  not 
prepared  to  say  that  the  rule  of  law  which  allows  such  a  revocation 
is  not  founded  in  wisdom.  We  think  it  is. 

In  the  present  case,  an  old  man,  upwards  of  eighty  years  of  age, 
and  now  dead,  was  induced  to  subscribe  for  twenty  shares  of  stock 
in  a  proposed,  but  not  then  organized,  manufacturing  corporation; 
but  after  a  Little  reflection,  he  determined  to  revoke  his  subscription 
and  withdraw  from  the  enterprise.  He  notified  the  agent  of  the 
promoters,  through  whom  his  subscription  had  been  obtained,  of  his 
determination  to  withdraw,  and  requested  him  to  take  his  name  off 
the  subscription  paper.  And  he  again  sent  word  by  his  son  to  have 
his  name  taken  off.  And  notice  of  his  withdrawal,  and  of  his  request 
to  have  his  name  taken  off  of  the  subscription  paper,  was  given  to 
the  other  subscribers  at  one  of  their  meetings,  and  before  the  cor- 


CHAP.  I.]  CARMICHAEL's    CASE.  179 

poration  was  organized.  We  think  his  withdrawal  was  legal  and 
complete,  and  that  no  action  to  recover  the  amount  of  his  subscrip- 
tion is  maintainable. 

Other  grounds  are  urged  in  defense  of  the  action,  but  it  is  un- 
necessary to  consider  them. 

Judgment  for  defendant. 

Note.  — But  in  Minneapolis  Machine  Co.  v.  Davis,  40  Minn.  110, 
Mitchell,  J.,  said  (p.  114) :  "A  subscription  by  a  number  of  persons 
to  the  stock  of  a  corporation  to  be  formed  by  them  has  in  law  a 
double  character:  First.  It  is  a  contract  between  the  subscribers 
themselves  to  become  stockholders  without  further  act  on  their  part 
immediately  upon  the  formation  of  the  corporation.  As  such  a  con- 
tract it  is  binding  and  irrevocable  from  the  date  of  the  subscription 
(at  least  in  the  absence  of  fraud  or  mistake),  unless  cancelled  by  con- 
sent of  all  the  subscribers  before  acceptance  by  the  corporation. 
Second.  It  is  also  in  the  nature  of  a  continuing  offer  to  the  proposed 
corporation,  which,  upon  acceptance  by  it  after  its  formation,  be- 
comes as  to  each  subscriber  a  contract  between  him  and  the  cor- 
poration." 


CARMICHAEL'S  CASE. 

[1896.]     2  Ch.  643. 

This  was  an  appeal  by  Carmichael  from  a  decision  of  Stirling  J., 
refusing  an  application  to  strike  liis  name  out  of  the  register  of 
shareholders. 

The  company  was  brought  out  in  February,  1896,  and  was  formed 
to  purchase  from  Mr.  C.  B.  Phillips  and  work  certain  mining  prop- 
erty of  liis.  The  price  was  145,000L  The  company  was  to  have  a 
nominal  capital  of  175,000L  in  II.  shares.  The  purchase-money  was 
to  be  paid,  as  to  58,333L  in  fully  paid-up  shares,  as  to  3O,O00L  in 
cash,  and  as  to  56,667^  in  cash  or  shares. 

On  February  21,  1896,  Carmichael  signed  an  underwriting  con- 
tract in  the  form  of  a  letter  addressed  to  Phillips:  "I  agree,  for  the 
consideration  below  stated,  to  subscribe  for  1000  shares  of  the  above 
issue,  and  to  pay  for  the  same  on  the  conditions  named  in  the  pro- 
spectus, or  any  modification  thereof,  or  of  the  title  of  the  company, 
or  the  directors  or  officers,  so  long  as  the  capital  of  the  company  and 
the  purchase  price  of  the  property  are  not  altered ;  and  I  hereby  en- 
close my  application  for  such  shares  and  a  cheque  for  2s.  Qd.  per 
share  deposit  in  respect  of  such  shares,  which  deposit  I  authorize 
and  request  you  to  pay  over  to  the  above-named  company;  and  I 
undertake  to  pay  the  further  moneys  payable  in  respect  of  any  shares 


180  carmichael's  case.  [CIIAP.  I. 

I  have  to  take  up  under  the  terms  of  this  contract.  If,  on  or  before 
the  public  issue  of  the  prospectus,  there  are  00,000  shares  of  the 
above  i.ssue  bond  fide  ami  duly  applied  for  by  the  pubhc,  then  no 
allotment  is  to  be  made  to  me  in  respect  of  this  agreement,  and  my 
application  and  the  said  deposit  is  to  bo  forthwith  returned  to  me  by 
the  said  company.  If  less  than  such  00,000  shares  are  applied  for  by 
the  public,  then  I  am  only  to  be  allotted  my  proportion  of  the  de- 
ficiency between  the  amount  so  subscriljed  for  by  the  public  aiul 
such  00,000  shares,  pro  rata  with  any  other  persons  who  have  sij^iu'd 
or  may  sign  underwriting  contracts  in  connection  with  the  above 
issue.  If  on  the  public  issue  of  the  i)rospectus,  and  i)efore  the  closing 
of  the  list,  I  deliver  to  you  applications  for  shares  from  responsible 
persons  to  your  .satisfaction,  such  aj)i)lications  shall  go  primarily  in 
relief  of  my  obligation  umlor  this  contract.  In  cither  case,  I  tun  to 
receive  from  you  a  commission  of  7^  per  cent,  in  cash  and  7^  per 
cent,  in  full}'  paid  shares  of  the  said  company  upon  the  total  shares 
hereby  underwritten  b}'  me  within  fourteen  days  after  the  comple- 
tion of  the  purchase  l)y  the  above  company,  if  the  whole  of  such 
00,000  shares  arc  applied  for  by  the  puljlic;  but  in  the  event  of  the 
pubhc  not  applying  for  the  whole  of  such  00,000  shares,  then  such 
commission  is  to  be  payable  by  you  within  fourteen  days  after 
payment  by  me  to  the  company  of  the  allotment-money  in  resjx'ct  of 
my  proportion  of  the  deficiency  of  such  shares,  or  the  completion  of 
the  purcha.se  by  the  above  company,  whichever  event  shall  be  kust; 
and  I  authorize  you,  if  you  think  fit  so  to  do,  to  apply  my  said  com- 
mission or  any  part  thereof  in  paNTiient  to  the  company  of  or  on 
account  of  the  said  allotment-moneys.  I  further  agree  that  this 
agreement  and  my  said  application  shall  be  irrevocable  on  my  part, 
and  shall,  notwithstanding  any  withdrawal  on  my  part  or  any 
repudiation  of  my  responsibility  hereunder  or  thereunder,  be  suf- 
ficient to  authorize  and  empower  you  to  make  any  further  or  other 
application  on  my  behalf,  and  also  be  sufficient  to  authorize  and 
empower  the  directors  of  the  company  to  allot  to  me  the  before- 
mentioned  shares,  and  to  enter  my  name  on  the  register  of  membere 
in  respect  thereof." 

On  February  22  Carmichael  signed  and  handed  in  an  application 
for  1000  shares,  and  gave  a  cheque  payable  to  the  company  for  125/., 
the  amount  of  the  deposit  payable  on  appUcation. 

On  the  same  day  Phillips  sent  to  Carmichael  a  letter  headed  with 
the  name  of  the  company:  "I  accept  your  underwriting  contract  on 
the  terms  mentioned  to  the  extent  of  1000  shares.  C.  B.  Phillips." 

On  March  24  the  company  was  incorporated,  and  advertisements 
were  issued  stating  that  the  subscription  list  would  open  on  the  27th 
and  close  on  the  30th  of  that  month. 

On  the  27th  Carmichael  directed  his  bankers  not  to  pay  the  cheque, 
which  accordingly  they  refused  to  pay.    On  the  30th  he  wrote  to 


CHAP.  I.]  carmichael's  case.  181 

Phillips  repudiating  his  underwriting  contract,  and  on  the  same  day 
v^rote  to  the  secretary  of  the  company  the  following  letter:  "Please 
take  notice  that  I  withdraw  my  underwriting  in  above  company,  and 
withdraw  any  authority  contained  in  the  underwriting  letter  to  apply 
for  any  shares  on  my  behalf." 

At  a  board  meeting  of  directors  on  April  2  the  secretary  produced 
the  last-mentioned  letter.  Mr.  Phillips,  who  was  present,  then  pro- 
duced the  underwriting  letter,  insisted  that  Carmichael  had  no  right 
to  withdraw,  and  handed  in  on  his  behalf  a  fresh  application  for  980 
shares  in  pursuance  of  the  underwriting  contract,  that  being  the 
number  which,  according  to  the  contract,  ought,  in  the  events  which 
had  happened,  to  be  allotted  to  him.  They  were  accordingly  allotted 
to  him,  and  he  was  placed  on  the  register  in  respect  of  them. 

Stirling,  J.,  held  that  the  authority  given  to  Phillips  by  the  under- 
writing letter  was  an  authority  coupled  with  an  interest,  and  there- 
fore irrevocable.  His  Lordship,  therefore,  refused  to  remove  Carmi- 
chael's name  from  the  register.   Carmichael  appealed. 

LiNDLEY,  L.J.  I  do  not  think  there  is  any  difficulty  in  this  case. 
Mr.  Bramwell  Davis  has  asked  us  to  treat  this  as  a  complex  trans- 
action consisting  of  two  parts  —  one  a  contract  and  one  an  authority, 
and  he  says,  "Although  I  agree  that  I  cannot  revoke  my  contract, 
still  I  am  at  liberty  to  revoke  my  authority."  Now,  I  do  not  mean 
to  say  that  there  may  not  be  cases  as  to  which  that  contention  would 
be  well  founded ;  but  when  we  look  at  this  case  and  see  the  purpose 
for  which  the  authority  is  given  and  the  object  of  it,  which  is  to  en- 
able a  contract  to  be  performed  in  which  Mr.  PhilKps  was  interested, 
his  argument  will  not  hold.  Let  us  look  at  the  document  itself.  It 
is  a  letter,  or,  as  it  is  called,  an  underwriting  contract.  Of  course,  it 
is  not  a  contract  until  it  is  accepted.  It  is  addressed  to  Mr.  Phillips, 
the  vendor  of  some  property  to  this  company,  who  was  to  be  paid  out 
of  money  raised  by  the  issue  of  shares.  He  had,  therefore,  a  clear  and 
direct  interest  in  raising  the  capital,  out  of  which  he  was  to  be  paid, 
and  Mr.  Carmichael  knew  that.  That  is  common  ground.  Under 
these  circumstances  he  signs  this  document,  which  is  called  an  un- 
derwriting contract,  and  it  is  addressed  to  Mr.  Phillips.  It  is  in 
these  terms :  [His  Lordship  read  the  material  parts  of  the  document 
down  to  the  last  clause.] 

Then  comes  this  clause,  which  is  very  important:  "I  further  agree 
that  this  agreement  and  my  said  application  shall  be  irrevocable  on 
my  part,  and  shall,  notwithstanding  any  withdrawal  on  my  part  or 
any  repudiation  of  my  responsibility  hereunder  or  thereunder,  be 
sufficient  to  authorize  and  empower  you  to  make  any  further  or 
other  application  on  my  behalf,  and  also  be  sufficient  to  authorize 
and  empower  the  directors  of  the  company  to  allot  to  me  the  before- 
mentioned  shares,  and  to  enter  my  name  on  the  register  of  members 
in  respect  thereof."   Now,  what  is  the  true  meaning  of  that?   It  is 


182  carmiciiael's  case.  (chap.  I. 

part  of  a  bargain  by  which,  for  valuable  consideration,  Mr.  Carmi- 
chael  agrees  to  take  certain  shares,  and  that  is  for  the  benefit  of  Mr. 
Phillips  as  he  knows;  and  in  order  to  enable  Mr.  Phillips  the  better 
to  secure  the  performance  of  the  contract  Mr.  Carmichael  authorizes 
Mr.  Phillips  to  apply  for  shares  in  his  name,  and  he  agrees  not  to 
revoke  that  authority  even  if  he  could  do  it  without  such  a  clause. 
Now,  Mr.  Phillips  acted  with  pei-fect  bona  fides,  and  upon  the  ternxs 
of  that  authority  he  does  apply  in  Mr.  Carmichael's  name  for  980 
shares,  which  are  allotted  to  him.  Why  is  Mr.  Carmichael  not  to  he 
held  a  member  of  this  company?  Can  it  under  the  circumstances  l)e 
said,  in  the  language  of  §  35  of  the  Companies  Act,  18G2,  that  his 
name  is  "without  sufficient  cause  entered  in  the  register  of  mem- 
bers"? It  appears  to  me  there  is  ample  cause.  The  attempt  to  make 
out  that  he  is  entitled  to  revoke  the  authority  although  he  cannot 
revoke  the  contract  entirely  fails. 

Stirli.xg,  J.,  in  deciding  this  case  has  referred  to  an  observation 
of  W1LLIA.MS,  J.,  in  the  case  of  Clerk  v.  Laurie,  2  H.  &.  N.  199,  200, 
which  runs  thus:  "What  is  meant  by  an  authority  couple<l  with  an 
interest  being  irrevocable  is  this  —  that  where  an  agreenumt  is  en- 
tered into  on  a  sufficient  con.sideration,  whereby  an  authority  is 
given  for  the  purpose  of  .'securing  some  Ix^nefit  to  the  donee  of  the 
authority,  such  an  authority  is  irrevocable."  That  is  the  principle 
on  which  Stiuij.\(i,  .J.,  decided  this  ca.so.  and  it  appeal's  to  me  the 
principle  proj)erly  applicable  to  it.  The  appeal  must  be  dismissed 
with  costs. 

Lopes,  L.J.  The  question  in  this  case  is  whether  the  company  had 
authority  to  allot  the.se  shares  to  Mr.  Carmichael.  That  question 
depends  on  whether  the  authority  given  to  Mr.  Phillips,  who  was  the 
vendor,  was  revocable  or  not.  If  it  was  an  authority  coupled  with  an 
interest,  it  would  be  irrevocable.  The  question  that  really  arises  is 
whether  in  this  case  it  is  an  authority  coupled  with  an  interest.  I 
think  the  answer  is  a  very  short  and  a  very  complete  one.  What  was 
the  object?  The  object  was  to  enable  Mr.  Phillips,  the  vendor,  to 
obtain  his  purchase-money,  and,  in  the  language  of  Williams,  J., 
it  therefore  conferred  a  benefit  on  the  donee  of  the  authority.  I 
think,  therefore,  the  judgment  of  iSTiRLiNG,  J.,  is  perfectly  right,  and 
that  Mr.  Carmichael  is  a  member  of  this  company,  and  is  not  en- 
titled to  have  his  name  struck  out. 


CHAP,  II.]  PENNELL  V.   LOTHROP.  183 


CHAPTER   II. 

CONVEYANCES  TO  PROMOTERS,   AND   CONTRACTS 

WITH  PROMOTERS   RELATING  TO 

PROPERTY  OR  SERVICES. 


PENNELL   V.    LOTHROP. 
191  Mass.  357.     1906. 

The  bill  was  founded  upon  an  agreement  in  part  as  follows: 
"Articles  of  indenture  entered  into  tliis  fifth  day  of  April,  a.d. 
1894,  by  and  between  Harriet  M.  Lothrop  of  Concord,  in  the  County 
of  Middlesex  and  Commonwealth  of  Massachusetts,  party  of  the 
first  part  and  Edmund  H.  Pennell  of  Medford  in  the  Count}^  of  Mid- 
dlesex, Harry  E.  Morrell  of  Hyde  Park  in  the  County  of  Norfolk,  and 
Frank  M.  Ho^i:  of  Chelsea  in  the  County  of  Suffolk,  all  in  the  Com- 
monwealth of  Massachusetts,  parties  of  the  second  part,  Witnesseth : 
That  the  said  party  of  the  first  part  in  consideration  of  One  Dollar 
and  other  valuable  considerations  to  her  paid  by  the  said  parties  of 
the  second  part  hereby  covenants  and  agrees  with  said  parties  of  the 
second  part,  that  she  will  allow  the  Lothrop  Publishing  Company,  a 
corporation  to  be  organized  by  said  parties  of  the  second  part  under 
the  laws  of  the  State  of  Maine,  the  exclusive  right  to  publish  in  book 
form  all  wTitings  of  said  party  of  the  first  part  which  now  are  or  have 
been  published  in  any  form,  and  the  exclusive  right  to  publish  in 
book  form  all  writings  for  publication  which  the  said  party  of  the 
first  part  shall  produce  for  a  period  of  five  years  from  the  date  of 
this  instrument  if  they  elect  to  publish  them;  otherwise  the  party  of 
the  firet  part  has  the  right  to  place  them  where  she  chooses." 

Knowlton,  C.J.  Let  us  first  consider  the  contract  on  which  the 
suit  is  founded.  It  is  a  contract  between  the  defendant  and  the  in- 
dividual plaintiffs,  and  not  a  contract  with  any  corporation.  When 
it  was  made  the  Lothrop  Publishing  Company  was  not  in  existence, 
and  could  not  be  a  party  to  a  contract.  In  Abbott  v.  Hapgood,  150 
Mass.  248,  it  was  said  that  "if  a  contract  is  made  in  the  name  and 
for  the  benefit  of  a  projected  corporation,  the  corporation  after  its 
organization  cannot  become  a  party  to  the  contract,  even  by  adop- 
tion or  ratification  of  it."  This  does  not  mean  that  after  the  organi- 
zation of  the  corporation  it  cannot  enter  into  a  contract  such  as 
previously  had  been  prepared.  Holyoke  Envelope  Co.  v.  United  States 
Envelope  Co.  182  Mass.  171.  Penn  Match  Co.  v.  Hapgood,  141  Mass. 


184  McARTHUR    V.  TIMES    PRINTING    CO.  [cHAP.  II. 

145.  Abbott  V.  Hapgood,  ubi  supra.  Such  a  contract,  as  between  the 
corporation  and  any  other  party,  would  have  its  inception  when  en- 
tered into  by  the  corporation,  and  would  require,  to  make  it  valid, 
the  existence  of  all  such  elements  as  are  necessary  in  other  contracts. 

Note.  —  In  Munson  v.  Stjracuse  R.R.  Co.,  103  N.  Y.  58,  Andrews, 
J.,  said  (p.  75) :  "But  the  promoters  of  a  corporation  are  not  the  cor- 
poration. The  legal  body  is  distinct  from  the  individuals  who  com- 
pose it.  The  statute  confers  no  authority  upon  the  |)roniotei-s  of  a 
corporation  to  enter  into  preliminary  contracts  binding;  the  corpora- 
tion when  it  shall  come  into  existence.  Such  contracts  may  bind 
the  individuals  who  make  them.  If  adopted  by  the  coi-poration,  and 
they  are  within  the  corporate  powers,  and  are  not  otherwi.se  subject 
to  objection,  they  may  become  the  contracts  of  the  corporation  and 
enforceable  as  such.  In  respect  to  contracts  of  promoters  Judge 
Redfield  says:  'The  promoters  are  in  no  sense  identical  with  the 
corporation,  nor  do  they  represent  it  in  any  relation  of  agency,  and 
their  contracts  could,  of  course,  only  bind  the  company  so  far  as 
they  should  be  subsequently  adopted  by  it,  as  their  successors.'" 


McARTHUR  v.  TIMES   PRINTING   CO. 

48  Minn.  319.     1892. 

Appeal  by  defendant.  Times  Printing  Company,  from  an  order  of 
the  district  court  of  Hennepin  County.  Canty,  J.,  made  August  4, 
1891,  denying  its  motion  for  a  new  trial. 

Action  brought  by  D.  A.  McArthur  to  recover  damages  sustained 
by  him  from  the  breach  of  a  contract  made  by  defendant  with  him. 
He  was  emi:>loyed  by  it  for  a  year  from  October  1,  1889,  to  solicit 
advertisements  for  its  newspaper,  antl  -was  to  receive  S20  a  week 
during  October,  and  S30  a  week  for  the  residue  of  the  year,  and  was 
also  to  receive,  at  the  end  of  the  year,  five  shares  of  its  stock,  of 
$100  each.  He  was  discharged  April  12,  1890.  After  the  year  ex- 
pired he  brought  this  suit.  It  was  tried  May  5,  1891,  and  plaintiff 
had  a  verdict  for  S450.  Defendant  moved  for  a  new  trial.  The  mo- 
tion was  denied,  and  it  appealed. 

Mitchell,  J.  The  complaint  alleges  that  about  October  1,  1889, 
the  defendant  contracted  with  plaintiff  for  his  services  as  advertis- 
ing solicitor  for  one  year;  that  in  April,  1890,  it  discharged  him,  in 
violation  of  the  contract.  The  action  is  to  recover  damages  for  the 
breach  of  the  contract.  The  answer  sets  up  two  defenses:  (1)  that 
plaintiff's  employment  was  not  for  any  stated  time,  but  only  from 
week  to  week;  (2)  that  he  was  discharged  for  good  cause.  Upon  the 
trial  there  was  evidence  reasonably  tending  to  prove  that  in  Septem- 


CHAP.  II.]  McARTHUR   V.  TIMES    PRINTING    CO.  185 

ber,  1889,  one  C.  A.  Nimocks  and  others  were  engaged  as  promoters 
in  procuring  the  organization  of  the  defendant  company  to  pubHsh 
a  newspaper;  that,  about  September  12th,  Nimocks,  as  such  pro- 
moter, made  a  contract  with  plaintiff,  in  behalf  of  the  contemplated 
company,  for  his  services  as  advertising  solicitor  for  the  period  of 
one  year  from  and  after  October  1st,  —  the  date  at  which  it  was 
expected  that  the  company  would  be  organized;  that  the  corpora- 
tion was  not,  in  fact,  organized  until  October  16th,  but  that  the 
publication  of  the  paper  was  commenced  by  the  promoters  October 
1st,  at  which  date  plaintiff,  in  pursuance  of  his  arrangement  with 
Nimocks,  entered  upon  the  discharge  of  his  duties  as  advertising 
solicitor  for  the  paper;  that  after  the  organization  of  the  company  he 
continued  in  its  employment  in  the  same  capacity  until  discharged, 
the  following  April;  that  defendant's  board  of  directors  never  took 
any  formal  action  with  reference  to  the  contract  made  in  its  behalf 
by  Nimocks,  but  all  of  the  stockholders,  directors,  and  officers  of  the 
corporation  knew  of  this  contract  at  the  time  of  its  organization, 
or  were  informed  of  it  soon  afterwards,  and  none  of  them  objected 
to  or  repudiated  it,  but,  on  the  contrary,  retained  plaintiff  in  the  em- 
ployment of  the  company  without  any  other  or  new  contract  as  to 
his  services. 

There  is  a  fine  of  cases  which  hold  that  where  a  contract  is  made 
in  behalf  of,  and  for  the  benefit  of,  a  projected  corporation,  the  cor- 
poration, after  its  organization,  cannot  become  a  party  to  the  con- 
tract, either  by  adoption  or  ratification  of  it.  Abbott  v.  Hapgood,  150 
Mass.  248  (22  N.E.  Rep.  907) ;  Beach,  Corp.  §  198.  This,  however, 
seems  to  be  more  a  question  of  name  than  of  substance;  that  is, 
whether  the  Hability  of  the  corporation,  in  such  cases,  is  to  be  placed 
on  the  grounds  of  its  adoption  of  the  contract  of  its  promoters,  or 
upon  some  other  ground,  such  as  equitable  estoppel.  This  court,  in 
accordance  with  what  we  deem  sound  reason,  as  well  as  the  weight 
of  authority,  has  held  that,  while  a  corporation  is  not  bound  by 
engagements  made  on  its  behalf  by  its  promoters  before  its  organiza- 
tion, it  may,  after  its  organization,  make  such  engagements  its  own 
contracts.  And  this  it  may  do  precisely  as  it  might  make  similar 
original  contracts ;  formal  action  of  its  board  of  directors  being  neces- 
sary only  where  it  would  be  necessary  in  the  case  of  a  similar  original 
contract.  That  it  is  not  requisite  that  such  adoption  or  acceptance 
be  expressed,  but  it  may  be  inferred  from  acts  or  acquiescence  on 
part  of  the  corporation,  or  its  authorized  agents,  as  any  similar 
original  contract  might  be  shown.  Battelle  v.  Northwestern  Cement 
&  Concrete  Pavement  Co.,  37  Minn.  89  (33  N.W.  Rep.  327).  See, 
also,  Mor.  Corp.  §  548.  The  right  of  the  corporate  agents  to  adopt 
an  agreement  originally  made  by  promoters  depends  upon  the  pur- 
poses of  the  corporation  and  the  nature  of  the  agreement.  Of  course, 
the  agreement  must  be  one  which  the  corporation  itself  could  make, 


186  McARTHUR    V.  TIMES    PRINTING    CO.  [CHAP.  H. 

and  one  which  the  usual  agents  of  the  company  have  express  or  im- 
plied authority  to  make.  That  the  contract  in  this  case  was  of  that 
kind  is  very  clear;  and  the  acts  and  acquiescence  of  the  corporate 
<jfficcrs,  after  the  organization  of  the  company,  fully  justified  the 
jury  in  finding  that  it  had  adopted  it  as  its  own. 

The  defendant,  however,  claims  that  the  contract  was  void  under 
the  statute  of  frauds,  because,  "by  its  terms,  not  to  be  performed 
within  one  year  from  the  making  thereof,"  which  counsel  assumes  to 
be  September  12th,  —  the  date  of  the  agreement  between  plaintiff 
and  the  promoter.  This  proceeds  upon  the  erroneous  theory  that 
the  act  of  the  corporation,  in  such  cases,  is  a  ratification,  which  re- 
lates back  to  the  date  of  the  contract  with  the  promoter,  under  the 
familiar  maxim  that  "a  subseciuent  ratification  has  a  retroactive 
effect,  and  is  cfjuivalent  to  a  prior  command."  But  the  liability  of 
the  corporation,  under  such  circumstances,  does  not  rest  upon  any 
principle  of  the  law  of  agency,  but  upon  the  immetliate  and  volun- 
tary act  of  the  company.  Although  the  acts  of  a  corporation  with 
reference  to  the  contracts  made  by  promotei-s  in  its  l)ehalf  before  its 
organization  are  frequently  loosely  termed  "ratification,"  yet  a 
"ratification,"  properly  so  called,  implies  an  existing  person,  on 
whose  behalf  the  contract  might  have  been  made  at  the  time.  There 
cannot,  in  law,  l)e  a  ratification  of  a  contract  which  could  not  have 
been  made  bindhig  on  the  ratifier  at  the  time  it  was  made,  because 
the  ratifier  was  not  then  in  existence.  In  re  Empress  Engineering  Co., 
16  Ch.  Div.  128;  Melhado  v.  Porto  Alegre,  N.H.  <fc  B.  Ry.  Co.,  L.R. 
9  C.P.  505;  Kelner  v.  Bojcler,  L.R.  2  C.P.  185.  What  is  called 
"adoption,"  in  such  cases,  is,  in  legal  effect,  the  making  of  a  contract 
of  the  date  of  the  adoption,  and  not  as  of  some  former  date.  The 
contract  in  this  case  was,  theretore,  not  within  the  statute  of  frauds. 
The  trial  court  fairly  submitted  to  the  jury  all  the  issues  of  fact  in 
this  case,  accompanied  by  instructions  as  to  the  law  which  were  ex- 
actly in  the  line  of  the  views  we  have  expressed;  and  the  evidence 
justified  the  verdict. 

The  point  is  made  that  plaintiff  should  have  alleged  that  the  con- 
tract was  made  with  Nimocks,  and  subsequently  adopted  by  the  de- 
fendant. If  we  are  correct  in  what  we  have  said  as  to  the  legal  effect 
of  the  adoption  by  the  corporation  of  a  contract  made  by  a  pro- 
moter in  its  behalf  before  its  organization,  the  plaintiff  properly 
pleaded  the  contract  as  ha\ing  been  made  with  the  defendant.  But 
we  do  not  find  that  the  evidence  was  objected  to  on  the  ground  of 
variance  between  it  and  the  complaint.  The  assignments  of  error  are 
very  numerous,  but  what  has  been  already  said  covers  all  that  are 
entitled  to  any  special  notice.  ^^^^^  ^^^^^^ 

Note.  —  See,  accord,  Brautigam  v.  Dean  &  Co.,  85  N.J.L.  549; 
Pratt  v.  Oshkosh  Match  Co.,  89  Wis.  406. 


CHAP.  II.]  KELNER  V.   BAXTER.  '      187 

KELNER  V.  BAXTER. 

L.R.  2  C.P.  174.     1866. 

The  declaration  was  for  goods  sold  and  delivered,  goods  bargained 
and  sold,  interest,  and  upon  accounts  stated. 

At  the  trial  before  Erle,  C.J.,  at  the  sittings  in  London  after  last 
Trinity  Term,  the  following  facts  appeared  in  evidence :  The  plaintiff 
was  a  wine  merchant,  and  the  proprietor  of  the  Assembly  Rooms  at 
Gravesend.  In  August,  1865,  it  was  proposed  that  a  company  should 
be  formed  for  establishing  a  joint-stock  hotel  company  at  Graves- 
end,  to  be  called  the  Gravesend  Royal  Alexandra  Hotel  Company, 
Limited,  of  which  the  following  gentlemen  were  to  be  the  directors, 
viz.  Mr.  L.  Calisher,  Mr.  T.  H.  Edmands,  Mr.  M.  Davis,  Mr.  Mac- 
donald,  Mr.  Hulse,  Mr.  N.  J.  Calisher  (one  of  the  defendants),  and 
the  plaintiff.  The  plaintiff  was  to  be  the  manager  of  the  proposed 
company,  and  Mr.  Dales  (another  of  the  defendants)  was  to  be  the 
permanent  architect.  One  part  of  the  scheme  was  that  the  company 
should  purchase  the  premises  of  the  plaintiff  for  a  sum  of  5000?.,  of 
which  3000Z.  was  to  be  paid  in  cash,  and  2000?.  in  paid  up  shares,  the 
stock,  etc.,  to  be  taken  at  a  valuation;  and  this  was  carried  into 
effect  and  completed,  the  other  defendant  (Baxter)  being  the  nomi- 
nal purchaser  on  behalf  of  the  company.  In  December  a  prospectus 
was  settled.  On  the  9th  of  January,  1866,  a  memorandum  of  associa- 
tion was  executed  by  the  plaintiff  and  the  defendants  and  others. 

Pending  the  negotiations  the  business  had  been  carried  on  by  the 
plaintiff,  and  for  that  purpose  additional  stock  had  been  purchased 
by  him;  and  on  the  27th  of  January,  1866,  an  agreement  was  entered 
into  for  the  transfer  of  this  additional  stock  to  the  company,  in  the 
following  terms:  -  "January  27th,  1866. 

"To  John  Dacier  Baxter,  Nathan  Jacob  Calisher,  and  John  Dales, 
on  behalf  of  the  proposed  Gravesend  Royal  Alexandra  Hotel 
Company,  Limited. 

"Gentlemen,  —  I  hereby  propose  to  sell  the  extra  stock  now  at 
the  Assembly  Rooms,  Gravesend,  as  per  schedule  hereto,  for  the 
sum  of  900L,  payable  on  the  28th  of  February,  1866. 

(Signed)  "John  Kelner." 

Then  followed  a  schedule  of  the  stock  of  wines,  etc.,  to  be  pur- 
chased, and  at  the  end  was  written  as  follows:  — 
"To  Mr.  John  Kelner. 

"Sir,  —  We  have  received  your  offer  to  sell  the  extra  stock  as 
above,  and  hereby  agree  to  and  accept  the  terms  proposed. 

(Signed)  "J.  D.  Baxter, 
"N.  J.  Calisher, 
"J.  Dales. 
"On  behalf  of  the  Gravesend  Royal  Alexandra 
Hotel  Company,  Limited." 


188  KELNER    V.   BAXTER.  [cilAP.   11. 

In  pui-suance  of  this  agreement  the  goods  in  question  were  handed 
over  to  the  company,  and  consumed  by  them  in  the  business  of  the 
hotel;  and  on  the  1st  of  PY'bruary  a  meeting  of  the  tlirectors  took 
place,  at  which  the  following  resolution  was  pa.ssed:  "That  the  ar- 
rangement entered  into  by  Messrs.  Calisher,  Dales,  and  Baxter,  on 
Ix'half  of  the  company,  for  the  purchase  of  the  additional  stock  on 
the  premises,  as  per  list  taken  by  Mr.  Bright,  the  secretary,  and 
pointed  out  by  Mr.  Kelner,  amounting  to  900/.,  Ix^,  and  the  .same  is 
horei)y  ratified."  There  was  also  a  sui)sequent  ratification  by  the 
company,  viz.  on  the  11th  of  April,  but  this  was  after  the  commence- 
ment of  the  action. 

The  articles  of  association  of  the  company  were  duly  stamped  on 
the  VMh  of  Fel)ruary,  and  on  the  20th  the  company  obtained  a  cer- 
tificate of  incori)oration  under  the  2.')  <!k  20  \'ict.  c.  89. 

The  company  having  collapsed,  the  prescmt  action  was  brought 
against  the  defendants  upon  the  agreement  of  the  27th  of  January. 

On  the  part  of  the  defendants  oral  evidence  was  tendered  for  the 
jiurposc  of  showing  that  it  never  was  intended  that  they  should  Ix; 
pei-sonall}'  liai)le;  l)Ut  his  Lordship  rejected  it.  It  was  then  submitted 
that,  inasmuch  as  the  agreement  was  not  entered  into  by  the  de- 
fendants pei*sonally,  but  only  as  agents  for  the  hotel  company,  they 
thereby  incurred  no  personal  obligation  to  the  plaintiff,  who  was 
himself  one  of  the  promoters. 

For  the  plaintiff  it  was  insisted  that,  there  being  no  company  in 
existence  at  the  time  of  the  agreement,  the  parties  thereto  had  ren- 
dered themselves  personally  liable;  and  that  there  could  be  no  ratifi- 
cation of  the  contract  l)v  a  sul)sequently  created  company. 

A  verdict  was  taken  for  the  plaintiff  for  900/.,  sul)ject  to  leave  re- 
ser^Td  to  the  defendants  (upon  giving  .securitjO  to  move  to  enter  a 
nonsuit,  on  the  ground  that  the  agreement  of  the  27th  of  January 
did  not  make  them  personally  liable. 

Erle,  C.J.  I  am  of  opinion  that  this  rule  should  be  discharged. 
The  action  is  for  the  price  of  goods  sold  and  delivered :  and  the  ques- 
tion is  whether  the  goods  were  delivered  to  the  defendants  under  a 
contract  of  sale.  The  alleged  contract  is  in  writing,  and  commences 
with  a  proposal  addressed  to  the  defendants,  in  these  words:  "I 
hereby  propose  to  sell  the  extra  stock  now  at  the  Assembly  Rooms, 
Gravesend,  as  per  schedule  hereto,  for  the  sum  of  900/.,  payable  on 
the  28th  of  February,  1866."  Nothing  can  be  more  distinct  than 
this  as  a  vendor  proposing  to  sell.  It  is  signed  by  the  plaintiff,  and 
is  followed  by  a  schedule  of  the  stock  to  be  purchased.  Then  comes 
the  other  part  of  the  agreement,  signed  by  the  defendants,  in  these 
words,  "Sir,  We  have  received  your  offer  to  sell  the  extra  stock  as 
above,  and  hereby  agree  to  and  accept  the  terms  proposed."  If  it 
had  rested  there,  no  one  could  doubt  that  there  w^as  a  distinct  pro- 
posal by  the  vendor  to  sell,  accepted  by  the  purchasers.  A  difficulty 


CHAP.  II.]  KELNER  V.   BAXTER.  189 

has  arisen  because  the  plaintiff  has  at  the  head  of  the  paper  addressed 
it  to  the  plaintiffs  "on  behalf  of  the  proposed  Gravesend  Royal 
Alexandra  Hotel  Company,  Limited,"  and  the  defendants  have 
repeated  those  words  after  their  signatures  to  the  document,  and  the 
question  is,  whether  this  constitutes  any  ambiguity  on  the  face  of 
the  agreement,  or  prevents  the  defendants  from  being  bound  by  it. 
I  agree  that  if  the  Gravesend  Royal  Alexandra  Hotel  Company  had 
been  an  existing  company  at  this  time,  the  persons  who  signed  the 
agreement  would  have  signed  as  agents  of  the  company.  But,  as 
there  was  no  company  in  existence  at  the  time,  the  agreement  would 
be  wholly  inoperative  unless  it  were  held  to  be  binding  on  the  de- 
fendants personally.  The  cases  referred  to  in  the  course  of  the  argu- 
ment fully  bear  out  the  proposition  that,  where  a  contract  is  signed 
by  one  who  professes  to  be  signing  "as  agent,"  but  who  has  no 
principal  existing  at  the  time,  and  the  contract  would  be  altogether 
inoperative  unless  binding  upon  the  person  who  signed  it,  he  is 
bound  thereby:  and  a  stranger  cannot  by  a  subsequent  ratification 
reheve  him  from  that  responsibility.  When  the  company  came  after- 
wards into  existence  it  was  a  totally  new  creature,  having  rights  and 
obhgations  from  that  time,  but  no  rights  or  obligations  by  reason 
of  anything  which  might  have  been  done  before.  It  was  once,  in- 
deed, thought  that  an  inchoate  liability  might  be  incurred  on  behalf 
of  a  proposed  company,  which  would  become  binding  on  it  when 
subsequently  formed:  but  that  notion  was  manifestly  contrary  to 
the  principles  upon  which  the  law  of  contract  is  founded.  There 
must  be  two  parties  to  a  contract;  and  the  rights  and  obligations 
which  it  creates  cannot  be  transferred  by  one  of  them  to  a  third 
person  who  was  not  in  a  condition  to  be  bound  by  it  at  the  time  it 
was  made.  The  history  of  this  company  makes  this  construction  to 
my  mind  perfectly  clear.  It  was  no  doubt  the  notion  of  all  the  parties 
that  success  was  certain:  but  the  plaintiff  parted  with  his  stock  upon 
the  faith  of  the  defendants'  engagement  that  the  price  agreed  on 
should  be  paid  on  the  day  named.  It  cannot  be  supposed  that  he 
for  a  moment  contemplated  that  the  payment  was  to  be  contingent 
on  the  formation  of  the  company  by  the  28th  of  February.  The 
paper  expresses  in  terms  a  contract  to  buy.  And  it  is  a  cardinal  rule 
that  no  oral  evidence  shall  be  admitted  to  show  an  intention  different 
from  that  which  appears  on  the  face  of  the  writing.  I  come,  there- 
fore, to  the  conclusion  that  the  defendants,  having  no  principal  who 
was  bound  originally,  or  who  could  become  so  by  a  subsequent  rati- 
fication, were  themselves  bound,  and  that  the  oral  evidence  offered 
is  not  admissible  to  contradict  the  written  contract. 

WiLLES,  J.  I  am  of  the  same  opinion.  Evidence  was  clearly  inad- 
missible to  show  that  the  parties  contemplated  that  the  liability  on 
this  contract  should  rest  upon  the  company  and  not  upon  the  per- 
sons contracting  on  behalf  of  the  proposed  company.  The  utmost  it 


190  KELNER    V.  BAXTER.  [CILAP.  II. 

could  amount  to  is,  that  both  parties  were  satisfied  at  the  time  that 
all  would  go  smoothly,  and  consequently  that  no  liability  would 
ensue  to  the  defendants.  The  contract  is,  in  substance,  this,  "I,  the 
plaintiff,  agree  to  sell  to  you,  the  defendants,  on  behalf  of  the  Graves- 
end  Royal  Alexandra  Plotel  Company,  my  stock  of  wines;"  and, 
"We,  the  defendants,  have  received  your  offer,  and  agree  to  and 
accept  the  terms  proposed;  and  you  shall  be  paid  on  the  28th  of 
February  next."  Who  is  to  pay?  The  company,  if  it  should  be 
formed.  But,  if  the  company  should  not  be  formed,  who  is  to  pay? 
That  is  tested  by  the  fact  of  the  immediate  delivery  of  the  subject  of 
sale.  If  payment  was  not  made  by  the  company,  it  must,  if  by  any- 
body, be  by  the  defendants.  That  brings  one  to  consider  whether 
the  company  could  be  legally  liable.  I  appn^hend  the  company 
could  only  become  liable  uj^on  a  new  contract.  It  would  reciuire  tiie 
assent  of  the  plaintiff  to  discharge  the  defendants.  Could  the  com- 
pany become  Uable  by  a  mere  ratification?  Clearly  not.  Ratifi- 
cation can  only  be  by  a  person  ascertained  at  the  time  of  the  act 
done,  —  by  a  person  in  existence  either  actually  or  in  contemplation 
of  law;  as  in  the  case  of  assignees  of  bankrupts  and  administrators, 
whose  title,  for  the  protection  of  the  estate,  vests  by  relation.  The 
case  of  an  executor  requires  no  such  ratification,  inasmuch  as  he 
takes  from  the  will.  It  is  unnecessary,  however,  to  pursue  this 
further.  In  addition  to  the  cases  cited  at  the  bar,  I  would  refer  to 
Gunn  v.  London  and  Lancashire  Fire  Insurance  Company,  12  C.B. 
N.S.  694  (E.C.L.R.  vol.  104),  where  this  Court,  upon  the  authority 
of  Payne  v.  New  South  Wales  Coal  and  International  Steam  Navi- 
gation Company,  10  Ex.  283,  24  L.J.  Ex.  117,  held  that  a  contract 
made  between  the  projector  and  the  directors  of  a  joint-stock  com- 
pany provisionally  registered,  but  not  in  terms  made  conditional 
on  the  completion  of  the  company,  was  not  binding  upon  the  sub- 
sequent completely  registered  company,  although  ratified  and  con- 
firmed by  the  deed  of  settlement:  and  Williams,  J.,  said  that  "to 
make  a  contract  valid,  there  must  be  parties  existing  at  the  time 
who  are  capable  of  contracting."  That  is  an  authority  of  extreme 
importance  upon  this  point;  and,  if  ever  there  could  be  a  ratifica- 
tion, it  was  in  that  case.  Both  upon  principle  and  upon  authority, 
therefore,  it  seems  to  me  that  the  company  never  could  be  liable 
upon  this  contract:  and,  as  was  put  by  my  Lord,  construing  this 
document  ut  res  magis  valeat  quam  pereat,  we  must  assume  that 
the  parties  contemplated  that  the  persons  signing  it  would  be  per- 
sonally liable.  Putting  in  the  words  "on  behalf  of  the  Gravesend 
Royal  Alexandra  Hotel  Company,"  would  operate  no  more  than  if 
a  person  should  contract  for  a  quantity  of  corn  "on  behalf  of  my 
horses."  As  to  the  suggestion  that  there  should  have  been  a  special 
count,  that  is  quite  a  mistake.  There  need  not  be  a  special  count 
unless  there  was  a  person  existing  at  the  time  the  contract  was  made 


CHAP.  II.]  heckman's  estate.  191 

who  might  have  been  principal.  The  common  count  perfectly  well 
represents  the  character  of  the  liability  which  these  defendants  in- 
curred. It  is  quite  out  of  the  question  to  suppose  that  there  was  any 
mistake.  The  document  represents  the  real  transaction  between  the 
parties.  I  tliink  that  the  course  taken  at  the  trial  was  perfectly  cor- 
rect, and  that  the  rule  should  be  discharged. 


HECKMAN'S   ESTATE. 

172  Pa.  185.     1896. 

Opinion  by  Mr.  Justice  Williams. 

This  case  depends  upon  the  inferences  to  be  drawn  from  the  evi- 
dence submitted  to  the  orphans'  court.  The  auditing  judge  reached 
one  conclusion  while  his  associates  reached  the  opposite  one,  and  it 
becomes  necessary  to  inquire  whether  the  evidence  fairly  sustains 
the  decree  made  by  the  majority  of  that  court.  It  appears-that  sev- 
eral persons,  among  whom  where  Heckman  and  Shafto,  had  ar- 
ranged to  organize  a  company  for  the  manufacture  and  sale  of  brick. 
Shafto  was  the  only  one  of  the  number  who  was  an  experienced  brick- 
maker,  and  his  judgment  as  to  the  preliminary  arrangements,  in- 
cluding the  selection  of  materials  and  the  location  of  a  brickyard, 
was  relied  on  b}'-  all  his  associates.  He  was  at  the  same  time  the 
agent  of  Ward,  employed  by  him  to  secure  a  tenant  for  a  brickyard 
owned  by  him,  with  the  promise  that  he  should  have  one  quarter  of 
the  rent  obtained.  Under  these  circumstances  he  directed  the  at- 
tention of  his  associates  to  Ward's  property,  proposing  a  lease  of  the 
yard  and  of  the  right  to  take  the  clay,  to  be  paid  for  by  a  royalty  of 
one  dollar  per  thousand  bricks,  with  a  minimum  royalty  of  twenty- 
five  hundred  dollars  for  the  first  year  and  four  thousand  per  annum 
thereafter.  Two  or  three  of  his  associates,  including  Heclonan, 
visited  the  property  at  his  instance.  The  brick  company  had  not 
been  organized.  A  meeting  was  brought  about  by  Shafto  between 
Ward  and  his  own  associates  in  the  brick  enterprise,  which  resulted  in 
a  lease  upon  the  terms  Shafto  had  proposed. 

Heckman  was  to  become  the  president  of  the  company  when  it 
was  fully  organized,  and  the  lease  was  executed  by  him  on  behalf  of 
the  company  then  in  process  of  formation,  and  as  soon  as  the  com- 
pany was  in  condition  to  take  it  he  assigned  it  directly  to  the  cor- 
poration. This  was  done  in  pursuance  of  an  understanding  to  which 
his  associates,  including  Shafto,  the  agent  of  the  lessor,  were  parties. 
The  bills  were  thereafter  made  to  the  Philadelphia  Brick  Company, 
presented  to  its  officers,  and  paid,  except  in  one  instance,  by  its 
checks. 

Under  the  circumstances  disclosed  by  the  evidence  we  think  the 


192  WEATHEKFOKD    HY.   CO.  V.  GIIA\GER.  [cilAP.   II. 

knowledge  of  Shafto  was  notice  to  his  principal  that  the  tenant  of 
the  yard  and  the  i)urch}i.sor  of  the  clay  was  the  corp<iration  and  not 
any  inenibcr  or  othcer  tliereof;  tliat  the  corporation  was  (he  pro- 
spective operator  and  owner  of  the  works,  and  was  to  be  looked  to 
for  the  rents  or  royalties.  The  subsecjuent  course  of  dealing  would 
indicate  actual  knowlctlge  of  the  facts,  antl  recognition  of  the  relation 
of  lessor  and  lessee  between  himself  and  the  corporation  on  the  part 
of  Ward. 

We  are  not  prepared  to  adopt  the  conclusion  reached  by  the  court 
below  that  the  bad  faith  of  .Shafto  in  his  dealings  witli  his  associates 
rendered  the  contract  he  had  nt'gotiated  between  them  and  his  em- 
ployer absolutely  void.  As  to  any  right  of  action  or  interest  of  lus 
own,  that  result  might  well  follow;  l)ut  we  can  sih)  no  reason  ^^hy 
the  lessor  should  not  recover  for  his  royalties,  at  least  as  to  so  nnich 
thereof  ;is  he  was  actually  to  receive.  It  is  not  necessary  however  to 
enter  upon  that  subject.  We  place  the  aflirmance  of  this  judgment 
on  the  ground  already  indicated.  The  agent  negotiated  this  lejisc. 
He  knew,  perfectly  well  who  was  to  l)e  the  le.s.see,  and  by  whom  the 
enterprise  wius  to  be  conducted.  He  was  himself  a  member  of  the 
comjxuiy  for  whose  use  and  benefit  Heckman  be<ain(»  temporarily  a 
substitute;  and  it  would  have  been  a  fraud  on  Heckman  for  Shafto 
to  attempt  to  hold  him  personally  responsible  for  what  he  well  knew 
was  understood  to  be  the  obligation  of  the  corporation.  The  prin- 
cipal cannot  secure  the  iKMiefit  of  the  contract  and  repudiate  the 
means  l)y  which  its  execution  was  induced.  He  stands  on  the  ground 
on  which  his  agent  hiLS  put  him. 

The  iissignments  of  error  are  overruled  and  the  decree  is  affirmed. 

Note.  — See,  accord,  Chicago  Building  Co.  v.  Talholton  Creamery 
Co.,  100  Ga.  84.  Cf.  Furniture  &  Carj^et  Co.  v.  Crawford,  127  Mo. 
35G. 


WEATHERFORD   RY.  CO.   v.   GRANGER. 

86  Tex.  .350.     1894. 

Gaines,  Associate  Ju.stice.  This  suit  was  brought  by  the  de- 
fendant in  error  against  the  plaintiff  in  error  to  recover  upon  open 
account  for  services  rendered.  The  plaintiff  in  the  trial  court  ob- 
tained a  judgment,  which  was  affirmed  by  the  Court  of  Civil  Ap- 
peals. This  writ  of  error  is  sued  out  for  the  purpo.se  of  reversing 
that  judgment. 

The  plaintiff  in  error,  the  defendant  in  the  trial  court,  is  a  cor- 
poration, organized  under  the  general  law  of  the  State  for  the  pur- 
pose of  constructing  and  operating  a  railroad.    The  defendant  in 


CHAP.  II.]       WEATHERFORD  RY.  CO.  V.   GRANGER.  193 

error,  the  plaintiff  in  the  trial  court,  is  a  practicing  attorney  at  law. 
The  services  for  which  a  recovery  was  sought  were  for  aiding  to 
raise  a  bonus  and  for  legal  advice  and  assistance,  and  were  rendered 
both  before  and  after  the  filing  with  the  Secretary  of  State  the  com- 
pany's articles  of  incorporation. 

The  testimony,  as  shown  by  the  statement  of  facts,  in  so  far  as  it 
bears  upon  the  question  before  the  court,  is  in  substance  as  follows: 

The  plaintiff  testified,  that  in  March,  1889,  he  was  employed  by 
one  Anderson  to  assist  in  raising  a  bonus  for  the  defendant  com- 
pany, and  "agreed  that  the  said  company  would  pay  him  well  for 
his  services; "  that  Anderson  was  a  promoter  of  the  corporation,  and 
represented  liimself  as  its  general  manager,  and  employed  plaintiff 
not  only  to  assist  in  procuring  the  bonus,  but  to  attend  to  all  the 
company's  business  as  its  attorney;  that  in  September,  1889,  An- 
derson allowed  his  account,  and  was  at  that  time  the  owner  of  a 
majority  of  the  stock,  which  he  subsequently  transferred  to  one 
Stone,  the  president  of  the  company,  and  his  associates. 

Stone  testified,  on  behalf  of  the  company,  that  in  the  spring  of 
1889,  in  Kansas  City,  Missouri,  he  employed  Anderson  to  go  to 
Weatherford,  and  to  procure  a  bonus  of  $40,000  and  survey  the 
right  of  way  for  a  railroad  from  that  city  to  Mineral  Wells,  and  to 
pay  him  $1000  for  his  services;  that  he  had  paid  Anderson  according 
to  his  agreement ;  that  he  did  not  know  that  Anderson  had  ever  em- 
ployed plaintiff  for  any  purpose ;  that  Anderson  was  never  general 
manager  for  the  company,  and  held  no  office  in  it  except  that  of  di- 
rector; that  he  knew  that  the  plaintiff  was  interesting  himself  in 
procuring  the  bonus,  but  supposed  he  was  working  for  one  Johnson, 
who  was  one  of  the  charter  members,  and  who  owned  certain  coal 
lands  which  he  wished  to  sell  to  the  projectors  of  the  railroad;  that 
plaintiff  never  said  anji-hing  to  him  about  the  company  owing  him 
anything,  and  that  the  first  he  knew  of  plaintiff's  claim  was  when 
this  suit  was  brought. 

There  was  further  testimony  tending  to  show,  that  Anderson  was 
the  chief  active  promoter  of  the  enterprise,  and  that  he  had  the 
principal  management  of  the  business  from  its  inception  in  March 
until  he  retired  in  September,  1889;  and  that  during  this  time  the 
plaintiff  was  frequently  in  attendance  upon  him,  aiding  and  assist- 
ing him  in  procuring  the  bonus,  and  otherwise  promoting  the  objects 
of  the  company. 

No  controversy  is  raised  in  this  court  as  to  the  fact  of  plaintiff's 
services,  or  as  to  their  value. 

The  trial  judge,  as  conclusions  of  fact,  found,  in  substance,  that 
some  kind  of  a  company  was  formed  to  build  the  railway  from 
Weatherford  to  Mineral  Wells;  that  Anderson  was  "the  principal 
mover  in  said  scheme,  and  was  so  recognized  by  all  parties;"  that 
he  employed  plaintiff  to  assist  him  in  procuring  a  bonus  and  in 


194  WEATHERFORD    RY.  CO.  V.  GRANGER.  (CHAP.  II. 

otherwise  advancing  the  enterprise,  and  that  the  plaintiff  rendered 
service  under  said  cinploytnont,  l)oth  before  antl  after  the  articles  of 
the  company  were  filed;  that  the  bonus  was  raised,  and  was,  after 
its  incorporation,  accepted  by  said  company. 

The  Court  of  Civil  Appeals  adopt  the  findings  of  the  trial  judge, 
and  add  additional  findings  as  follows:  "The  charter  of  the  defend- 
ant company  was  signed  and  acknowledgetl  about  June  1,  1881),  and 
was  filed  in  the  oflice  of  the  Secretary  of  State  at  Austin,  July  2, 
1889.  The  bonus  or  subsitly  was  not  secured  until  after  the  filing  of 
the  charter.  The  record  wouUl  have  justifie(l  the  trial  court,  antl  so 
justifies  us,  in  finding,  :us  we  do,  the  fact  to  be,  that  in  avaihng  itself 
of  the  subsidy  securetl,  the  company  knew  of  the  services  of  the 
plaintiff  in  raising  the  bonus." 

Under  the  statute,  the  corporation  came  into  existence  when  its 
articles  of  incorporation  were  filed  in  the  office  of  Secretary  of  State. 
Rev.  Stats.,  arts.  410-1,  4105.  Although  the  trial  court  found  that  the 
services  for  which  plaintiff  sued  were  rendered  in  part  before  and  in 
part  after  the  filing  of  the  articles,  their  value  wius  a.s.sessed  as  an  en- 
tirety at  S')00,  and  judgment  was  rendered  for  the  whole  amount.  In 
this  there  wa.s  error.  We  are  of  opinion,  that  under  the  circumstances 
of  this  case,  jus  shown  by  the  evidence,  the  defendant  corporation  can 
not  be  held  hable  to  the  plaintiff  for  any  services  rendered  by  him 
before  it  was  brought  into  legal  existence. 

Upon  the  question  as  to  the  liability  of  a  corporation  growing  out 
of  contracts  made  on  its  behalf  by  its  promoters,  there  is  consider- 
al)le  diversity  and  some  conflict  of  opinion.  But  there  are  some  prop- 
ositions affecting  this  question  upon  which  the  authorities  .seem 
to  be  in  substantial  accord.  A  promoter,  though  he  purport  to  act 
on  behalf  of  the  projected  corporation,  and  not  for  him.self,  can  not 
be  treated  as  agent,  because  the  nominal  principal  is  not  then  in 
existence;  and  hence  when  there  is  nothing  more  than  a  contract 
by  a  promoter,  in  which  he  undertakes  to  bind  the  future  corpora- 
tion, it  is  generally  conceded  that  it  can  not  be  enforced.  Kelner  v. 
Baxter,  L.R.  2  Com.  PI.  174;  Melhado  v.  Railway,  L.R.  9  Com. 
PI.  503. 

The  promoters  themselves  are  liable  upon  the  contract,  unless  the 
pei-son  with  v.hom  they  engage  agi'ees  to  look  to  some  other  fund  for 
payment.  Kerridge  v.  Hesse,  9  Carr.  &  P.  200. 

The  statute,  however,  which  authorizes  the  incorporation  may 
provide  that  the  corporation,  when  formed,  shall  pay  the  necessary 
expenses  of  promoting  the  scheme;  in  such  a  case,  though  the  right 
of  action  is  dependent  upon  the  contract,  the  hability  is  created  by 
the  statute.  Re  Rotherham,  etc.,  Co.,  L.T.  Rep.  N.S.  217. 

It  is  now  held  in  England,  that  although  the  articles  of  association 
bind  the  company  to  pay  the  e\-penses  of  its  promotion,  a  third  party 
can  not  avail  himself  of  such  a  provision  so  as  to  maintain  an  action 


CHAP.  II.]  WEATHERFORD    RY.  CO.  V.  GRANGER.  195 

against  the  company.  Re  Rotherham,  etc.,  Co.,  supra;  Eley  v.  As- 
surance Co.,  34  L.T.  Rep.  N.S.  190. 

It  is  also  generally  held,  that  contracts  by  promoters  made  on  be- 
half of  the  corporation,  within  the  scope  of  its  general  authority, 
may  be  adopted  by  the  latter  after  its  organization.  Some  of  the 
courts  say  they  may  be  ratified;  but  ratification  presupposes  a  prin- 
cipal existing  at  the  time  of  the  agent's  action,  and  it  seems  to  us, 
therefore,  that  the  term  is  not  applicable  in  its  technical  sense. 
McArthur  v.  Printing  Co.,  51  N.W.  Rep.  215;  Spiller  v.  Paris  Skat- 
ing Rink  Co.,  7  Ch.  Div.  368. 

With  the  exception  of  the  law  courts  of  England,  the  rule  is  also 
very  generally  recognized,  that  if  a  contract  be  made  on  behalf  of  a 
corporation  by  its  promoters,  and  the  corporation,  after  its  organiza- 
tion, with  a  knowledge  of  the  facts,  accept  its  benefits,  it  must  take 
it  with  its  burdens ;  and  if  the  other  party  has  performed  the  stipula- 
tion binding  upon  him,  it  may  be  enforced  as  against  the  corporation. 
Spiller  V.  Rink  Co.,  supra;  Loucke  v.  Warehousing  Co.,  6  Ch.  67. 

But  as  to  the  application  of  the  rule  last  announced,  the  courts 
differ  in  opinion.  A  leading  case  upon  this  subject  is  Edwards  v. 
Grand  Junction  Railway  Company,  1  Milne  &  Cr.  650.  There  the 
promoters  of  the  railway  company  had  entered  into  a  contract  with 
the  trustees  of  a  turnpike  company,  in  which  the  latter  agreed  to 
withdraw  their  opposition  to  an  act  of  Parliament  for  the  incorpora- 
tion of  the  railway  company,  in  consideration  of  an  agreement  by 
the  promoters  to  insert  certain  clauses  in  the  act  as  to  the  nature  of 
the  necessary  constructions  at  the  crossing  of  the  railway  and  the 
turnpike  road,  and  the  opposition  was  withdrawn,  but  the  clauses 
were  not  inserted;  and  it  was  held,  that  the  railway  company  should 
be  enjoined  from  constructing  the  crossing  in  a  manner  different 
from  that  specified  in  the  clauses  which  had  been  agreed  upon  and 
had  been  omitted.  The  correctness  of  the  ruling  in  this  case  was 
seriously  questioned  in  the  House  of  Lords  in  Preston  v.  Railway,  5 
House  of  Lords,  605,  and  in  Caledonian  Railway  Company  v.  Helens- 
burgh, 2  McQuean,  391 ;  same  case,  2  Jur.  N.S.  695.  We  presume 
the  doubt  as  to  this  case  arises  from  the  fact  that  the  only  benefit 
accepted  by  the  defendant  company  was  the  exercise  of  the  powers 
conferred  upon  it  by  the  act  of  Parliament. 

When  the  promoters  of  a  railway  company  have  agreed  with  a 
landed  proprietor  through  whose  estates  the  road  is  projected  to  run, 
to  take  the  requisite  quantity  of  his  land  at  a  stipulated  price,  and 
after  the  corporation  is  formed  it  takes  the  land,  it  is  certainly  equi- 
table that  the  company  should  be  made  to  pay  the  agreed  compen- 
sation; and  the  doctrine  is  recognized  in  many  English  equity  cases. 
Stanley  v.  Railway,  3  Milne  &  Cr.  773;  Gooday  v.  Colchester  Railway 
Co.,  L.R.  15  Eq.  596;  Preston  v.  Liverpool  Railway  Co.,  L.R.  7  Eq. 
124;  Edwards  v.  Grand  Junction  Railway  Co.,  1  Milne  &  Cr.  650. 


196  WEATHERFORD    RY.  CO.  V.  GRANGEUi  [CHAP.   11. 

The  same  rule  has  Ijcen  announced  also  in  many  American  casca. 
Little  Hock  Railway  Co.  v.  Pcmj,  37  Ark.  IM;  Paiton  Cattle  Co.  v. 
Bank,  21  Xcb.  021;  Grape  Siiyar  Co.  v.  Small,  40  Mil.,  3'J.j;  Bom- 
mer  v.  Manufacturing  Co.,  81  N.Y.  468;  Battelle  v.  Pavement  Co., 
37  Minn.  89;  McArthur  v.  Printing  Co.,  .snipra. 

Having  exorcised  rights  and  enjoyed  henefits  secured  to  it  hy  the 
terms  of  a  contract  made  hy  its  promoters  in  its  behalf,  a  cori)ora- 
tion  should  l)e  held  cstopixnl  to  deny  its  validity. 

Again,  when  the  promoters  of  a  corporation  have  made  a  contract 
in  its  behalf,  to  l>e  jxTformed  after  it  is  organized,  it  may  Im*  (hn'tiKul 
a  continuing  offer  on  part  of  the  other  party  to  the  agreement,  un- 
less withdrawn  by  him,  and  may  be  accepted  and  adopted  by  the 
corporation  after  such  organization;  and  the  exercise*  of  any  right 
incon.sistent  with  the  non-existence  of  such  contract  might  1)0  deemed 
conclusive  evidence  of  such  adoption. 

But  there  are  some  coses  which  go  a  step  further.  Low  v.  Hail- 
way,  4o  New  Hampshire,  370,  was  a  case  of  a  Vermont  corporation 
sued  in  Ncnv  Hampshire  upon  a  contract  made  in  the  former  State. 
After  a  chartcT  had  Ix'on  grante(l,  but  U'fore  an  organization  had 
l>een  elTocto<l,  a  pul)lic  meeting  was  hold  to  promote  the  enterprise, 
at  which,  it  is  to  bo  prosmnod  from  the  opinion,  the  corporators  were 
present  or  wore  represented.  A  proposition  wjus  made  that  the 
plaintiff  should  1k'  employed  and  paid  to  visit  various  towns  and 
cities  to  interest  capital  in  the  projected  scheme,  and  to  solicit  and 
procure  subscriptions.  The  plaintiff  accepted  the  offer  and  por- 
formoil  the  services,  and  it  was  held  that  the  corporation  was  liable. 
The  court  dotormined  that  the  question  of  liability  deix«ndod  ui)on 
the  law  of  \'ermoMt.  as  aimouncod  in  the  ca.se  of  Hall  v.  Railway, 
28  \'ermont,  401.  But  they  wore  also  inclined  strongly  to  think,  that 
upon  general  principles  the  company,  by  accepting  subscriptions 
which  wore  procured  by  the  plaintiff,  bound  it.self  to  pay  for  his  serv- 
ices. Tlu>v  also  se(Mn  to  recognize  the  doctrine,  that  after  a  charter 
has  been  granted  a  majority  of  the  corporators  have  the  power  to 
make  contracts  necessary  to  perfect  the  organization,  which  may  be 
binding  upon  the  company  when  formed.  But  they  also  lay  stress 
upon  the  fact  that  the  charter  of  the  defendant  corporation  pro- 
vided, that  "the  expenses  of  all  surveys  antl  examinations,  as  also  of 
the  preliminary  survey's  already  made  and  making,  and  all  manner  of 
incidental  expenses  relating  thereto,  shall  be  paid  by  said  corpora- 
tion." 

In  Hall  V.  Railway,  supra,  a  coq'x^rator  was  hold  entitled  to  re- 
cover for  necessary  serNices  in  organizing  the  company,  although 
there  was  no  express  promise  by  any  one  that  he  should  be  paid. 
Unless  the  charter  of  the  company  pro\'ided  for  the  pa>"Tnent  of 
such  expenses,  this  decision  we  think  is  unsupported  by  authority. 

It  is  generally  held,  that  in  the  absence  of  such  provision  in  the 


CHAP.  II.]       WEATHERFORD  RY.  CO.  V.   GRANGER.  197 

act  of  incorporation  in  case  of  a  special  charter,  or  in  the  general 
law  or  in  the  articles  of  incorporation  under  a  general  law,  no  im- 
plied promise  can  be  imputed  to  a  corporation  to  pay  for  the  serv- 
ices of  a  corporator  or  promoter  before  the  corporation  comes  into 
existence.  A  contract  made  by  promoters  may  be  adopted  by  a  cor- 
poration, expressly  or  impliedly,  by  exercising  rights  under  it;  but 
otherwise  it  is  not  binding  upon  such  corporation.  Kelner  v.  Baxter, 
supra;  Melhado  v.  Railway,  supra;  Railway  v.  Ketchum,  27  Conn. 
170;  Kerridge  v.  Hesse,  9  Carr.  &  P.  200;  Munson  v.  Railway,  103 
N.Y.  58;  Morrison  v.  Mining  Co.,  52  Cal.  306;  Gent  v.  Ins.  Co.,  107 
111.  652;  Railway  v.  Sage,  65  111.  328;  Western,  etc.,  Co.  v.  Cousley, 
72  111.  531;  Buffington  v.  Borden,  80  Wis.  635;  see  also.  Railway  v. 
Helensburgh,  2  McQuean  (H.  of  L.);  same  case,  2  Jur.  N.S.  695;  Teft 
V.  Bank,  141  Pa.  550. 

Now,  when  it  is  said  that  when  a  corporation  accepts  the  benefit 
of  a  contract  made  by  its  promoters,  it  takes  it  cum  onere,  it  is  im- 
portant to  understand  distinctly  what  is  meant.  There  is,  so  far  as 
this  matter  is  concerned,  a  radical  difference  between  a  promise  made 
on  behalf  of  the  future  corporation  in  the  contract  itself,  the  benefits 
of  which  the  corporation  has  accepted,  and  the  promise  in  a  previous 
contract  to  pay  for  services  in  procuring  the  latter  to  be  made.  This 
is  well  illustrated  by  the  facts  of  the  present  case.  Here  a  proposition 
was  made  on  behalf  of  the  company,  by  its  promoters,  that  if  a  bonus 
should  be  subscribed  and  paid  to  it,  it  would  build  its  road  between 
certain  points,  and  would  carry  coal  at  a  certain  stipulated  rate. 

By  accepting  the  bonus,  the  company  became  bound  to  fulfill  the 
stipulations  of  that  contract.  That  was  the  burden  which  it  took 
with  the  benefit  of  the  agreement.  But  it  also  appears  that  one  of 
the  promoters  promised  the  plaintiff,  that  if  he  would  assist  in  pro- 
curing subscribers  to  the  bonus,  the  company  would  pay  him  for 
his  services.  This  was  no  part  of  the  contract  the  benefits  of  which 
were  taken  by  the  defendant. 

The  benefits  of  a  contract  are  the  advantages  which  result  to 
either  party  from  a  performance  by  the  other;  and  in  like  manner 
its  burdens  are  such  as  its  terms  impose.  A  more  accurate  manner 
of  stating  the  nature  of  the  plaintiff's  demand  is  to  say,  that  the 
defendant  has  accepted  the  benefit  of  the  plaintiff's  services  and 
should  pay  for  them.  It  is  true,  in  one  sense,  that  the  company  has 
had  the  benefit  of  plaintiff's  services,  and  it  is  equally  true  that  it 
would  have  had  that  benefit  if  the  services  had  been  rendered  under 
an  employment  by  the  subscribers  to  the  bonus;  and  yet  in  the  latter 
case  it  could  not  be  claimed  that  the  company  would  be  liable  for 
such  services,  unless  payment  for  them  by  the  company  were  made 
one  of  the  terms  of  the  contract  between  the  company  and  the  sub- 
scribers. 

In  Re  Rotherham,  etc.,  Company,  50  Law  Times  Reports,  New 


198  WEATIIERFORD    RY.  CO.  V.  GRANGER.  [c!LA.P.   II. 

Series,  219,  in  the  opinion  of  one  of  the  justices,  this  hinp;uage  is 
used:  "It  is  said  that  Mr.  Peace  has  anecjuity  aj^ainst  the  company, 
because  the  company  had  the  benefit  of  his  labor.  \\'hat  does  that 
mean?  If  I  order  a  coat  and  receive  it,  I  get  the  benefit  of  the  hibor 
of  the  cloth  manufacturer;  but  does  any  one  dream  that  I  am  under 
any  hability  to  him?  It  is  a  mere  fallacy  to  say,  that  l^ecause  a  per- 
son gets  the  ix'nefit  of  work  done  i)y  somebotly  else,  he  is  liable  to 
pay  the  person  who  did  tlie  work." 

There  is  more  doubt  as  to  the  plaint ifT's  right  to  recover  for  his 
legal  services  in  advising  as  to  the  articles  of  incorporation  and  in 
correcting  and  preparing  this  paper.  Such  services  are  usually  neces- 
sary, and  it  woukl  seem  that  the  corporation  shoukl  pay  for  them. 
Such  payment  is  frequently  proviiled  ff)r  in  the  act  of  incorporation, 
or  in  the  articles  when  the  incorporation  is  effected  under  a  general 
law.  When  such  is  the  case,  persons  who  take  stock  in  the  company 
are  chargeable  with  notice  that  a  liability  for  this  purpose  has  al- 
readj'  l)een  created,  and  it  is  prt)per  for  the  corporation  to  discharge 
it.  But  in  the  absence  of  such  provision  in  the  statute  or  in  the  arti- 
cles, it  may  beMnjust  to  shareholders  to  charge  the  corporation  with 
liabilities  of  which  they  had  no  actual  knowledge  at  the  time  they 
accepted  the  shares.  We  therefore  hold,  with  some  hesitation,  that 
claims  for  the  necessary  expenses  of  the  organization,  under  our 
statute,  should  not  be  excepted  from  the  general  rule  applicable  to 
contracts  made  before  the  corporation  has  come  into  legal  existence. 

Applying  the  rules  we  have  announced  to  the  case  before  us,  it  is 
apparent  that  the  plaintiff  has  recovered,  in  part  at  least,  for  serv- 
ices for  which  the  defendant  was  not  bound  to  pay.  He  maele  his 
contract  before  the  company  had  a  legal  existence  as  a  corporation, 
with  a  single  promoter;  and  it  is  a  matter  of  no  moment  that  the 
promoter  was  the  general  manager  of  the  project  and  became  the 
owner  of  the  majority  of  the  stock  upon  its  organization.  There 
were  other  stockholders.  The  law  requires  that  there  should  be  ten 
at  least.  Rev.  Stats.,  art.  4099. 

The  evidence  does  not  disclose  that  his  contract  with  Anderson 
was  actually  known  to  any  other  person;  nor  do  we  see  any  other 
circumstance  from  which  knowledge  should  necessarily  be  inferred. 
Since  Anderson  had  no  power  to  bind  the  future  corporation,  but 
could  bind  himself,  the  inference  from  his  assisting  Anderson  would 
be  that  he  was  acting  gratuitously,  or  that  Anderson  had  agreed 
to  pay  him. 

Anderson  was  interested  in  shifting  his  contract  upon  the  com- 
pany; and  it  may  be  doubted  whether,  although  he  became  a  director, 
notice  to  liim  could  be  deemed  notice  to  the  company.  The  Court  of 
Civil  Appeals  find,  however,  that  the  company  had  notice. 

Waiving  the  question  of  the  right  of  the  court  to  supplement  the 
finding  of  the  trial  judge  under  such  evidence,  and  the  further  ques- 


CHAP.  II.]       WEATHERFORD  RY.  CO.  V.   GRANGER.  199 

tion  whether  there  be  any  evidence  to  support  this  conclusion,  it 
follows  from  what  we  have  already  said,  that  the  question  of  the 
company's  knowledge  does  not  affect  the  case.  The  plaintiff's  con- 
tract with  Anderson,  though  made  by  the  latter  on  behalf  of  the 
company,  was  not  a  lien,  encumbrance,  or  burden  upon  the  contract 
between  the  subscribers  to  the  bonus  and  the  defendant,  and  it  in- 
curred no  liability  on  the  former  contract  by  accepting  the  benefit 
of  the  latter. 

The  evidence  was  sufficient  to  sustain  a  recovery  by  the  plaintiff 
for  the  value  of  his  services  rendered  after  the  corporation  was 
created ;  but  the  court  below  failed  to  find  separately  the  reasonable 
worth  of  such  services.  Therefore  the  entire  judgment  must  be 
reversed. 

We  deem  it  proper  to  say,  in  conclusion,  that  if  the  opinion  in  the 
case  of  McDonough  v.  Bank,  34  Texas,  309,  is  to  be  construed  as  hold- 
ing that  merely  by  accepting  the  benefit  of  the  plaintiff's  labor,  the 
defendant  ratified  and  became  bound  under  the  promoter's  con- 
tract, it  does  not  meet  our  approval.  Whether  the  contract  in  that 
case  was  one  which  the  bank  had  the  power  to  ratify,  is  to  say  the 
least  a  doubtful  question;  but  it  is  one  that  does  not  concern  us  here, 
and  upon  which  we  express  no  opinion. 

The  judgments  of  the  District  Court  and  of  the  Court  of  Civil 
Appeals  are  reversed  and  the  cause  remanded. 

Reversed  and  remanded. 


200  pell's  case.  (chap.  hi. 


CHAPTER    III. 

ISSUES  OF  STOCK   AT  A   DISCOUNT  OR  FOR 
OVERVALUED    PROPERTY.' 


PELL'S  CASE. 

L.R.  5Ch.  11.     1S69. 

This  was  an  appeal  from  an  order  of  the  Ma-stcr  of  the  [{oils  made 
in  tlie  \viiidinj:-up  of  the  Ileyford  C'omi)any,  Limited.  The  eiuse  i.s 
reported,  Law  Rep.  8  Ia\.  222.  Tlie  eompany  wius  rej^istered  in  Au- 
{^ust,  1805.  George  Pell  .sij^ned  the  memorandum  of  association  as  a 
subscriber  for  1350  shares  of  £20  each. 

In  clause  80  of  the  articles  of  juvsociation  a  certain  apreement  was 
set  forth  which  was  thereby  ratified  and  declared  to  Ik*  hindinp  on 
the  company,  by  which  Pell  ajn"t't'd  to  sell  to  the  company  the  pootl 
will  and  stock  in  trade  of  a  certain  bu.siness  carried  on  by  him,  and  it 
was  apjreed  that  as  part  of  the  consideration  to  Ik-  paid  to  Pell  by  the 
company,  the  company  were  to  issue  to  Pell,  or  his  nominees,  l.')(H) 
shares  of  the  notninal  value  of  £20  each,  which  shares  should  be 
credited  in  the  books  of  the  company  as  fully  paid  up,  and  that  Pell 
would  accept  the  same  in  part  payment  of  the  purcha.se  or  considera- 
tion money  for  his  interest  in  the  premises  sold  to  the  company. 

150  jiaid-up  shares  were  accordingly  allotted  in  the  names  of  Pell's 
nominees,  and  1350  in  his  own  name. 

On  the  21st  of  December,  18G6,  the  company  was  ordered  to  be 
wound  up. 

The  books  of  the  company  shewed  no  pajinent  for  the  shares 
standing  in  Pell's  name,  and  no  other  shares  were  allotted  to  him 
except  the  shares  mentioned  in  the  articles.-  Under  these  circum- 
stances the  Master  of  the  Rolls  hekl  that  Pell  was  liable  as  a  contril^ 
utory,  but  was  entitled  to  be  allowed  the  value  of  any  property 
handed  over  by  him  to  the  company;  and  accordingly  made  an  order 
placing  Pell  on  the  list  of  contributories,  but  directing  an  inquiry  as 
to  the  value  of  the  property  handed  over  by  him.  From  this  de- 
cision Pell  appealed. 

^  The  cases  in  this  chapter  deal  only  with  such  issues  when  made  by  a  corporation 
at  its  formation,  or,  at  least,  before  its  capital  has  been  impaired  through  losses. 
Whether  a  corporation,  the  capital  of  which  ha.s  l^een  impaired  by  losses,  may  prop- 
erly make  such  issues  is  considered,  infra,  in  the  Book  on  the  Reorganization  of 
Corporations. 

2  On  the  report  of  the  case  in  L.R.  4  Eq.  222,  it  is  stated:  "The  books  of  the  com- 
pany shewed  no  payment  for  the  shares  standing  in  Pell's  name,  except  the  handing 
over  of  the  good-will  and  stock-in-trade  under  the  agreement." 


CHAP.  III.]       OOREGUM    GOLD    MINING    CO.,    LTD.,    V.  ROPER.  201 

Sir  G.  M.  Giffard,  L.J.  I  agree  with  the  Master  of  the  Rolls  that 
the  shares  issued  by  the  company  to  Pell  must  be  taken  to  have  been 
issued  in  respect  of  their  obligation  under  the  agreement.  But  the 
Master  of  the  Rolls  directed  an  inquiry  as  to  the  value  of  the  property 
handed  over  by  him  under  the  agreement,  and  declared  the  Appellant 
entitled  to  be  allowed  only  the  amount  of  that  value.  Now  that  agi-ee- 
ment  has  not  been  impeached  by  any  evidence  or  otherwise.  The 
Court  has,  therefore,  no  grounds  for  going  behind  that  agreement. 
I  must,  consequently,  take  it  that  in  this  case,  as  in  Drwnmond^s 
Case,  Law  Rep.  4  Ch.  772,  the  subscriber  agreed  to  take  1350  shares, 
and  that  he  paid  for  them  in  money's  worth.  I  think,  therefore,  he 
must  be  struck  off  the  list  of  contributories. 

Note.  —  In  Drummond's  Case,  L.R.  4  Ch.  772,  Sir  G.  M.  Gif- 
fard, L.J.,  said  (p.  779) :  "If  a  man  contracts  to  take  shares  he  must 
pay  for  them,  to  use  a  homely  phrase  '  in  meal  or  in  malt ; '  he  must 
either  pay  in  money  or  in  money's  worth.  If  he  pays  in  one  or  the 
other,  that  will  be  a  satisfaction." 

PelUs  Case  and  Drummond^s  Case  concerned  companies  formed 
under  the  Companies  Act  of  1862,  prior  to  1867.  By  the  Companies 
Act  of  1867,  §  25,  it  was  provided  as  follows:  "Every  share  in  any 
company  shall  be  deemed  and  taken  to  have  been  issued  and  to*be 
held  subject  to  the  paj'^ment  of  the  whole  amount  thereof  in  cash, 
unless  the  same  shall  have  been  otherwise  determined  by  a  contract 
duly  made  in  writing,  and  filed  with  the  Registrar  of  Joint  Stock 
Companies  at  or  before  the  issue  of  such  shares."  This  was  a  re- 
strictive, not  an  enabling  provision.  Certain  methods  of  payment 
which  had  theretofore  been  valid,  were  now  invalid  unless  the  provi- 
sions of  this  section  were  complied  with.  As  to  what  amounted  to 
a  payment  in  cash,  so  that  no  contract  under  this  provision  was  ne- 
cessary, see  S-pargo's  Case,  L.R.  8  Ch.  407. 

In  Anderson's  Case,  L.R.  7  Ch.  Div.  75,  Thesiger,  L.J.,  said 
(p.  112),  with  reference  to  this  provision:  "I  think  it  may  very  fairly 
be  said  —  at  all  events  I  do  not  dissent  from  that  view  —  that  under 
the  word  '  contract '  is  intended  a  contract  binding  in  law,  which  of 
course  imports  a  consideration,  although  we  may  not  be  able  to  go 
into  the  question  of  what  was  the  value  of  the  consideration." 


OOREGUM  GOLD  MINING  CO.,  LTD.,  v.   ROPER. 

[1892.]     A.C.  125. 

The  Ooregum  Gold  Mining  Company,  Limited,  was  incorporated 
in  October  1880  under  the  Joint-Stock  Companies  Acts  1862  to  1880. 
The  statement  contained  in  the  memorandum  of  association  with 


202  OOUEGUM    GOLD    MIXING    CO.,    LTD.,    V.  UOI'ER.       [ciIAP.    III. 

refcreiioc  to  the  capital  of  the  company  was  as  follows:  —  "The  cap- 
ital of  the  company  is  £125,000,  divided  into  125,000  shares  of  £1 
each,  and  the  shares  of  which  the  orij^inal  or  incretised  cajjital  may 
consist  may  be  divided  into  difl'ereht  classes  and  issued  with  such 
preference,  privilege,  guarantee,  or  condition  Jis  the  company  may 
direct."  Forty  thousand  of  the  shares  were  allotted  to  the  vendors  to 
the  company,  the  residue  were  issued  to  the  public,  and  the  full 
amount  paid  thereon.  The  ojK'rations  of  the  company  were  not,  in 
the  first  instance,  successful,  and  a  windinp-up  order  was  obtained. 
An  application  was  subsequently  made  to  the  Court  for  an  order  to 
stay  the  windinp;-up,  with  a  view  to  the  introduction  of  fresh  capital 
and  a  resumption  of  mininp;  op(>rati(jns,  and  an  order  was  made  ac- 
cordingly. In  i)Ui-suance  of  this  policy  an  extraordinary  jiicneral  meet- 
ing of  the  company  was  summoned  in  1885,  at  wliich  it  was  resolved 
that  the  capital  should  be  increased  by  the  issue  of  120,000  prefer- 
ence shares  of  £1  each,  to  be  credited  in  the  capital  and  books  of  the 
company  as  having  the  sum  of  15.v.  per  share  paid  thereon,  such  pref- 
erence shares  caiTying  the  right  to  a  non-cumulative  preference  div- 
idend up  to  10  per  cent,  on  the  nominal  amount  of  such  preference 
capital  out  of  the  profits  of  the  undertaking  each  year,  and  to  equal 
participation  (share  per  share)  with  the  ordinary  shares  in  such 
further  prolits  as  should  remain  for  distribution  each  year  after  the 
payment  of  the  above  10  per  cent,  preference  diviilend.  The  special 
resolution  so  passed  was  duly  confirmeil.  At  this  time  the  market 
value  of  the  ordinary  shares  was  only  2.s.  C</.  per  share. 

Upwards  of  KM), ()()()  of  these  preference  shares  were  allotted,  with 
15s.  credited  as  paid  thereon.  Prior  to  the  actual  allotment  an  agree- 
ment was  entered  into  between  the  company,  of  the  one  part,  and  an 
agent  or  trustee  for  the  several  pei*sons  whose  names  were  entered  in 
the  schedule  thereto,  of  the  other  jiart,  whereby,  after  reciting  the 
agreement  to  issue  the  shares  at  a  discount  of  \os.  per  share,  and  that 
Is.  had  been  paid  on  allotment,  it  was  agreed  that  the  shares  to  be 
allotted  should  be  held  as  shares  on  which  16s.  per  share  had  been 
paid,  and  should  be  subject  and  liable  to  further  payment  of  4s.  per 
share,  and  no  more,  and  the  company  thereby  undertook  to  cause 
the  agi'eement  to  be  registered  at  the  Joint-Stock  Registration  Office, 
pursuant  to  the  Companies  Act  1867,  Ix^fore  the  issue  of  the  shares. 
The  agreement  was  duly  filed  accordingly.  The  capital  raised  by 
means  of  the  issue  of  the  preference  shares  sufficed  to  discharge  the 
obhgations  of  the  company,  to  extricate  it  from  its  difficulties,  and  to 
give  it  a  new  start.  Gold  to  a  considerable  amount  was  shortly  after- 
wards raised  from  the  mines,  and  the  company  has  since  been  pros- 
perous, the  market  value  of  the  ordinary  shares  having  risen  to  about 
40s. 

In  February  1889  the  respondent,  George  Roper,  purchased  on 
the  Stock  Exchange  and  paid  for  ten  fully  paid-up  ordinary  shares 


CHAP.  III.]       OOREGUM    GOLD    MINING    CO.,    LTD.,    V.  ROPER.  203 

in  the  company.  On  the  15th  of  July  following  on  behalf  of  himself 
and  the  other  ordinary  shareholders  Roper  brought  this  action 
against  the  company  and  Wallroth  (as  an  original  allottee  of  the 
preference  shares  and  as  representing  the  other  original  allottees) 
to  have  it  declared  that  the  issue  by  the  company  of  the  120,000  pre- 
ferred shares,  at  a  discount  of  15s.  per  share,  was  ultra  vires,  and  to 
have  the  register  rectified  accordingly  and  other  consequent  rehef 
granted.  The  statement  of  claim  contained  the  allegation  that  the 
company  had  in  1889  issued  debentures  to  the  amount  of  £20,000, 
which  were  charged  on  all  the  property  of  the  company,  and  which 
were  then  outstanding.  It  further  alleged  as  follows:  —  "The  de- 
fendant company  had  no  power  to  issue  the  said  preferred  shares  at 
a  discount,  and  the  entry  of  the  preferred  shares  in  the  register  book 
as  fully  paid-up  should  be  rectified.  The  said  preferred  shares  are 
now  quoted  on  the  Stock  Exchange  at  a  premium,  and  if  the  said 
entry  is  rectified  the  ordinarj^  shares  will  benefit  thereby,  and  the 
15s.  unpaid  on  the  preferred  shares  will  be  available  for  paying  off 
the  said  debentures  as  and  when  they  fall  due." 

North,  J.,  upon  the  authority  of  In  re  Almada  and  Tirito  Compayiy, 
38  Ch.D.  415,  without  argument  made  an  order  declaring  that  the 
issue  of  the  preferred  shares  of  £1  each  at  a  discount  of  15s.  per  share 
was  beyond  the  powers  of  the  company,  and  that  the  said  shares  so 
far  as  the  same  were  held  by  Wallroth  or  by  original  allottees  rep- 
resented by  him  were  held  subject  to  the  hability  of  the  holdere  to 
pay  to  the  company  in  cash  so  much  of  the  £1  per  share  as  had  not 
been  paid  on  the  same ;  and  ordering  that  the  company  do  rectify  the 
register  in  accordance  with  the  above  declaration.  Tliis  order  was 
affirmed  by  the  Court  of  Appeal  without  argument.  Against  these 
orders  appeals  were  brought  by  the  company  and  by  AVallroth. 

Lord  Halsbury,  L.C.  :  My  Lords,  the  question  in  this  case  has 
been  more  or  less  in  debate  since  1883,  when  Chitty,  J.,  decided  that 
a  company  limited  by  shares  was  not  proliibited  by  law  from  issuing 
its  shares  at  a  discount.  That  decision  was  overruled,  though  in  a 
different  case,  by  the  Court  of  Appeal  in  1888,  and  it  has  now  come 
to  your  Lordships  for  final  determination. 

My  Lords,  the  whole  structure  of  a  limited  company  owes  its  ex- 
istence to  the  Act  of  Parliament,  and  it  is  to  the  Act  of  Parliament 
one  must  refer  to  see  what  are  its  powers,  and  within  what  limits  it 
is  free  to  act.  Now,  confining  myself  for  the  moment  to  the  Act  of 
1862,  it  makes  one  of  the  conditions  of  the  limitation  of  liability  that 
the  memorandum  of  association  shall  contain  the  amount  of  capital 
with  which  the  company  proposes  to  be  registered,  divided  into 
shares  of  a  certain  fixed  amount.  It  seems  to  me  that  the  system  thus 
created  by  which  the  shareholder's  hability  is  to  be  hmited  by  the 
amount  unpaid  upon  his  shares,  renders  it  impossible  for  the  company 
to  depart  from  that  requirement,  and  by  any  expedient  to  arrange 


204  OOKEGUM    GOLD    xMINlN'G    CO.,    LTD.,    I'.   KOl'ER.       [ciLM'.  111. 

with  their  shareholders  that  they  shall  not  Ix'  liable  for  the  amount 
unpaitl  on  the  shares,  although  the  amount  of  those  shares  has  U'cn, 
in  aecordanee  with  the  Act  of  Parliament,  fi.xed  at  a  certain  sum  of 
money.  It  is  manifest  that  if  the  comjjany  could  do  s(j  the  provision 
in  question  would  operate  notliing. 

I  observe  in  the  arRument  it  hius  l)oen  sou^lii  to  draw  a  distinc- 
tion between  the  nominal  capital  and  the  capital  which  is  :issumed 
to  be  the  real  capital.  I  can  find  no  authority  for  such  a  distinction. 
The  capital  is  hxeil  and  certain,  and  every  creditor  of  tin-  (  (hhm.iiiv 
is  entitled  to  look  to  that  capital  as  his  security. 

It  may  l)e  that  such  limitations  on  the  power  of  a  company  lo 
mafiaj^e  its  own  alTairs  niay  occasionally  be  inconvenient,  and  pre- 
vent its  obtainins  money  for  the  purposes  of  its  trading  on  terms  so 
favourable  sis  it  could  do  if  it  were  more  free  to  act.  But,  speaking 
for  mysi'lf,  I  recognise  the  wisdom  of  enforcing  on  a  company  the 
disclosure  of  what  its  real  capital  is,  and  not  p«>rmitting  a  statement 
of  its  alTaii-s  to  Im*  such  as  may  mislead  and  deceive  those  who  are 
either  about  to  Iwcomc  its  sharehoUlers  or  about  to  give  it  credit. 

I  think,  with  Ff{Y,  L.J.,  in  th(>  Almnda  and  Tiritn  Cnmpani/s  Case, 
38  ('h.D.  41.'),  that  the  ciuestion  which  your  Lordships  have  to  solve 
is  one  which  may  be  answeretl  by  refen'iice  to  an  iiuiuiry:  What  is 
the  nature  of  an  agreement  to  take  a  share  in  a  limited  company? 
and  that  that  question  may  l)c  answered  by  saying,  that  it  is  an 
agHH'ment  to  iM'come  liable  to  pay  to  the  company  the  amount  for 
which  the  share  has  U-en  created.  That  agrei'inent  is  one  which  the 
company  itself  h;us  no  tiuthority  to  alter  or  qualify,  and  I  am  there- 
fore of  opinion  that,  treating  the  question  as  unatTected  by  the  .\ct 
of  1807,  the  company  were  prohibited  by  law,  upon  the  principle  laid 
down  in  Ashhury  Company  v.  liichr,  Law  Rep.  7  ILL.  Vhi'A,  from 
doing  that  which  is  compendiously  ilescribed  as  issuing  shares  at  a 
discount. 

Thq  question  remains  whether  §  25  of  the  Act  of  1867  has  made 
any  difference  in  the  matter  now  under  discussion.  That  section 
prescribes  that  every  share  in  any  company  shall  l)c  deemed  and 
taken  to  have  been  issued  and  to  be  held  subject  to  the  payment  of  the 
whole  amount  thereof  in  cash,  unless  the  same  shall  have  l)een  other- 
wise determined  by  contract  duly  made  in  writing,  and  filed  with  the 
Registrar  of  Joint-Stock  Companies  at  or  before  the  issue  of  such 
shares.  Two  things  are  manifest  in  this  provision.  The  share  is  to  be 
held  subject  to  payment,  and  the  payment  is  to  be  in  cash.  The 
amount  is  to  be  paid  and  the  whole  amount  to  be  paid  in  cash,  and 
to  me  it  appears,  looking  at  the  latter  part  of  the  section,  whereby  a 
contract  made  and  filed  may  qualify  and  cut  down  the  form  of  pay- 
ment, and  that  it  may  be  in  goods  or  in  value  received  in  some  form, 
instead  of  in  cash,  it  must  nevertheless  be  payment.  I  regret  that 
the  words  in  cash  have  received  a  judicial  exposition  which  allows 


CHAP.  III.]       OOREGUM    GOLD    MINING    CO.,    LTD.,    V.  ROPER.  205 

payment  otherwise  than  in  cash,  and  I  hold  myself  free,  if  the  ques- 
tion should  ever  come  before  your  Lordships,  to  consider  the  pro- 
priety of  that  decision.  But  for  my  present  purpose  it  is  enough  to  say 
that  there  is  nothing  in  the  section  which  justifies  the  notion  that 
that  which  the  statute  required  to  be  paid  in  cash,  subject  to  qualifi- 
cation of  a  mode  of  payment,  should  not  be  paid  at  all. 

Lord  Watson:  My  Lords,  can  a  company  limited  by  shares, 
formed  and  registered  under  the  Act  of  1862,  issue  its  shares  as  fully 
paid  up,  for  a  money  consideration  less  than  their  nominal  value? 
That  was  the  only  question  argued  in  these  appeals.  It  has  been  an- 
swered in  the  negative  by  both  Courts  below,  without  hearing  argu- 
ment, upon  the  authority  of  the  Almada  and  Tirito  Company's  Case, 
38  Ch.D.  415,  decided  by  the  Court  of  Appeal  in  1888.  The  limita- 
tion of  such  a  company's  liability  is  the  creature  of  statute,  and  the 
question  lies  within  a  narrow  compass,  depending  on  the  construc- 
tion of  one  or  two  clauses  in  the  Companies  Acts  of  1862  and  1867. 

The  Act  of  1862  (§  8  (5))  requires  that,  in  the  case  of  a  company 
limited  by  shares,  the  memorandum  of  association  shall  contain  the 
amount  of  the  capital  with  which  it  proposes  to  be  registered,  di- 
vided into  shares  of  a  certain  fixed  amount.  The  statutory  limita- 
tion which  it  imposes  upon  the  liability  of  individual  shareholders 
is  contained  in  the  enactment  (§38  (4)),  that  "no  contribution  shall 
be  required  from  any  member  exceeding  the  amount,  if  any,  unpaid 
on  the  shares  in  respect  of  which  he  is  liable  as  a  present  or  past  mem- 
ber." In  my  opinion,  these  enactments  read  together  indicate  the 
intention  of  the  Legislature  that  every  member  who  takes  shares 
from  the  company  in  return  for  cash  shall  either  pay  or  become  lia- 
ble to  contribute  their  full  nominal  value.  The  "amount,  if  any,  un- 
paid," obviously  refers  to  the  "fixed  amount"  of  the  shares  into 
which  the  capital  is  divided,  as  set  forth  in  the  memorandum,  and 
not  to  any  lesser  amount  which  may  be  agreed  upon  between  the 
company  and  its  shareholders;  and  the  statutory  liability  of  each 
shareholder  is  for  the  difference  between  the  amount  fixed  by  the 
memorandum  and  the  sum  which  has  actually  been  paid  upon  his 
shares.  Consequently,  if  shares  are  issued  against  money,  it  appears 
to  me  that  any  payment  to  the  company  less  than  the  nominal 
amount  of  the  share  must,  by  force  of  the  statute,  and  notwith- 
standing any  agreement  to  the  contrary,  be  treated  as  a  payment  to 
account,  the  member  remaining  liable  to  contribute  the  balance,  when 
duly  called  for. 

A  company  is  free  to  contract  with  an  applicant  for  its  shares; 
and  when  he  pays  in  cash  the  nominal  amount  of  the  shares  allotted 
to  him,  the  company  may  at  once  return  the  money  in  satisfaction 
of  its  legal  indebtedness  for  goods  supplied  or  services  rendered  by 
him.  That  circuitous  process  is  not  essential.  It  has  been  decided 
that,  under  the  Act  of  1862,  shares  may  be  lawfully  issued  as  fully 


206  OOREGUM    GOLD    MINING    CO.,    LTD.,    V.  ROPER.       (CHAF.  III. 

paid  up,  for  considerations  which  the  company  has  agreed  to  accept 
as  representing  in  money's  worth  the  nominal  value  of  the  shares, 
I  do  not  think  any  other  decision  could  have  been  given  in  the  case 
of  a  genuine  transaction  of  that  nature  where  the  consideration  was 
the  substantial  equivalent  of  full  payment  of  the  shares  in  cash.  The 
possible  objection  to  such  an  arrangement  is  that  the  company  may 
over-<^stimate  the  value  of  the  consideration,  and,  therefore,  re- 
ceive less  than  nominal  value  for  its  shares.  The  Court  would  doubt- 
less refuse  effect  to  a  colourable  transaction,  entcretl  into  for  the 
purpose  or  with  the  obvious  result  of  enabling  the  company  to  issue 
its  shares  at  a  discount;  l)ut  it  has  i)een  ruled  that,  so  long  as  the 
company  honestly  regards  the  consitl(>ration  given  as  fairly  repre- 
s(Miting  the  nominal  value  of  the  shares  in  cash,  its  estimate  ought 
not  to  be  critically  examined.  That  state  of  the  law  is  certainly  cal- 
culated to  induce  companies  who  are  in  want  of  money,  and  whose 
shares  are  unsaleable  except  at  a  discount,  to  pay  extravagant  prices 
for  goods  or  work  to  persons  who  arc  willing  to  take  payment  in 
shares.  The  rule  is  capable  of  being  abused,  and  I  have  little  doubt 
that  it  has  been  lil)erally  construed  in  practice. 

The  Companies  Act  of  ISO?  contains  one  clause  only  which  can 
effect  the  jin'sent  question.  Sect.  25  enacts  that  "every  share  in  any 
company'  shall  be  deemed  and  taken  to  have  been  issued  and  to  l)c 
held  subject  to  the  payment  of  the  whole  amount  thereof  in  ca.sh, 
unless  the  same  shall  have  l)een  otherwise  determined  by  a  contract 
duly  made  in  writing,  and  filed  with  the  Registrar  of  Joint-v^tock 
Companies  at  or  before  the  issue  of  such  shares." 

It  was  argued  that  §  25  recognises  power  in  the  company  to  ac- 
cept a  partial  payment  as  a  cash  payment  in  full,  provided  there  be  a 
contract  to  that  effect  duly  executetl  and  filed  with  the  registrar.  I 
am  unable  so  to  construe  the  clause.  I  do  not  think  its  object  was  to 
give  companies  new  powers  in  relation  to  the  issue  of  their  shares, 
but  to  regulate  the  statutory  powers  already  possessed  by  them  in 
regard  to  the  acceptance  of  other  than  cash  payments  as  part  of 
their  capital.  The  expression  "  unless  the  same  shall  have  been  other- 
wise determined"  does  not,  in  my  opinion,  imply  that  part  payment 
may  be  accepted  as  payment  in  full.  It  refers  to  contracts  so  far  as 
then  lawful,  by  which  a  company  might  agree  to  accept  considera- 
tions other  than  cash.  In  all  such  cases,  the  clause  provides  that  the 
contract,  if  not  duly  filed  with  the  registrar,  shall  be  of  no  effect,  and 
that  the  shareholder  shall  remain  liable  for  the  value  of  his  shares  in 
money.  The  obvious  purpose  of  the  enactment  is  to  enable  persons 
dealing  with  the  company  to  judge  for  themselves  what  may  be  the 
value  of  the  consideration  given  as  representing  capital. 

It  is  admitted  that  the  appellants  acted  in  good  faith,  and  that  the 
arrangement  made  with  them  would,  even  if  carried  out  to  the  letter, 
have  been  of  solid  advantage  to  the  company.   But  they  accepted 


CHAP.  III.]       OOREGUM    GOLD    MINING    CO.,    LTD.,    V.  ROPER.  207 

shares  of  the  nominal  value  of  20s.  as  fully  paid  up,  in  the  knowledge 
that  only  5s.  per  share  had  been  paid;  and  they  cannot,  therefore, 
benefit  by  the  principle  recognised  by  this  House  in  Waterhouse  v. 
Jamieson,  Law  Rep.  2  H.L.,  Sc.  29,  and  BurJdnshaw  v.  Nicolls, 
3  App.  Cas.  1004. 

It  was  urged  at  the  bar  that  the  appellants  could  have  secured  by 
other  means  all  the  advantages  which  were  stipulated  in  their  con- 
tract with  the  company;  that,  instead  of  20s.  shares,  the  company 
could  have  issued  5s.  shares  fully  paid,  bearing  a  preferential  divi- 
dend of  40  per  cent.,  and  participating  in  the  remaining  profits  equally 
with  its  ordinary  20s.  shares;  or  that  the  appellants  might  themselves 
have  bought  the  goods  purchased  with  their  contributions,  and  re- 
ceived in  exchange  20s.  shares  fully  paid  up.  I  see  no  reason  to  doubt 
that  the  first  of  these  courses  might  have  been  successfully  adopted ; 
but  I  am  not  certain  that  the  second  would  have  been  a  legitimate 
proceeding,  seeing  that  it  might  have  involved  acceptance  by  the 
company  of  goods  in  lieu  of  cash,  at  an  estimated  price  of  no  less 
than  four  times  their  actual  cost.  It  is  needless,  however,  to  consider 
what  the  parties  might  have  done,  if  that  which  they  did  is  not  of 
legal  effect. 

In  my  opinion,  therefore,  the  register  of  the  company  is  erroneous, 
in  so  far  as  it  bears  that  these  additional  shares  have  been  fully  paid 
up;  and  the  order  appealed  from,  which  merely  provides  for  its  cor- 
rection in  that  respect,  ought  to  be  affirmed. 

Lord  Herschell  :  My  Lords,  this  case  raises  the  important  ques- 
tion whether  a  company  incorporated  with  limited  liability  can  issue 
its  shares  at  a  discount.  , 

The  question  whether  there  was  power  to  issue  the  shares  depends 
mainly  upon  the  construction  of  the  8th  and  38th  sections  of  the 
Companies  Act  1862,  though  the  25th  section  of  the  Companies  Act 
1867  has  also  a  material  bearing  upon  it.  By  the  8th  section  of  the 
Act  of  1862  it  is  enacted  that  in  the  case  of  a  company  limited  by 
shares  the  memorandum  of  association  shall  contain  "the  amount  of 
capital  with  which  the  company  proposes  to  be  registered  divided 
.  into  shares  of  a  certain  fixed  amount."  The  38th  section  of  the  same 
statute  provides  that  in  the  event  of  a  company  formed  under  the 
Act  being  wound  up,  every  present  and  past  member  should  be  liable 
to  contribute  to  the  assets  of  the  company  to  an  amount  sufficient 
for  payment  of  the  debts  and  liabilities  of  the  company,  and  the  costs 
of  the  winding-up,  and  for  the  payment  of  such  sums  as  may  be  re- 
quired for  the  adjustment  of  the  rights  of  the  contributories  amongst 
themselves,  with  (amongst  others)  this  qualification,  that  in  the  case 
of  a  company  limited  by  shares,  no  contribution  should  be  required 
from  any  member  exceeding  the  amount,  if  any,  unpaid  on  the  shares 
in  respect  of  which  he  is  Hable  as  a  present  or  past  member. 

It  is  contended  that  these  two  enactments  taken  together  pre- 


208  OOUEGl'M    COLD    MIXING    CO.,    LTD.,    I'.  ROPEIl.       (ciIAl".   III. 

clutle  a  company  from  i.ssuiiif?  shares  as  fully  paiii  up  in  respect  of 
the  payment  of  a  sum  less  than  the  nominal  amount  of  the  share  — 
th:it  is  to  say,  that  a  person  taking  a  share  on  those  terms,  if  he  re- 
mains a  shareholder,  is  lial)le  to  pay  the  dilTerence  between  the 
amount  he  has  already  paid  and  the  nominal  value  of  the  share.  If 
it  had  been  determined  that  under  the  Companies  Act  a  shareholder 
was  in  all  ca.ses  liai)le  to  pay  the  whole  of  the  nominal  value  of  a 
share  in  cash,  I  should  have  had  less  difliculty  in  adhering  to  the 
judfi;ment  of  the  Court  Ix'low.  But  the  contrary  has  Ix'en  deter- 
mined. And  not  only  may  a  share  be  allotted  jus  fully  paid  up  in 
respect  of  property,  gootls,  or  services  received  by  the  company,  but 
the  Courts  will  not  intjuire  into  the  adequacy  of  the  consideration, 
and  certainly  have  not  rtMiuired  it  to  l)e  j)rove(l  that  the  considera- 
tion niven  was  eciuivalcnt  in  c;vsh  value  to  the  nominal  amount  of 
t  he  share.  The  transactions  which  have  taken  place  on  this  view  of 
tlu^  law  have  been  so  numerous,  and  have  extended  over  so  long  a 
period  of  years,  that  I  doubt  if  it  would  have  been  possible  for  your 
Lordshij)s  to  adopt  a  ditTerent  view  now,  even  if  the  lejiishiture  had 
not  interveneil.  But  1  think  that  the  legislature  has  distinctly  !•<«•<  xr. 
nised  and  ^iven  its  sanction  to  these  ilecisions. 

The  2.')th  se<'tion  of  the  Companies  Act  lS(i7  provides  that  iviry 
share  in  any  company  shall  Ik*  deemed  and  taken  to  have  Ix'cn  issued 
and  to  l)e  held  subject  to  the  payment  of  the  whole  amount  thereof 
in  cash,  unless  the  same  shall  have  been  otherwi.se  determined  by 
contract  duly  made  in  writinj;,  an<l  fihMl  with  the  liej^strar  of  Joint- 
Stock  ( 'ompanies  at  or  before  the  issue  of  such  shares.  I  (juite  apree 
that  this  enactment  does  not  purport  to  render  valid  an  issue  of 
shares  in  respect  of  something  other  than  full  cash  payment,  in  case 
it  would  have  l)oen  invalid  under  the  Act  of  18()2.  But  it  seems  to  me 
distinctly  to  recopjinst^  the  validity  of  such  a  transaction,  impo.sinR 
only  the  condition  that  the  contract  determininK  that  payment  is 
not  to  be  made  in  cjush  shall  be  in  writing  and  duly  file(l.  The  object 
of  this  is  obvious.  It  is  to  enable  any  creditor,  by  reference  to  the 
documents  at  the  ofTice  of  the  Registrar  of  Joint-Stock  Companies, 
to  a.scertain  how  much  of  the  lial)ility  on  the  shares  which  does  not 
remain  undischarged  has  Ix'en  discharged  by  cash  payment,  and  how 
much  in  some  other  way.  A  creditor  has  not  the  right  to  a.ssume  that 
so  much  of  the  amount  of  the  share  as  is  no  longer  liable  to  be  called 
up  hius  found  its  way  in  the  shape  of  ca.sh  into  the  hands  of  the  com- 
pany. But  he  has  placed  at  his  disposal  the  means  of  full  information 
on  the  subject. 

Having  regard  to  the  considerations  to  which  I  have  called  atten- 
tion, and  notably  to  the  provisions  of  the  Act  of  1867,  I  do  not  feel 
so  much  impressed  as  some  of  your  Lordships  by  the  mischiefs  which 
it  is  contended  would  result  from  the  decision  that  shares  might  be 
issued  as  fully  paid  up  in  consideration  of  a  paj-ment  less  in  amount 


CHAP.  III.]       OOREGUM    GOLD    MINING    CO.,    LTD.,    V.  ROPER.  209 

than  their  nominal  cash  value,  and  I  can  conceive  many  cases  in 
which  such  a  course  would  be  advantageous  both  to  shareholders 
and  creditors.  But  the  matter  must,  after  all,  be  determined  by  an 
examination  of  the  language  of  the  Act  of  1862,  bearing  in  mind,  of 
course,  the  decisions  upon  it,  and  the  subsequent  legislation,  which, 
as  I  think,  sanctioned  and  acted  on  those  decisions. 

I  cannot  myself  place  any  great  weight  on  the  requirement  of 
§  8,  that  the  amount  of  capital  with  which  the  company  proposes 
to  be  registered  is  to  be  divided  into  shares  "of  a  certain  fixed 
amount."  The  provision  was,  of  course,  necessary  in  introducing 
a  scheme  of  limited  liability.  But  it  does  not,  of  itself,  determine 
anything  as  to  the  extent  of  liability.  Had  it  stood  alone,  the  share- 
holders would  have  been  liable,  on  general  principles,  to  the  extent 
necessary  to  discharge  all  the  obligations  of  the  industrial  partner- 
ship. The  limitation  of  liability  arises  from  the  provision  of  §  38, 
that  in  case  the  company  is  wound  up  an  individual  shall  only  be 
liable  "to  the  amount,  if  any,  unpaid  on  the  shares  in  respect  of 
which  he  is  liable  as  a  present  or  past  member."  This  must  be  re- 
garded as  by  implication  enacting  that  he  shall  be  liable  to  that  ex- 
tent. What,  then,  is  the  meaning  of  the  "amount  unpaid"  on  the 
shares?  If  it  had  been  the  law  that  taking  shares  in  a  limited  lia- 
bility company  necessarily  involved  the  payment  in  cash  of  the 
nominal  amount  of  the  share,  the  answer  would  have  been  free  from 
difficulty.  The  words  "the  amount  unpaid"  w^ould  have  been  taken 
in  their  ordinary  sense  as  meaning  so  much  as  has  not  been  paid  in 
cash.  But  it  is  impossible  now  to  adopt  that  interpretation  as  ap- 
plicable to  every  case. 

The  Acts  of  1862  and  1867  must  be  read  together.  And  the  latter 
statute  prescribes  that  a  share  shall  be  deemed  to  be  held  subject  to 
the  payment  of  the  whole  amount  thereof  in  cash,  unless  "the  same 
shall  have  been  otherwise  determined"  by  a  filed  contract.  What 
is  "the  same"?  Clearly,  as  it  appears  to  me,  that  the  share  is  held 
subject  to  the  payment  of  the  whole  amount  in  cash.  When,  then, 
it  has  been  lawfully  "otherwise  determined,"  it  appears  to  me  im- 
possible that  the  words  "the  amount  unpaid"  can  have  their  ordi- 
nary meaning.  They  must,  at  least,  be  interpreted  as  meaning  "  un- 
paid, or  not  otherwise  satisfied,  in  accordance  with  the  provisions  of 
a  filed  contract."  And  once  this  conclusion  is  arrived  at,  I  do  not 
think  there  would  be  any  insuperable  difficulty  in  including  within 
them  the  case  where,  in  consideration  of  a  certain  payment,  the 
liability  had  been  by  a  filed  contract  entirely  discharged. 

At  the  same  time,  I  am  quite  sensible  of  the  force  of  the  argument 
that  in  the  25th  section  of  the  Act  of  1867  the  emphatic  words  are 
payment  "in  cash,"  implying  that  there  must  be  payment  in  some 
form,  even  though  it  is  not  to  be  made  in  cash.  And  whilst  goods  or 
services  given  or  taken  in  lieu  of  payment  in  cash  may  be  regarded 


210  OOREGUM    GOLD    MIXING    CO.,    LTD.,    V.  ROPER.       (ciiAi'.  Iii. 

as  in  a  sc*ns<'  payinont,  it  i.s  difTuailt  to  say  that  payment  of  a  j)ortion 
of  a  sum  i.'^  payment  of  the  whole.  Ahh(juph,  therefore,  my  mind  hits 
not  been  free  from  doubt,  I  am  not  prepared  to  ihffer  from  the  Court 
below,  and  from  those  of  your  Lonl.ships  who  entertain  tiiat  view, 
in  thinking  that  a  company  cannot  issue  its  shares  at  a  di.seount  so  as 
to  exonerate  thos(^  taking  the  shares  from  the  liability,  in  ea.se  the 
company  be  wound  up,  to  pay  the  amount  not  already  paid  on  the 
shares. 

But  the  question  l)efore  your  Lordships  does  not  arise  in  the  case 
of  a  winding-up.  The  interest  of  the  cre<litors  is  not  in  issue.  The 
action  is  brought  i)y  a  shareholder  avowedly  for  the  pur|>os(»  ofl>ene- 
fiting  the  holders  of  the  ordinary  shares  at  the  expenst^  of  those  who 
are  pos.Hessed  of  the  preference  shares,  wliich  were  taken  on  the  ex- 
press condition  that  their  holders  should  not  l)e  recpiired  to  pay  more 
than  5.S'.  per  share.  To  accede  simpliciter  to  the  prayer  of  the  plain- 
tiff woultl,  JUS  it  s<^'ems  to  me,  U'  to  sanction  a  violation  by  the  com- 
pany of  a  .solemn  agnvment  entered  into  between  them  and  thase 
who  took  the  shares.  I  should  have  thought  it  was  wrong  to  do  this, 
except  in  so  far  as  the  contract  provides  for  that  which  has  l)een 
otherwi.s*'  provide(l  for  by  the  legislature.  In  so  far  as  the  obligations 
arising  under  the  contract  do  not  involve  a  contravention  of  any  en- 
actment of  the  legislature,  I  .see  no  reason  why  they  should  not  be 
given  effect  to.  The  point  wjis  not  argued  at  the  bar  in  the  present 
ca.se,  but  I  will  give  my  reasons  for  the  opinion  I  have  expres.sed. 
Except  when  the  legislature  has  expressly  or  by  implication  for- 
bidden any  act  to  be  done  by  a  company,  their  rights  must  Ije  gov- 
erned by  the  ordinary'  principles  of  law,  anil  they  are  free  to  make, 
aslx'tween  them  and  their  shareholders,  such  contractsas  they  please. 
They  may  enter  into  any  undertaking  with  those  who  are  invit(>d  to 
become  shareholders  as  to  the  terms  on  which  the  shares  shall  \)C 
taken,  and  as  to  the  rights  of  the  respective  shareholders  inter  se. 
What  they  cannot  do  is  to  exclude  the  liability,  in  ca.se  the  company 
is  woimd  up,  to  contribute  to  the  extent  unpaid  on  the  shares  for  the 
benefit  of  the  creditoi-s.  But  what  is  to  prevent  the  company  agree- 
ing that,  except  in  so  far  as  the  legislature  has  imposed  the  liability, 
they  will  not  enforce  any?  Suppasing  the  agreement  had  been  in 
terms  that  the  company  would  not  enforce  the  payment  of  more 
than  5."?.  per  share,  except  in  the  case  of  a  winding-up,  and  then  only 
to  satisfy  the  claims  of  creditors  and  the  costs  of  the  winding-up, 
would  there  have  been  anjihing  illegal  in  such  an  agreement?  I  fail 
to  see  anything  in  the  Companies  Acts  which  would  render  such  an 
agreement  invalid.  And  taking  the  contract  between  the  company 
and  the  shareholders,  and  the  enactment  together,  is  not  this,  in 
effect,  what  has  been  done?  I  am,  of  course,  assuming  that  to  issue 
shares  on  such  terms  would  be  within  the  memorandum  of  a.s.socia- 
tion.   There  can  be  lio  doubt  of  that  in  the  present  case.   It  is  pro- 


CHAP.  III.]       OOREGUM    GOLD    MINING    CO.,    LTD.,    V.  ROPER.  211 

vided  that  the  original  or  increased  capital  may  be  issued  with 
"such  preference,  privilege,  guarantee,  or  condition"  as  the  com- 
pany may  direct. 

Whilst,  then,  I  think  it  ought  to  be  declared  that  the  agreement 
between  the  company  and  those  to  whom  the  preference  shares  were 
allotted  was  ineffectual  to  absolve  them  from  the  liability  prescribed 
by  the  38th  section  of  the  Act  of  1862,  I  should  have  thought,  had 
the  point  been  insisted  upon,  that  it  ought  also  to  be  declared  that 
the  company  are  not  entitled  to  call  upon  such  shareholders  for  any 
further  payment  beyond  that  agreed  upon,  except  in  the  case  of  a 
winding-up,  and  then  only  so  far  as  necessary  for  the  discharge  of  the 
obligations  of  the  company  and  the  costs  of  the  winding-up. 

Lord  Macnaghten:  My  Lords,  your  Lordships  are  called  upon 
to  determine  whether  it  is  or  is  not  competent  for  a.  company  limited 
by  shares  to  issue  shares  at  a  discount  so  as  to  relieve  persons  taldng 
shares  so  issued  from  liability  to  pay  up  their  amount  in  full.  It  was 
suggested  that  different  considerations  might  apply  to  shares  in  the 
capital  with  which  a  company  is  originally  registered  and  shares  in 
additional  capital  created  afterwards.  But  it  seems  to  me  to  be 
perfectly  clear  that,  for  the  present  purpose,  no  distinction  can  be 
drawn  between  one  portion  of  the  capital  of  a  company  limited  by 
shares  and  another. 

The  question  turns  upon  the  construction  of  the  Companies  Act 
1862.  The  provisions  of  the  Act  are,  I  think,  plain  enough  if  one 
bears  in  mind  the  condition  of  things  which  existed  before  the  prin- 
ciple of  limited  liability  was  introduced  in  1855.  Before  that  time 
there  was  no  way  known  to  the  law  by  which  persons  trading  in 
partnership  could  restrict  their  liability.  They  were  liable  to  the 
uttermost  farthing.  At  last  the  legislature  intervened  and  authorised 
persons  who  proposed  to  trade  in  partnership  to  form  themselves 
into  a  registered  company  with  a  declared  capital  and  shares  of  a 
fixed  amount,  and  then  limited  the  liability  of  the  partners  as  mem- 
bers of  the  company  to  the  amount  unpaid  upon  their  shares. 

But  all  this  legislation  proceeds  on  the  footing  of  recognising  and 
maintaining  the  liability  of  the  individual  members  to  the  company 
until  the  prescribed  limit  is  reached.  The  memorandum  of  associa- 
tion of  a  company  limited  by  shares  must  contain  "the  amount  of 
capital  with  which  the  company  proposes  to  be  registered  divided 
into  shares  of  a  certain  fixed  amount."  It  must  also  contain  "a 
declaration  that  the  liability  of  the  members  is  limited."  Neither 
the  liability  nor  the  limitation  is  defined  in  the  memorandum  itself. 
And  so  the  declaration  carries  you  back  to  the  earlier  part  of  the 
section,  where  you  are  told  what  is  meant  by  "a  company  limited  by 
shares."  ^ It  is  a  company  "formed  on  the  principle  of  having  the 
liability  of  its  members  limited  to  the  amount  unpaid  upon  their 
shares."  That  must  mean  that  the  liability  of  a  member  continues 


212  OOREGUM    GOLD    MINING    CO.,    LTD.,    V.  ROPER.       [CUAP.  III. 

SO  long  as  anything;  remains  unpaid  upon  his  sliarcs.  Nothing  but 
payment,  and  payment  in  full,  ean  put  an  end  to  the  li:ihility. 

Plainer  still  and  more  e.xjjlieit  is  the  .section  headed  "Liability  of 
members."  It  begins  by  declaring  that,  in  the  event  of  a  company 
formed  under  the  Act  being  wound  up,  the  measure  of  the  liability 
of  every  present  and  ptust  meml)er  is  the  amount  re(|uired  t<j  sati.sfy 
all  claims  of  creditors,  to  i)ay  all  the  expenses  of  licjuidation,  and  to 
adjust  the  claims  of  meml)ei's  inter  se.  Then  come  certain  (jualifica- 
tions  to  which  that  liability  is  subject.  One  is,  that  in  the  ciuse  of  a 
company  limited  by  shares  no  contribution  shall  Ix;  required  from 
any  meml)er  exceeding  the  amount,  if  any,  unpaid  on  the  shares  in 
respect  of  which  he  is  lialjle  ius  a  pre.sent  or  p:ust  member. 

To  sum  the  matter  up,  I  cannot,  I  think,  do  better  than  adopt  the 
language  Mr.  But'kley  ha.s  used  in  speaking  of  the  Limited  Liability 
Acts.  "The  tlominant  and  cardinal  principle  of  the.se  Acts,"  he  says, 
"is  that  the  investor  shall  purchase  immunity  from  liability  beyond 
a  certain  limit,  on  the  terms  that  there  shall  be  and  remain  a  liability 
up  to  that  limit."  Whether  this  liability  is  one  of  "the  conditions 
of  the  memorandum,"  within  theineaning  of  that  expression  in  the 
Act  of  1802,  as  Lord  Seluor.vk  s<'ems  to  have  thought  (Dent's  Case, 
Law  Rep.  8  Ch.  708),  o^  a  condition  attaciied  l)y  the  Act  to  a  com- 
pany limited  by  shares  ami  of  the  essence  of  such  a  company,  though 
it  may  not  be  found  contained  within  the  four  corners  of  the  memo- 
randum, is  a  matter  of  little  or  no  importance.  In  either  view  of  the 
ca.sc  it  is  plain  that  the  condition  is  one  which  cannot  be  dispensed 
with  by  anything  in  the  articles  of  a.s.sociation,  or  by  any  resolution 
of  the  comjjany,  or  by  any  contract  between  the  company  and  out- 
siders who  have  been  invited  to  become  members  of  the  company 
and  who  do  come  in  on  the  faith  of  such  a  contract. 

If  this  conclusion  be  correct,  there  is,  I  think,  an  end  of  the  ques- 
tion, and  the  arguments  urged  on  behalf  of  the  appellants  may  be 
disposed  of  very  briefly.  .  .  . 

Lastly,  it  was  said  that  if  it  be  the  case  that,  in  companies  limited 
by  shares,  members  are  liable  to  pay  up  in  full  the  amount,  if  any, 
unpaid  upon  their  shares,  still  the  liability  is  one  that  may  be  easily 
evaded.  And  it  was  pointed  out  that,  in  the  present  case,  if  only  a 
different  method  had  been  adopted,  a  result  practically  the  same 
might  have  been  attained,  and  then  the  tran.saction  would  have 
been  unimpeachable.  Whether  that  is  a  good  reason  for  permitting 
the  requirements  of  an  Act  of  Parliament  to  be  contravened  may, 
perhaps,  be  doubted. 

But  I  desire  to  protest  against  some  of  the  propositions  which  were 
advanced  m  connection  with  this  part  of  the  argument.  It  was  said 
that  if  a  company  limited  by  shares  owes  its  bankers  £1000,  and  its 
shares  are  at  50  per  cent,  discount,  fully  paid  shares  of  £2000  nomi- 
nal value  may  be  given  in  discharge  of  the  debt.  It  was  said  that  a 


CHAP.  III.]  IN    RE    WRAGG,    LIMITED.  213 

company  limited  by  shares  may  issue  fully  paid  shares  at  their 
market  price  at  the  time,  however  much  they  may  have  become  de- 
preciated, in  exchange  for  goods  having  a  recognised  market  value. 
Speaking  for  myself,  I  am  not  prepared  to  assent  to  either  of  those 
propositions  without  further  argument.  I  am  inclined  to  agree  with 
the  view  expressed  by  Cotton,  L.J.,  though  it  is  not  necessary  to 
decide  the  point.  It  seems  to  me  that  all  that  has  been  determined 
so  far  is  that  the  Court  will  decline  to  rip  up  a  transaction  not  im- 
peached as  dishonest,  and  not  proved  to  be  such,  merely  because  the 
company  may  have  paid  an  extravagant  price  for  their  propert5^ 

In  the  present  case,  I  regret  that  I  am  compelled  to  say  that  in  my 
opinion  the  transaction  cannot  stand.  The  course  which  the  di- 
rectors took  probably  saved  the  company.  All  parties  concerned 
acted  in  a  perfectly  open  and  honest  manner.  But  it  seems  to  me 
that  the  requirements  of  the  Companies  Act  1862  have  been  con- 
travened, and,  therefore,  I  think  that  the  appeal  must  be  dismissed. 

Note.  —  In  Welton  v.  Saffery,  [1897]  A.C.  299,  it  was  held  that 
the  holders  of  shares  issued  at  a  discount  or  by  way  of  bonus,  al- 
though this  was  authorised  by  the  articles  of  association,  were  sub- 
ject to  liability,  in  a  winding-up,  to  calls  for  the  amounts  unpaid  on 
their  shares  for  the  adjustment  of  the  rights  of  the  shareholders 
inter  se,  as  well  as  for  the  payment  of  the  company's  debts  and  the 
costs  of  winding-up.  Lord  Herschell  dissented. 


In  Re  WRAGG,  LIMITED. 

[1897.]     1  Ch.  796. 

This  was  a  summons  taken  out  by  the  official  receiver,  as  the 
liquidator  in  the  winding-up  of  the  above-named  company,  in  sub- 
stance for  a  declaration  that  certain  shares  in  that  company  held 
by  Messrs.  E.  J.  Wragg  &  J.  B.  Martin  and  registered  in  their  names 
as  fully  paid  up  were  not  fully  paid  up,  and  for  an  order  that  Messrs. 
Wragg  &  Martin  should  forthwith  pay  the  amounts  unpaid  thereon. 

For  many  years  prior  to  1894  Messrs.  Wragg  &  Martin  carried 
on  business  together  as  omnibus  and  coach  proprietors,  livery-stable 
keepers  and  job-masters  in  Whitechapel,  and  elsewhere  in  London; 
and  they  were  the  ownere  of  certain  freehold  and  leasehold  property, 
and  a  considerable  number  of  horses  and  carriages,  and  a  quantity 
of  harness,  stock-in-trade,  plant  and  effects. 

In  1894  they  determined  to  convert  their  business  into  a  private 
limited  company,  and  with  that  intent  they  formed  such  a  company 
to  buy  the  goodwill,  stock-in-trade,  and  property  of  their  business 
at  a  price  which  they  fixed  at  46,300^.,  to  be  payable  in  cash,  deben- 
tures, and  fully  paid-up  shares. 


214  IN    RE    WRAGG,    LIMITED.  (CHAP.  III. 

Of  this  46,300/.,  27,300/.  wa.s,  in  tho  aKnvincnt  with  the  coiupaiiy, 
placed  as  the  value  of  the  stock  in  trade.  It  appeared,  however,  that 
this  same  property  was  placed  on  the  company's  books,  pursuant  to 
a  valuation  by  the  vendors  made  at  or  about  the  time  of  the  transfer, 
at  15,37')/.  The  odicial  li(juidator  claimed  that  the  shares  issue<l  to 
the  vendoi-s  must  be  regarded  as  unpaid  to  the  extent  of  the  difTeience 
between  the  two  sums.' 

The  court  considered  how  far  it  could  examine  into  the  value  of 
propcM'ty  received  l)y  the  company  at  a  figure,  in  consideration  of 
the  issue  of  shares  declared  to  be  full  paid. 

LiNDLEY,  L.J.  That  shares  cannot  Ix'  issued  at  a  discount  was 
finally  settled  in  the  ca.se  of  the  Oorcgnm  dnld  Mininy  Co.  of  India 
V.  Roper,  (1H<)21  \.i\  12.').  the  judgments  in  which  are  strongly  relied 
upon  by  the  appellant  in  this  c;use.  It  has,  however,  never  yet  been 
decided  that  a  limited  company  cannot  buy  property  or  pay  for  serv- 
ices at  any  price  it  thinks  proper,  and  pay  for  them  in  fully  paid-up 
shares.  Provided  a  limited  company  does  so  honestly  and  not  colour- 
ably,  and  provided  that  it  has  not  been  so  imposcvl  ujion  as  to  be 
entitled  to  \\q  relieved  from  its  bargain,  it  appears  to  be  settled  by 
PcWaCase,  L.R.  8  Eq.  222;5C'h.  11,  and  the  others  to  which  I  have 
referred,  of  which  Arulcrson's  Case,  7  Ch.D.  75,  is  the  most  striking, 
that  agrecMnents  by  limited  companies  to  pay  for  property  or  services 
in  i)aid-up  shares  are  valid  and  binding  on  the  companies  and  their 
creditors.  The  legislature  in  18b7  appears  to  me  to  have  distinctly 
recognised  such  to  be  the  law,  but  to  have  required  in  order  to  make 
such  agreements  binding  that  they  shall  be  registered  Ix^foro  the 
shares  are  issued. 

There  is  certainly  no  decision  yet  which  is  opposed  to  the  above 
statement  of  the  law.  The  observations  in  In  re  Addlestone  Lino- 
leum Co.,  37  Ch.D.  191,  In  re  AlmaHa  mid  Ti'rito  Co.,  38  Ch.D.  415, 
Lee  v.  Ncuchatel  .4.sp/ia//c  Co.,  41  Ch.D.  1.  antl  Ooregum  Gold  Mining 
Co.  of  India  v.  lioper,  [1892]  A.C.  125.  relied  upon  by  the  appellant 
in  this  case,  fall  far  short  of  deciding  that  the  value  of  the  property 
or  services  paid  for  in  shares  can  l>e  inquired  into  or  is  material  in  any 
ca.se  in  which  the  sale  is  not  impeached.  The.se  and  other  cases  de- 
cided upon  the  Act  of  1807  shew  (1)  that  since  that  Act,  as  before, 
shares  must  be  paid  for  in  money  or  money's  worth;  (2)  that  since 
that  Act,  as  before,  they  may  be  paid  for  in  money's  worth;  (3)  that 
since  the  Act  payment  in  money's  worth  can  only  be  effectually 
made  pursuant  to  a  properly  registered  contract ;  (4)  that,  even  if 
there  is  such  a  contract,  shares  cannot  be  issued  at  a  discount;  (5) 
that  if  a  company  owes  a  person  100/.,  the  company  cannot  by  paying 
him  200/.  in  shares  of  that  nominal  amount  discharge  him,  even  by  a 
registered  contract,  from  his  obligation  as  a  shareholder  to  pay  up 

'  This  statement  of  facts  is  greatly  condensed,  and  it  omits  several  details  which, 
it  is  believed,  have  no  beaiing  on  the  question  of  law  involved. 


CHAP,  in.]  IN    RE    WRAGG,    LIMITED.  215 

the  other  100?.  in  respect  of  those  shares.  That  would  be  issuing 
shares  at  a  discount.  The  difference  between  such  a  transaction  and 
paying  for  property  or  services  in  shares  at  a  price  put  upon  them 
by  a  vendor  and  agreed  to  by  the  company  may  not  always  be  very 
apparent  in  practice.  But  the  two  transactions  are  essentially  dif- 
ferent, and  whilst  the  one  is  ultra  vires  the  other  is  intra  vires.  It  is 
not  law  that  persons  cannot  sell  property  to  a  limited  company  for 
fully  paid-up  shares  and  make  a  profit  by  the  transaction.  We  must 
not  allow  ourselves  to  be  misled  by  talking  of  value.  The  value  paid 
to  the  company  is  measured  by  the  price  at  which  the  company 
agrees  to  buy  what  it  thinks  it  worth  its  while  to  acquire.  Whilst  the 
transaction  is  unimpeached,  this  is  the  only  value  to  be  considered. 

A.  L.  Smith,  L.J.  It  is  now  well  settled  law  that  for  a  shareholder 
in  a  company  hmited  by  shares  to  have  fully  paid-up  shares,  and 
therefore  not  to  be  liable  for  calls  in  a  winding-up  of  the  compan}^, 
he  must  shew  that  he  has  fully  paid  up  to  the  face  value  of  the  shares, 
either  in  cash  or  in  value  i*eceived  by  the  company  in  some  form;  or 
partly  in  cash  and  partly  in  value  received  by  the  company  in  some 
form;  and  if  the  payment  other  than  in  cash  be  rehed  on,  this  can 
only  be  so  if  there  be  a  "contract  duly  made"  in  writing,  and  filed 
with  the  Registrar  of  Joint-Stock  Companies,  at  or  before  the  issue 
of  the  shares,  pursuant  to  §  25  of  the  Companies  Act,  1867.  The 
House  of  Lords  has  definitely  settled  this  point  in  the  case  of  the 
Ooregum  Gold  Mining  Co.  of  India  v.  Roper,  [1892]  A.C.  125. 

Partial  payment  is  not  sufficient;  but  shares  may  be  lawfully  is- 
sued as  fully  paid  up  for  considerations  which  the  company  have 
agreed  to  accept  as  representing  in  money's  worth  the  nominal  value 
of  the  shares :  per  Lord  Watson  in  the  Ooregum  Case,  [1892]  A.C.  136. 

It  is  not  suggested  that  the  contract  of  January  .10,  1894,  is  not 
an  honest  bargain,  or  that  its  consideration  is  colourable  or  illusory. 

Now,  is  a  liquidator  entitled  to  go  into  the  adequacy  of  the  con- 
sideration, and  to  shew,  if  he  can,  that  the  consideration  for  the 
contract  was  inadequate,  unless  it  appears  so  upon  the  transaction 
itself;  or,  if  not,  if  he  desires  to  do  so,  must  he  not  impeach  the  con- 
tract itself? 

If  there  be  no  consideration  at  all  for  the  shares,  and  it  be  shew^n, 
as  in  the  case  of  In  re  Eddystone  Marine  Insurance  Co.,  [1893]  3  Ch. 
9,  that  the  words  inserted  in  the  registered  contract,  "in  considera- 
tion of  services,"  were  placed  there  as  a  mere  bhnd,  that  will  suffice. 

Again,  if  in  a  registered  contract  a  money  value  less  than  the  face 
value  of  the  share  be  placed  upon  the  consideration  which  the  com- 
pany had  agreed  to  accept  as  representing  in  money's  worth  the 
nominal  value  of  the  share,  that  share,  I  should  think,  would  not 
be  fully  paid  up;  for  instance,  as  was  put  in  argument,  a  contract 
to  supply  to  a  limited  company  100  tons  of  coal,  valued  at  10s.  per 
ton,  as  a  consideration  for  100  11.  shares  in  the  company  —  i.e.,  a 


21G  HONG    KONG    h    CHINA    GAS    CO.,    LTD.,    V.  GLEN.       [CHAP.   III. 

value  of  .")()/.  worth  of  coiil  for  10()  1/.  shares  —  these  shares  would 
not  Ih",  I  think,  fully  puid  up. 

There  would  be  no  necessity  in  such  a  case  for  impeaching  the 
agreement,  for  that  the  shares  were  not  fully  paid  up  in  money  or 
money's  worth  would  l)e  apparent  upon  its  face.  Corro.v,  L.J.,  in 
In  re  Almwla  and  Tirito  Co.,  38  Ch.D.  421,  points  to  such  a  case  as 
this,  though  he  did  not  decide  it. 

If,  however,  the  consideration  which  the  company  hjia  agreed  to 
accef)t  as  rei)resenting  in  money's  worth  the  nominal  value  of  the 
shares  he  a  cousitlertition  not  clearly  eoloural)le  nor  illu.sory,  then, 
in  my  judgment,  the  adecjuacy  of  the  eonsiileration  cannot  Im'  im- 
peached by  a  li(iuidator  unle-ss  the  contract  can  also  l)o  impeachetl; 
and  I  take  it  to  Ih»  the  law  that  it  is  not  open  to  a  licjuidator,  unless 
he  is  able  to  impeach  the  agreement,  to  go  into  the  ade(iuacv  of  the 
consideration  to  shew  that  the  company  have  agreeil  to  give  an 
excessive  value  for  what  they  have  purch:used. 

Ric.BV,  L.J.  I  am  not  prepared  to  say  that  in  no  ca.ses  can  the 
consideration  in  kind  given  for  paid-up  shares  be  incjuired  into, 
even  although  there  may  Ik*  nothing  on  the  face  of  the  contract  to 
shew  the  insufhciency  of  the  consideration;  but  I  abstain  from  at- 
tempting to  define  what  the  cases  are.  I  think  it  sufficient  to  say 
that  in  my  judgment  the  opinions  of  tlie  noble  and  learnecl  Lords 
in  the  Oorcgum  Case,  [1892)  A.C  125,  sufficiently  indicate  that  such 
cases  may  arise. 


HONG  KONG  &   CHINA  G.\S  CO.,  LTD.,  v.   GLEN. 

[1914.1     1  .Ch-  527. 

The  Hong  Kong  and  China  Gas  Company,  Limited,  was  incor- 
porated under  the  Joint-Stock  Companies  Acts,  18.')(),  1S,')7,  and 
1858,  in  June,  1802,  with  a  capital  of  35,000/.  divided  into  3500 
shares  of  10/.  each.  The  objects  of  the  company  were  (amongst 
othei"s)  to  manufacture,  supply,  and  sell  gas  in  the  city  of  Victoria, 
Hong  Kong,  and  other  cities  and  places  in  China;  to  carry  on  the 
business  of  a  gas  company  in  those  cities  and  places  or  any  of  them; 
to  make  and  sell  coke  and  other  products;  and  to  obtain  charters, 
grants,  and  concessions  from  Her  then  Majesty's  Imperial  or  Co- 
lonial Government,  the  Governor  of  Hong  Kong,  the  Government 
of  China,  and  other  governments  and  authorities,  to  hold  lands,  and 
exercise  the  rights  and  powers  of  a  body  corporate  or  public  com- 
pany. Clause  5  of  the  articles  of  association  provided  that  "no 
shares  shall  l)e  issued  at  a  discount  unless  with  the  authority  of  a 
special  general  meeting  of  shareholders  duly  convened  for  the  pur- 
pose."   By  clause  24  the  company  was  empowered  to  increase  its 


CHAP.  III.]      HONG    KONG    &    CHINA    GAS    CO.,    LTD.,    V.  GLEN.  217 

capital.  By  clause  53  the  directors  of  the  company  were  specially 
authorized  to  make  and  enter  into  a  contract  (a  copy  of  which  was 
scheduled  to  the  articles)  with  William  Glen  and  Thomas  Glen. 

The  contract  referred  to  in  clause  53  was  contained  in  certain 
articles  of  agreement  which  were  dated  July  14,  1862,  and  were 
made  between  Wilham  Glen  of  the  first  part,  Thomas  Glen  of  the 
second  part,  and  the  company  of  the  third  part.  By  that  agreement, 
after  recitals  which  shewed  that  William  Glen  had  obtained  a  con- 
cession for  supplying  the  city  of  Victoria,  Hong  Kong,  with  gas, 
that  this  concession  had  been  transferred  to  Thomas  Glen,  and  that 
the  latter  was  prepared  to  sell  it  to  the  company,  it  was  agreed  (ar- 
ticles 1,  2,  3,  and  4)  that  the  concession  should  be  effectually  sold  and 
transferred  to  the  company,  who  should  be  free  from  any  competi- 
tion by  the  vendors ;  (articles  5  and  6)  that  in  the  event  of  either  of 
the  vendors  acquiring  any  like  concessions  for  any  other  place  or 
places  in  China,  they  would  not  dispose  thereof  to  any  other  party 
on  any  terms  without  first  giving  the  company  an  ample  opportu- 
nity of  acquiring  them  upon  the  same  terms;  (article  7)  that  the 
company  would  within  three  months  allot  to  Thomas  Glen  or  his 
nominees  400  shares  of  lOZ.  each  of  the  company's  capital  (not  ex- 
ceeding 20,000Z.)  and  would  provide  4000^.  to  be  immediately  applied 
in  paying  up  the  400  shares  in  full. 

Article  8  of  the  agreement  was  as  follows : 

"If  and  whenever  the  amount  of  the  company's  paid  up  capital 
shall  be  increased  above  the  sum  of  20,000/.,  the  company  will  allot 
to  the  said  Thomas  Glen,  his  executors,  administrators  or  assigns, 
such  further  number  of  shares  as  shall  be  equal  to  one-fifth  part  of 
the  increased  capital,  so  from  time  to  time  actually  paid  up  beyond 
the  said  sum  of  20,000/.,  and  will  pay  to  him,  or  them,  or  to  the  said 
Henry  Parkinson  Sharp  and  William  Matthew  Mills  Whitehouse, 
as  the  nominees  of  him  or  them,  a  sum  equal  to  the  nominal  amount 
of  the  shares  so  allotted  to  him  or  them,  which  sum  or  sums  so  paid 
shall  from  time  to  time  be  immediately  applied  in  paying  up  in  full 
the  shares  so  allotted." 

Articles  9  and  10  were  merely  ancillary  to  article  8. 

Issues  of  stock  were  made,  in  accordance  with  this  agreement, 
to  Thomas  Glen  during  his  lifetime  upon  each  increase  of  the  com- 
pany's stock.  He  died  in  1900  and  the  present  action  was  brought 
by  the  company  against  his  executors  for  (1.)  a  declaration  that 
the  provisions  contained  in  clauses  8,  9,  and  10  of  the  articles  of 
agreement  were  ultra  vires  the  plaintiff  company  and  invalid  and 
void;  and,  alternatively,  (2.)  a  declaration  that,  according  to  the 
true  construction  of  the  said  articles  of  agreement,  the  provisions 
of  clauses  8,  9,  and  10  thereof  ceased  to  operate  after  the  issued  capi- 
tal of  the  company  amounted  to  50,000/. ;  and,  in  the  further  alterna- 
tive, that  any  further  shares  to  be  allotted,  on  any  future  increase 


218  HONG    KONG    «k    CHINA    GAS    CO.,    LTD  ,    V.  GLEN.       (CILAP.  III. 

of  the  company's  capital,  to  the  defendants  or  their  nominees,  in 
pursuance  of  the  said  articles  of  ann'cnicnt,  would,  notwithstan<liiiK 
anythinj;  therein  contained,  he  held  hy  the  noniiiUHJS  suhject  to  the 
liability  to  pay  the  full  nominal  amount  thereof  in  cash  to  the  com- 
pany, without  any  liability  on  the  company  to  provide  such  c:ush 
or  any  j)art  thereof. 

Sauuk.nt,  J.  I  should  premise  that,  although  the  incorporation  of 
the  company  took  place  under  the  Act  of  185G  and  its  amending 
Acts,  and  the  langua^  of  the  material  provisions  of  the  Act  of  ISoO 
differs  slightly  from  that  of  the  corresponding  provisions  of  the  Act 
of  I(S()2,  no  material  distinction  for  the  present  purpose  has  been 
pointed  out  l)ctween  the  meaning;  and  effect  of  the  two  sets  of  pro- 
visions. It  wjis  practically  conceded  on  both  sides  that  the  ciusc  of 
Oorcgum  Gold  Mining  Co.  of  India  v.  Roper,  [1892)  A.C  12o,  and 
the  otIuT  like  decisions  under  the  Act  of  1.S02  ajjply  ecjually  to  com- 
panies incorporated  under  the  Act  of  iHoG.  And.  indeed,  the  point 
is  to  some  extent  at  legist  governed  by  authority:  see  In  re  Wey- 
vwxdh  and  Channel  Islands  Steam  Packet  Co.,  (1801]  1  Ch.  00. 

Next,  the  preci.se  meaning  and  effect  of  the  lanpuage  of  article 
8  should  be  exannne<l.  This  does  not  in  terms  provide  that  the 
shares  should  be  issued  at  a  discount  or  as  fully  paid  up,  and  Mr. 
Gore-Iirowne  uttered  a  warning  again.st  the  use  of  catchwords  in 
deciding  this  ca.se.  When,  however,  the  clause  is  carefully  examined, 
I  cannot  think  that  it  tends  less  to  contraveiu*  the  statutory  provi- 
sions as  to  the  capital  of  companies  than  if  it  were  a  clau.se  proviil- 
ing  in  terms  for  the  issue  of  fully-paid  shares.  For,  while  the  first 
part  of  the  article  contains  an  obliRation  to  allot  to  Thomas  (lien  or 
his  nominees  one-fifth  of  all  incr(\ise»l  share  capital,  the  .second  part 
of  the  article  provides  that,  contemporaneously  with  such  allotment, 
the  company  shall  furni.sh  cash  equal  to  the  full  nominal  value  of 
the  shares,  and  earmarks  and  dedicates  that  cash,  so  that  it  has 
immediately  to  return  to  the  company's  coffers  for  the  purpose  of 
paying  up  the  very  shares  in  full.  It  is  impossible,  in  my  view,  to 
hold  that  the  second  part  of  article  8  does  not  amount  to  a  contract 
for  the  contemporaneous  absolution  and  discharge  of  the  allottee 
from  his  prima  facie  statutory  liability  to  provide  the  nominal  value 
of  his  shares  in  money.  But  it  is,  of  course,  clear  that  a  shareholder 
may  effectually  contract  to  discharge  his  lial)ility  on  his  shares  by 
(inter  alia)  the  transfer  of  property  in  lieu  of  the  payment  of  cash, 
and  that  it  is  not  essential  that  for  this  purpose  the  real  value  of 
the  property  transferred  should  be  ivscertained  as  being,  or  should 
be  in  fact,  the  full  equivalent  of  the  cash  liability:  In  re  Wragg,  Ltd., 
[1897]  1  Ch.  796.  And  accordingly  it  is  argued,  and  this  is  the  real 
pinch  of  the  case,  that  the  transfer  of  the  concession,  though  made 
once  and  for  all  in  1862,  was  a  sufficient  equivalent  in  kind,  not  only 
for  the  discharge  of  the  habiUty  on  the  first  400  shares  to  be  issued 


CHAP.  III.]       HONG    KONG  .&    CHINA    GAS    CO.,    LTD.,    V.  GLEN.  219 

to  the  concessionaire,  but  also  for  the  discharge  of  the  HabiHty  on  a 
fifth  of  any  increased  capital  that  might  at  any  future 'time  be  issued 
to  the  concessionaire  by  the  company. 

This  argument,  however,  seems  to  me  to  go  far  beyond  the  deci- 
sion in  In  re  Wragg,  Ltd.,  [1897]  1  Ch.  796,  and,  indeed,  to  be  in  con- 
flict with  the  views  expressed  both  in  that  case  and  in  the  numerous 
cases  there  cited  and  examined,  particularly  In  re  Almada  and  Tirito 
Co.,  38  Ch.D.  415,  423,  and  the  Ooregimi  Case,  [1892]  A.C.  125. 
These  cases  clearly  shew  that  although  a  value  put  on  purchased 
property  by  the  contract,  and  not  fixed  dishonestly  or  coiourably, 
would  be  accepted  as  conclusive  tor  this  purpose  while  the  contract 
still  stands,  yet  the  contrary  would  be  the  case  where  the  contract 
shews  on  its  face  that  the  property  is  not  an  equivalent  for  the 
amount  of  the  capital  which  it  is  proposed  to  exempt  from  liability. 
For  instance,  if  shares  were  contracted  to  be  issued  as  paid  up  to  the 
extent  of  20,000Z.,  as  against  property  which  might  be  shewn  out- 
side the  contract  to  be  worth  only  15,000L,  the  arrangement  would 
probably  hold  water  as  in  In  re  Wragg,  Ltd.,  [1897]  1  Ch.D.  796,  it- 
self, where  the  discrepancy  was  one  between  a  total  of  35,000/.  and 
a  total  of  46,000L  But,  if  the  agreement  were  that  the  property  to 
be  purchased  should  be  valued,  and  that  against  tliis  property  shares 
should  be  issued  as  fully  paid  to  an  extent  exceeding  the  amount  of 
the  valuation  by  one-third,  the  arrangement  would,  in  my  judgment, 
be  bad  as  to  this  excess  of  one-third.  It  would  to  this  extent  be 
apparent  on  the  face  of  the  contract  that  the  attempted  discharge 
of  a  part  of  the  liability  was  illusory. 

Now,  in  the  present  case  the  liabihty  to  be  discharged  on  one- 
fifth  of  all  future  increases  of  capital  obviously  and  necessarily  has 
no  connection  with  or  relation  to  the  value  of  the  concession.  The 
case  is  far  stronger  in  this  respect  than  if  article  8  related  only  to 
share  capital  issued  for  the  purpose  of  exploiting  the  concession  in 
question.  For  it  applies  to  the  whole  increased  capital  of  the  com- 
pany, whatever  the  purpose  for  which  it  may  be  required.  Indeed, 
the  absurdity  becomes  specially  obvious  if  the  event  is  consid- 
ered of  a  gas  concession  for  any  other  place  in  China  being  trans- 
ferred by  the  Glens  to  the  company.  In  that  case  the  company 
would,  on  the  face  of  the  agreement,  have  to  pay  the  Glens  the  full 
value  of  the  new  concession,  for  the  company  are  only  to  have  the 
first  refusal,  and  are  not  to  be  entitled  to  any  better  terms  than  any 
other  purchaser.  And  yet  after  paying  the  full  price  they  would  still 
be  bound,  in  respect  of  any  share  capital  raised  to  complete  the  pur- 
chase, to  issue  a  further  25  per  cent,  to  the  Glens,  and  pay  up  or 
credit  as  paid  up  the  whole  of  this  25  per  cent,  in  full. 

It  is  true  that  an  individual  may  contract  to  pay  for  property 
on  any  terms,  and  may  find  it  convenient  and  choose  to  pay  a  price 
which  shall  be  little  or  almost  nothing  in  any  ordinary  event,  but 


220  SCOVILL    V.  THAYER.  [CHAP.   III. 

shall  be  increased  tenfold  or  a  hundredfold  in  certain  improbable 
events  altogether  unconnected  with  any  increase  in  the  value  of  the 
property  purchased.  But  I  do  not  see  how  a  limited  company  can 
speculate  in  this  way  consistently  with  the  principles  laid  down  in 
the  cases  to  wliich  I  have  referred.  As  I  understantl  the  legislation 
in  question,  as  interpreted  by  the  cases,  the  liability  of  a  shareholder 
may  be  discharged  either  by  the  meal  of  cash  or  by  the  malt  of  prop- 
erty, services,  or  the  like;  but  this  discharge  will  not  take  place  if  it 
is  apparent  that  the  malt  bears  no  relation  to  the  meal,  and  cannot 
therefore  be  estimated  as  Ix'ing  an  eciuivalent  for  it.  Can  it  be  iield 
here  that  the  definite  quantity  of  malt  represented  once  and  for  all 
by  the  transfer  of  the  concession  is  to  be  taken  as  the  equivalent  for 
ever  of  the  obligation  to  render  at  any  future  time  or  times  a  wholly 
indefinite  and  unlimited  quantity  of  meal?  It  seems  to  me  that  this 
question  must  be  answere<l  in  the  negative,  and,  indeed,  that  such  a 
clause  as  article  8  could  hardly  have  i:)een  introtluced  into  the  agree- 
ment of  1862  hat!  the  law  on  the  subject  been  as  fully  ascertained  at 
that  date  as  it  has  since  l)een. 

[The  court  held  that  the  agreement  was  bad  only  in  so  far  as  it 
provided  that  the  shares  should  be  issued  without  payment,  and 
that  the  company  was  under  the  obligation  to  allot  to  the  repre- 
sentatives of  Glen  one-fifth  of  the  share  capital  from  time  to  time 
issued.] 

Note.  —  Famatina  Development  Corporation,  Ltd.,  v.  Bury,  [1910] 
A.C.  439.  A  company  issued  obligations  by  the  terms  of  which  it 
was  obliged  to  pay  specified  sums,  if  there  should  be  net  profits 
available  for  that  purpose.  The  question  was  whether  it  could  issue 
paid-up  shares  to  satisfy  these  obligations.  The  court  held  that  the 
company  could  not  lawfully  make  this  charge  on  future  net  profits 
a  charge  on  capital  and  a  present  debt,  and  then  issue  paid-up  shares 
in  satisfaction  of  the  debt  so  created. 


SCOVILL  V.   THAYER. 

105  U.S.  143.     1S81. 

The  Fort  Scott  Coal  and  Mining  Company,  a  Kansas  corpora- 
tion, issued  stock  to  the  defendant  Thayer,  upon  payment  of  a  part 
of  the  par  value,  and  credited  him  with  the  balance  unpaid  by  "dis- 
count." Certificates  were  issued  for  full-paid  shares.  The  corpora- 
tion became  bankrupt,  and  the  assignees  sought  to  recover  from 
Thayer  the  unpaid  balance  upon  such  shares. 

Mr.  Justice  Woods.  The  stock  held  by  the  defendant  was  evi- 
denced by  certificates  of  full-paid  shares.    It  is  conceded  to  have 


CHAP.  III.]  SCOVILL    V.  THAYER.  221 

been  the  contract  between  him  and  the  company  that  he  should 
never  be  called  upon  to  pay  any  further  assessments  upon  it.  The 
same  contract  was  made  with  all  the  other  shareholders,  and  the 
fact  was  known  to  all.  As  between  them  and  the  company  this  was 
a  perfectly  valid  agreement.  It  was  not  forbidden  by  the  charter 
or  by  any  law  or  public  policy,  and  as  between  the  company  and  the 
stockholders  was  just  as  binding  as  if  it  had  been  expressly  author- 
ized by  the  charter. 

If  the  company,  for  the  purpose  of  increasing  its  business,  had 
called  upon  the  stockholders  to  pay  up  that  part  of  their  stock, 
which  had  been  satisfied  "by  discount"  according  to  their  contract, 
they  could  have  successfully  resisted  such  a  demand.  No  suit  could 
have  been  maintained  by  the  company  to  collect  the  unpaid  stock 
for  such  a  purpose.  The  shares  were  issued  as  full  paid,  on  a  fair 
understanding,  and  that  bound  the  company. 

In  fact,  it  has  been  held  in  recent  English  cases  that  not  only  is 
the  company  but  its  creditors  also  are  bound  by  such  a  contract. 
Waterhouse  v.  Jamieson,  Law  Rep.  2  H.L.  (Sc.)  29;  Currie's  Case,  3 
DeG.,  J.  &  S.  367;  Carling,  Hespeler,  and  Walsh's  Cases,  1  Ch.D. 
115. 

But  the  doctrine  of  this  court  is,  that  such  a  contract,  though 
binding  on  the  company,  is  a  fraud  in  law  on  its  creditors,  which  they 
can  set  aside ;  that  when  their  rights  intervene  and  their  clamis  are 
to  be  satisfied,  the  stockholders  can  be  required  to  pay  their  stock  in 
full.  Sawyer  v.  Hoag,  Assignee,  17  Wall.  610;  New  Albany  v.  Burke, 
11  id.  96;  Burke  v.  Smith,  16  id.  390. 

The  reason  is,  that'  the  stock  subscribed  is  considered  in  equity 
as  a  trust  fund  for  the  payment  of  creditors.  Wood  v.  Dummer,  3 
Mass.  308;  Mumma  v.  Potomac  Co.,  8  Pet.  281;  Ogilvie  v.  Knox  In- 
surance Co.,  22  How.  387;  Sawyer  v.  Hoag,  supra.  It  is  so  held  out 
to  the  public,  who  have  no  means  of  knowing  the  private  contracts 
made  between  the  corporation  and  its  stockholders.  The  creditor 
has,  therefore,  the  right  to  presume  that  the  stock  subscribed  has 
been  or  will  be  paid  up,  and  if  it  is  not,  a  court  of  equity  will  at  his 
instance  require  it  to  be  paid. 

Note.  —  See,  accord,  as  to  the  liability  to  creditors  of  persons 
to  whom  stock  is  issued  as  a  bonus  or  at  a  discount,  Vaughn  v.  Ala- 
bama National  Bank,  143  Ala.  572;  Wait  v.  McKee,  95  Ark.  124;  Ver- 
mont  Co.  V.  Declez  Co.,  135  Cal.  579;  New  Haven  Trust  Co.  v.  Gaff- 
ney,  73  Conn.  480  (insurance  corporation) ;  Knight  &  Wall  Co.  v. 
Tampa  Brick  Co.,  55  Fla.  728;  Bates  v.  Great  Western  Tel.  Co.,  134 
111.  536;  Boidton  Carbon  Co.  v.  Mills,  78  Iowa,  460;  Bank  v.  Northup, 
82  Kan.  638;  Haldeman  v.  Ainslie,  82  Ky.  395;  Belknap  v.  Adams, 
49  La.  Ann.  1350;  Barron  v.  Burrill,  86  Me.  66;  Hooper  v.  Central 
Trust  Co.,  81  Md.  559;  Utica  Fire  Alarm  Co.  v.  Waggoner  Clock  Co., 


222  GUARANTEE    TRUST   CO.  V.  DILWORTII    COAL    CO.       [cilAP.   III. 

166  Mich.  618;  McConey  v.  Belton  Oil  Co.,  97  Minn.  190  (ef.  Ross 
V.  Kelly,  36  Minn.  38;  a  mining  corporation);  Skrainka  v.  Allen, 
76  Mo.  384;  Libby  v.  Mt.  Monadnock  Co.,  67  N.H.  587;  Ilebberd  v. 
Southwestern  Land  &  Cattle  Co.,  55  N.J.  Eq.  18,  31 ;  Bernard  v.  Carr, 

167  N.C.  4H1;  McAllister  v.  American  Hospital  A.^s'n,  02  Or.  530; 
Matins  V.  Pridliam,  1  Tex.  Civ.  App.  58,  Ki;Martin  v.  ,St»)<//i  Salem 
Land  Co.,  94  Va.  28;  Cox  v.  Dickie,  48  Wash.  264;  Bank  v.  Belington 
Coal  Co.,  51  W.Va.  60,  80;  G'aj/rr  v.  Poi//,  HI  Wis.  638. 


GUARANTEE  TRUST  CO.   r.   DILWORTH  COAL  CO. 

235  Pa.  594.      1912. 

Mr.  Justice  Brown.  This  proceeding  is  on  a  corporation  mort- 
gage, in.stitiited  in  pursuance  of  a  provision  in  it  that,  on  ilefault  in 
payment  of  interest  on  the  bonds  secured  by  it,  the  trustee,  upon 
re(iuest  of  the  lioldei-s  of  one-third  of  tlie  l)onds,  might  proceed  by 
scire  facias  on  the  mortgage  and  prosecute  it  to  judgment,  execution 
and  sale  of  the  property.  The  mortgage  was  given  by  the  Dilworth 
Coal  Company,  which  was  adjudged  a  bankrupt  after  the  writ  was 
issued,  and  J.  T.  Blair,  its  trustee,  was  allowed  to  intervene  for  the 
purpose  of  making  the  defense  that  th(>  bonds  were  still  in  the  hands 
of  the  original  ownei-s  and  had  not  lK>en  paid  for.  This  defense  was 
regarded  as  unavailing  by  the  learned  trial  judge,  whose  direction 
to  the  jury  was  that,  if  they  should  find  there  had  been  default  in 
the  payment  of  interest  for  a  period  of  ninety  days,  and  the  trustee 
had  l)een  requested,  in  writing,  by  the  holders  of  one-third  of  the 
bonds  to  proceed  for  the  collection  of  the  amount  due  on  all  of  the 
bonds  secured  by  the  mortgage,  their  verdict  should  be  for  the 
plaintiff.  A  verdict  was  accordingly  rendered  in  its  favor  for  S338,- 
125,  and  from  the  judgment  entered  thereon  the  defendant's  trus- 
tee in  bankruptcy  has  appealed. 

It  is  hardly  conceivable  that  the  juiy,  if  they  had  been  permitted 
to  do  so,  would  have  failed  to  find  that  not  a  single  bond  issued  under 
the  mortgage,  in  pursuance  of  the  scheme  adopted  and  carried  out 
for  the  organization  of  the  Dilworth  Coal  Company,  had  been  paid 
for  either  in  property  or  money.  The  facts  as  developed  seem  to 
clearly  show  this.  In  June,  1901,  H.  P.  Dilworth  and  George  M. 
Dilworth  purchased  from  W.  P.  Dilworth  for  863,622  his  half  in- 
terest in  one  hundred  and  thirteen  acres  of  coal  land  situated  in 
Jefferson  township,  Greene  county.  They  owTied  the  other  half,  and 
the  total  value  of  the  whole,  based  upon  what  was  paid  for  W.  P. 
Gilworth's  half,  was  $127,244.  The  purchasers  immediately  took 
steps  to  organize  the  Dilworth  Coal  Company.  An  organization 
agreement,  which  has  been  lost,  was  signed  by  them  and  others,  who 


CHAP.  III.]       GUARANTEE    TRUST    CO.  V.  DILWORTH    COAL    CO.  223 

are  the  beneficial  plaintiffs  below.  That  agreement  —  its  contents 
having  been  established  by  parol  testimony  —  provided  that  the 
Dilworth's  coal  land  should  be  valued  at  $156,000,  and  for  turning 
it  over  to  the  corporation  they  were  to  receive  $156,000  in  stock  and 
$156,000  in  first  mortgage  bonds  of  the  company.  The  agreement 
further  provided  that  the  capital  stock  should  be  $300,000,  and  that 
a  first  mortgage  should  be  placed  on  the  property  for  $300,000,  to 
secure  the  $156,000  of  bonds  which  the  Dilworths  were  to  get,  and 
$144,000  of  bonds  which  were  to  be  issued  to  others  who  were  to  con- 
tribute $144,000  as  the  balance  of  the  capital  stock.  Each  contrib- 
utor was  to  be  put  on  an  equality  with  the  Dilworths,  and  for 
every  $1,000  cash  contributed  he  was  to  receive  $1,000  in  stock 
and  $1,000  in  bonds  secured  by  the  $300,000  mortgage.  The  sum 
of  $144,000  was  contributed  by  different  persons,  and  each  one,  for 
every  $1,000  paid  by  him,  received  twenty  shares  of  the  capital 
stock  of  the  company,  at  a  par  value  of  $50  per  share,  and  a  bond 
for  $1,000.  Just  what  the  agreement  was  as  carried  out  appears 
from  the  following  taken  from  the  testimony  of  H.  P.  Dilworth, 
one  of  the  witnesses  called  by  the  plaintiff:  "  Q.  What  were  the  terms 
of  this  contract?  A.  My  brother  George,  and  myself  put  a  value  of 
$156,000  on  the  coal  lands  we  owned,  and  we  were  to  get  $160,000 
in  bonds  or  $156,000  rather,  and  also  were  to  get  the  same  amount 
of  stock  of  the  Dilworth  Company.  Q.  And  what  else  was  contrib- 
uted to  the  company?  A.  To  anybody  else  who  paid  $1,000  they 
were  to  get  a  $1,000  bond  and  $1,000  par  value  of  the  stock  for  their 
$1,000  cash.  We  made  an  assessment  of  a  $1,000.  Q.  This  agree- 
ment provided  for  the  payment  of  $144,000  cash  —  cash  to  the 
extent  of  $144,000,  took  with  it  bonds  and  the  same  amount  of 
stock?  A.  Yes,  sir.  Q.  What  were  the  parties  contributing  that  to 
get?  A.  They  were  to  get  $1,000  worth  of  bonds  which  would  en- 
title them  to  $1,000  in  stock,  equal  amount  of  bonds,  equal  amount 
of  stock.  Q.  For  $144,000  in  cash  they  were  to  receive  bonds  to  the 
extent  of  $144,000,  and  also  to  the  extent  of  $144,000  in  stock,  — 
now  who  were  the  parties  who  came  into  this  agreement  originally, 

—  the  Dilworth  Coal  Company?  A.  Eugene  O'Neil,  $10,000;  Calvin 
Wells,  $20,000;  F.  E.  Richardson,  $20,000;  Pennock  Hart,  $10,000; 
Newton  Hemphill,  $12,000;  J.  H.  Lockhart,  $10,000;  Henry  Buhl, 
$15,000;  J.  M.  Lockhart,  $10,000;  C.  B.  McLean,  $20,000;  G.  A. 
McLean,  $10,000;  James  Black,  $4,000  and  myself  $3,000."  This 
witness  further  testified  as  follows,  when  cross-examined  by  counsel 
for  plaintiff:  ''Q.  Mr.  Dilworth,  how  did  you  pay  for  your  stock? 
A.  I  gave  my  property.  Q.  Your  property  was  duplicated  in  value, 

—  that  is,  for  $156,000  worth  of  property  you  received  $156,000 
worth  of  bonds  and  $156,000  stock?  A.  Yes,  sir." 

''No  corporation  shall  issue  stock  or  bonds  except  for  money, 
labor  done,  or  money  or  property  actually  received;"  Const.,  Art. 


224  GUARANTEE   TRUST    CO.  V.  DILWORTII    COAL    CO.       [CHAP.  III. 

XVI,  §  7.  What  the  organizers  of  the  Dilworth  Coal  Company  did 
was  done  in  the  face  of  this  provision,  but  the  jury  were  not  per- 
mitted to  pass  ui)on  the  vahdity  of  the  bonds  issucil  to  the  sub- 
scribers to  the  capital  stock  of  the  company,  even  though  they  were 
still  in  the  hands  of  the  onfj;inal  holders.  The  (luestion  of  the  rij^hts 
of  innocent  holders  does  not  arise  in  this  controversy,  and  there  is 
no  merit  in  the  contention  of  the  ajiijeliee  that  the  validity  of  the 
bonds  cannot  be  questioned  because  the  bondholders  did  not  have 
their  day  in  court.  The  holders  of  the  bonds  who  gave  the  notice 
to  the  trustees  to  proceed*  on  the  mortgage  were  those  to  whom 
S107,(J(X)  of  the  bonds  had  been  issued  under  the  agreement  giving 
them  $1,000  in  stock  and  SI, 000  in  a  bond  for  each  $1,000  sub- 
scribed, anil  their  holdings  were  unchanged  from  the  time  they 
received  them.  They  cannot,  therefore,  be  said  to  have  been  denied 
their  day  in  court,  for  they  themselves  caused  this  proceeding  to 
be  instituted.  H.  P.  Dilworth  testified  that  he  wius  still  the  owner 
of  the  $81,000  of  bonds  originally  issued  to  him,  and  had  acijuired 
the  $78,000  originally  issued  to  his  brother  George.  E.  M.  O'Neil, 
who  had  receivetl  $10,000  of  the  bonds,  wius  rej^resented  on  the  trial 
by  his  general  agent,  wiio  testified  that  he  still  held  the  bonds.  It 
thus  appeared  that  original  hoJdei-s  of  $270,000  of  the  bonds  had 
notice  of  this  proceeding.  Of  the  remaining  bontls  it  was  testified 
that  C.  B.  McLean  was  still  the  owner  of  the  $20,000  of  bonds 
originally  issued  to  him,  and  an  unchallenged  statement  of  counsel 
for  appellant  is  that  James  Black,  an  original  subscriber  to  $4,000 
of  the  bonds,  which  he  still  held,  was  present  at  the  trial.  All  the 
original  holders  of  the  bonds  with  the  possible  exception  of  C.  B. 
JVIcLean,  seem  to  have  had  notice  of  this  proceeding,  and  there  was 
ample  evidence  to  justify  the  jury  in  finding  that  the  entire  issue 
was  void. 

If  it  had  affirmatively  appeared  that  cash  or  property  to  the  value 
of  $000,000  iuid  actually  l)een  turned  over  to  the  coal  company,  a 
different  situation  would  be  presented;  but,  from  what  appeared  on 
the  trial,  the  conclusion  seems  to  be  unavoidable  that  all  the  com- 
pany got  was  property  and  money  amounting  in  value  to  but  $300,- 
000,  and  that  all  the  parties  to  the  scheme  of  organization  under- 
stood this.  Of  a  situation  very  similar  to  the  one  before  us  Mr. 
Justice  LuRTON,  now  of  the  Supreme  Court  of  the  United  States, 
aptly  said:  "Whether  this  'basis  of  organization'  be  construed  to 
be  a  contract  whereby  each  subscriber  to  the  stock  was  to  be  given 
a  bond  as  a  bonus,  or  each  subscriber  to  the  bonds  was  to  be  given 
paid-up  stock  as  a  bonus,  or  as  an  agreement  by  which  each  con- 
tributor to  the  capital  stock  was  to  receive  the  obUgation  of  the 
company,  secured  by  a  primary  mortgage,  that  he  should  be  repaid 
the  amount  of  his  subscription,  with  i2_terest,  such  an  agreement 
would  clearly  be  illegal  and  ineffective  as  to  existing  or  subsequent 


CHAP.  III.]  SOUTHWORTH    V.  MORGAN.  225 

creditors  of  the  corporation,  upon  the  ground  that  the  payment  for 
the  stock  was  unreal  and  simulated,  or  that  the  bond  had  been  issued 
upon  no  consideration:  2  Morawetz,  Priv.  Corp.  §  824;  Sawyer  v. 

Hoag,  84  U.S.  (17  Wall.)  610;  Scovill  v.  Thayer,  105  U.S.  143 

It  was  an  arrangement  whereby  the  franchise  was  to  be  secured, 
and  at  the  same  time  deprive  the  public  of  the  security  which  by 
law  they  are  entitled  to  have,  and  upon  which  the  grant  of  the  fran- 
chise depends.  Whatever  the  real  motive  and  purpose  of  the  pro- 
moters of  this  arrangement  may  have  been,  its  legal  effect,  if  vahd, 
would  have  been  to  throw  all  the  risks  and  hazards  of  the  business 
upon  the  public  who  should  deal  with  it;  while  the  contributors  were 
to  reap  all  possible  gains,  and  should  be  secured  against  loss  in  the 
event  the  enterprise  prove  unprofitable.  Is  a  contract  by  which  a 
corporation  agrees  to  repay  to  the  contributors  of  its  capital  stock 
their  several  contributions,  and  whereby  such  contributions  are 
converted  into  corporate  debts,  valid  even  as  against  the  corpo- 
ration? Upon  what  consideration  does  such  an  agreement  rest? 
And  what  power  has  a  corporation  to  bind  itself  by  such  a  con- 
tract?" Morrow  v.  Nashville  Iron,  Steel  &  Charcoal  Co.,  3  L.R.A.  37. 

The  validit}'  of  the  bonds  issued  by  the  Dilworth  Coal  Company 
was  clearly  for  the  jury. 

All  of  the  assignments  of  error  are  sustained  and  the  judgment 
is  reversed  with  a  venire  facias  de  novo. 

Note.  —  And  see  Brown  v.  Clow,  158  Ind.  403;  Morrow  v.  Iron 
&  Steel  Co.,  87  Tenn.  262;  Rolaw  v.  Ogden  R.R.  Co.,  37  Utah  540. 
Cf.  Broderip  v.  Salomon,  [1897]  A.C.  22,  supra. 


SOUTHWORTH  v.   MORGAN. 

205  N.Y.  293.     1912. 

Collin,  J.  The  plaintiff,  trustee  of  the  bankrupt  corporation, 
Remington  Automobile  &  Motor  Company,  seeks  to  recover  from 
the  defendant  a  sum  unpaid,  as  plaintiff  alleges,  upon  a  subscription 
by  the  defendant  for  two  shares  of  the  capital  stock  of  the  corpora- 
tion. 

The  trial  court  found  as  facts:  The  bankrupt  was  organized  in 
1900  under  the  laws  of  New  Jerse3^  Its  authorized  capital  stock  was 
$250,000,  divided  into  twenty-five  hundred  shares  of  the  par  value 
of  SlOO  each.  Soon  after  its  incorporation,  the  board  of  directors 
adopted  a  resolution  as  follows:  ''Resolved,  that  for  the  purpose  of 
securing  a  local  interest  in  the  Remington  Automobile  &  Motor 
Company  on  the  part  of  the  citizens  of  Ilion  (N.Y.)  that  200  shares 
of  the  stock  be  issued,  to  be  sold  at  $25  per  share,  and  that  the  pro- 


226  SOUTHWORTH    V.  MORGAN.  [CHAP.  III. 

ceeds  of  such  sale  be  placed  in  the  treasury  to  be  used  for  regular 
expenses."  Thereafter,  in  pursuance  of  the  resolution,  the  general 
manager  and  secretary  of  the  corporation  presented  to  the  defendant 
a  writing  which  contained  the  agreements  that  the  plant  of  the  cor- 
poration was  to  be  located  and  its  business  to  be  carried  on  at  Ilion, 
and  that  the  defendant  would  purcluise  two  non-as.ses.sable  shares  of 
the  capital  stock  of  the  corporation  at  S25  for  each  share  and  no 
more  would  ever  have  to  be  paid  upon  them.  The  defendant  signed 
the  agreement  and  purchased  the  two  shares  of  .stock  upon  the  dis- 
tinct undcrstantling  and  agreement  made  between  the  defendant  and 
the  general  manager  and  secretary  of  the  corporation  that  S25  per 
share  fully  paid  for  the  stock.  He  paid  $oO  for  the  two  shares  of  stock 
at  the  time  he  received  them.  The  corporation  located  its  plant  at 
Utica,  New  York,  and  not  at  Ilion.  In  December.  1902,  the  com- 
pany was  adjudged  a  bankrupt,  and  in  April,  1900,  the  Unit^^d 
States  District  Court  granted  an  ortler  directing  a  call  or  assessment 
upon  the  defendant  and  others  of  S75  per  share  to  meet  the  defi- 
ciency in  the  assets  of  said  corporation  to  meet  the  obligations  of  its 
creditors,  said  a.s.sessments  to  be  paid  on  or  before  July  1,  190(),  and 
the  defendant  was  duly  served  with  a  copy  of  said  order.  The  court 
found  as  a  conclusion  of  law  that  the  plaintiff  was  entitled  to  recover 
the  sum  of  S150,  a  conclusion  which  the  facts  found  do  not  support. 

The  liability  of  the  defendant  is  to  be  determined  by  the  law  of 
the  state  of  New  Jei-sey.  That  state,  through  its  laws,  gave  the  cor- 
poration its  existence,  powers,  liabilities  and  the  limits  within  which 
it  was  free  to  act,  and  a  citizen  of  this  state,  who  became  a  share- 
holder in  it,  entered  into  contract  relations,  the  extent  and  obliga- 
tion of  which  depend  upon  those  laws,  in  so  far  as  they  do  not  violate 
a  statute  or  the  settled  public  policy  of  this  state.  Loivry  v.  Inman, 
46  N.Y.  119;  Hancock  National  Bank  v.  Ellis,  166  Mass.  414;  Mol- 
son's  Bank  v.  Boardman,  47  Hun,  135.  The  relevant  laws  of  New 
Jersey  are  not  disclosed  or  laid  before  us  by  the  printed  record;  nor 
do  the  findings  make  known  the  provisions  of  the  charter  of  the 
bankrupt  other  than  that  stated  relating  to  the  authorized  capital 
stock.  We  are  confined  to  the  case  as  the  record  presents  it.  The 
laws  of  other  states  are  facts  which  must  be  alleged  and  proved  and 
of  which  we  cannot  take  judicial  notice  either  in  their  language  or 
their  interpretation.  Genet  v.  Del.  &  Hud.  Canal  Co.,  163  N.Y.  173, 
177;  Hancock  National  Bank  v.  Ellis,  166  Mass.  414.  In  the  absence 
of  those  facts  we  must  presume  that  the  common  law  of  New  Jersey 
is  the  same  as  the  common  law  of  New  York.  Ruse  v.  Mut.  Benefit 
Life  Ins.  Co.,  23  N.Y.  516,  522. 

It  is  urged  by  the  respondent,  at  this  point,  that  the  order  of  the 
United  States  District  Court  directing  the  assessment  of  the  shares 
of  the  defendant  conclusively  determined  the  validity  and  the 
amount  of  the  assessment.  It  is  true  that  the  regularity  and  validity 


CHAP.  III.]  SOUTHWORTH    V.  MORGAN.  227 

of  the  proceeding  in  that  court  and  its  conclusions  cannot  be  at- 
tacked in  this  action;  but  the  existence  or  non-existence  of  an  obhga- 
tion  on  the  part  of  the  defendant  to  pay  the  assessment  was  not 
within  the  subject-matter  of  which  that  court  took  jurisdiction.  To 
enable  the  plaintiff  to  enforce  the  liability  of  the  delinquent  share- 
holders to  the  extent  only  which  the  deficiency  in  the  corporate  as- 
sets required  and  to  effect  parity  of  contribution  between  them  it  was 
necessary  that  an  account  of  the  assets  and  debts,  of  the  entire 
amount  of  the  capital  remaining  unpaid  upon  the  issued  shares,  and 
the  part  of  the  face  value  of  his  shares  unpaid  by  each  stockholder 
should  be  taken,  and.  the  aggregate  assessment  required  equitably 
rated  by  the  court,  and  it  is  upon  those  issues  that  its  order  is  be- 
yond attack  in  this  action.  Great  Western  Telegraph  Co.  v.  Purdy, 
162  a  S.  329;  Howarth  v.  Angle,  162  N.Y.  179.  In  the  former  case 
the  court,  speaking  of  an  analogous  order  of  a  court  of  IlHnois,  said: 
''But  the  order  was  not,  and  did  not  purport  to  be,  a  judgment 
against  any  one.  It  did  not  undertake  to  determine  the  question 
whether  any  particular  stockholder  was  or  was  not  liable  in  any 
amount.  It  did  not  merge  the  cause  of  action  of  the  company 
against  any  stockholder  on  his  contract  of  subscription,  nor  deprive 
him  of  the  right,  when  sued  for  an  assessment,  to  rely  on  any  de- 
fense which  he  might  have  to  an  action  upon  that  contract"  (p.  337). 
The  respondent  does  not  contend  that  the  charter  provision  divid- 
ing the  authorized  capital  stock  into  shares  "of  the  par  value  of  $100 
each"  prohibited  the  creation  of  an  actual  share  or  interest  upon 
a  consideration  less  than  $100,  or  secures  to  the  creditors  or  their 
representative  the  right  of  collecting  upon  each  share,  as  the  dis- 
charge of  the  corporate  debts  demands,  the  difference  between  the 
consideration  and  $100. 

Inasmuch  as  no  statute  of  the  state  of  New  Jersey,  nor  provision 
of  the  charter  of  the  corporation  relative  to  the  liability  of  the  defend- 
ant, was  proven,  we  turn  to  the  common  law,  remarldng  parentheti- 
cally, however,  that  we  have  not  been  referred  to  and  have  not  found 
any  domestic  statute  which  prescribes,  as  a  condition  to  the  exer- 
cise here  of  the  rights  derived  from  the  state  of  New  Jersey  that  the 
shareholders  shall  be  liable  to  the  creditors  or  their  representative 
up  to  the  nominal  value  of  their  stock,  and  there  is,  therefore,  no 
statutory,  as  there  is  no  charter,  prohibition  against  the  issuance  of 
the  shares  of  the  capital  stock  for  less  than  their  par  value  as  named 
in  the  charter,  and  no  statutory  mandate  that  the  shares  shall  be 
deemed  issued  and  held  subject  to  the  payment  of  such  value.  Nor 
do  the  principles  of  the  common  law  of  this  state  work  such  results. 
In  Christensen  v.  Eno,  106  N.Y.  97,  the  action  was  brought  by  a 
judgment  creditor  of  an  insolvent  corporation  organized  under  the 
laws  of  Illinois  to  recover  forty  per  cent  of  the  authorized  par  value 
of  $100  each  of  twenty-five  shares  of  the  stock  of  the  company  issued 


228  SOUTHWORTII    V.  MORGAN.  [CHAP.  III. 

to  but  unsubscribed  for  by  the  defendant,  upon  which  the  forty  per 
cent  was  not  paid,  but,  as  a  gratuity,  was  credited  as  jxii<l,  when  the 
stock  was  issued.  Judge  Andrews,  writing  for  this  court,  which  re- 
versed the  judgment  in  favor  of  the  plaintiff,  said  (citing  authori- 
ties): "But  the  HabiHty  of  a  shareholder  to  pay  for  stock  does  not 
arise  out  of  his  relation,  but  depends  \\\)0\\  his  contract,  express  or 
implied,  or  upon  some  statute,  and  in  the  absence  of  eitluT  of  these 
gi'ounds  of  liability,  we  do  not  perceive  how  a  person  to  whom  shares 
have  been  issued  as  a  gratuity  has,  by  accepting  them,  commit tel 
any  wrong  upon  creditors,  or  made  himself  lial)le  to  pay  the  nomin:d 
face  of  the  shares  as  upon  a  subscription  or  contract"  (p.  102).  The 
principles  which  determined  our  judgment  in  that  case  were  re- 
affirmed in  Christensen  v.  Colby,  110  N.Y.  GGO.  In  the  case  at  bar,  no 
statute  supports  the  alleged  liability  of  the  defendant,  and  the  express 
agreement  between  the  corporation  and  the  defendant  was  that  the 
defendant  should  pay  twenty-five  per  cent  of  the  nominal  value  of 
the  shares  and  no  more.  The  respondent  contends,  however,  and 
therein  he  has  been  successful  in  the  courts  below,  that  the  creditors 
of  the  corporation  represented  by  the  j)l:untiff,  have  the  right  to 
comp(>l  tlu^  payment  of  the  unpaid  seventy-five  per  cent,  because  the 
capital  stock  is  a  trust  fund  for  the  security  of  the  creditoi-s,  and 
that  a  liability  in  their  favor  to  the  extent  of  the  unpaid  part  of  the 
nominal  value  of  the  actual  shares  exists  and  can  be  enforced.  Such 
contention  availed  the  plaintiff  in  the  Christcuscn  Case  until  it 
reached  this  court,  the  General  Term  saying  therein  that  the  practi- 
cal effect  of  the  transaction  was  to  take  out  of  the  assets,  to  which 
the  creditors  were  entitled,  the  forty  per  cent  indorsed  as  paid  upon 
the  stock,  when  in  fact  it  was  not  paid.  It  is  strenuously  urged  that 
this  case  is  not  controlled  by  the  j^rinciples  which  decided  the  Chris- 
tensen Case,  for  the  reason  that  the  defendant  subscribed  for  the  two 
shares  of  the  capital  stock,  while  in  the  Christensen  Case  the  stock 
certificate  was  merely  issued  to  and  accepted  by  the  defendant.  The 
subscription,  as  expressed  in  the  agreement  between  the  defendant 
and  the  corporation,  has  been  completely  fulfilled  by  the  payment 
in  full  of  the  sum  it  bound  him  to  contribute  and  therewith  his  liabil- 
ity to  the  corporation  or  the  creditore  terminated,  unless  there  issued 
from  the  trust  fund  doctrine,  through  implication,  a  contract  which, 
in  the  paramountcy  given  it  by  the  fact  that  it  was  the  irresistible 
product  of  the  law,  nullified  the  expressed  stipulation  that  S25  was 
the  whole  sum  to  be  paid  upon  each  share,  and  substituted  in  its 
place  the  requirement  that,  as  to  the  creditors,  there  should  be  paid 
$100  or  so  much  thereof  as  the  satisfaction  of  their  demands  made 
necessary.  That  doctrine  has  not  such  potency.  Its  peculiar  vigor 
is,  that  contrary  to  the  common  law  of  England,  it  secures  to  the 
creditors  of  insolvent  corporations  or  their  representatives  the  right 
of  enforcing  subscriptions  for  shares  of  which  the  corporation  has 


CHAP.  III.]  SOLTHWORTH   V.  MORGAN.  229 

deprived  itself  by  release  or  defeasance.  It  declares  that  the  capital 
or  capital  stock  of  a  corporation  is  a  substitute  for  the  personal  lia- 
bility which  subsists  in  individual  or  partnership  undertakings  and  is 
a  fund  set  apart  as  a  security  for  the  payment  of  the  corporate  debts. 
The  capital  or  capital  stock  which  it  thus  segregates  is  not  the  capital 
stock  authorized  or  named  in  the  charter  of  the  corporation.  If  it 
were  the  members  would  be  bound  by  the  doctrine  to  contribute  on 
account  of  it  the  sum  within  its  named  value  needed  to  pay  the  debts 
of  the  insolvent  coi-poration.  The  statement  in  the  charter  does  not 
create  a  security  for  the  creditors.  It  creates  authorized  or  potential 
capital  stock  and  shares  which,  transferred  into  actual  shares  through 
the  acquisition  of  subscribing  members  and  their  payments,  pro- 
duces the  money  or  property  which,  put  into  a  single  corporate  fund, 
is  the  actual  capital  or  capital  stock  on  wliich  the  business  is  under- 
taken and  the  assets  or  fund  contemplated  by  the  trust  fund  doctrine 
which  the  directors  or  stockholders  may  not  lawfully  diminish  by 
appropriating  or  squandering  it  or  giving  it  away.  And  as  there  is 
not  a  fund  or  security  in  the  nominal  or  potential  shares,  there  is 
none  in  the  excess  of  the  nominal  value  over  the  subscribed  value  of 
the  shares.  The  subscription  agreements,  as  they  are  enforceable 
through  their  express  provisions  or  implication  or  statutory  con- 
ditions, are  the  sources  and  the  measure  of  the  duty  of  the  sub- 
scribers. Christensen  v.  Eno,  106  N.Y.  97;  Burrall  v.  Bushwick  Rail- 
road Co.,  75  N.Y.  211.  The  doctrine  further  declares  that  unpaid 
subscriptions  are  a  part  of  the  capital  and  that  a  subscriber  cannot 
be  discharged  to  the  injury  of  creditors  by  arrangement  or  device  to 
which  creditors  do  not  give  their  assent  and  by  which  he  is  to  pay 
less  than  his  subscription.  Stoddard  v.  Limi,  159  N.Y.  265;  Ward  v. 
City  Trust  Co.,  192  N.Y.  61;  Hazard  v.  Wight,  201  N.Y.  399.  The 
doctrine  does  not  create  or  nullify  subscriptions.  It  lays  hold  of  the 
assets  of  an  insolvent  corporation,  and  in  doing  that  it  compels  sub- 
scribers to  fulfill  their  legal  obligations  and  perform  their  legal  duties; 
but  it  does  not  beget  those  duties  or  obligations;  it  does  not  make 
unlawful  or  invalid  a  subscription  which,  apart  from  it,  was  valid 
and  lawful.  The  question  with  it  is,  has  the  subscriber  fully  per- 
formed the  subscription  agreement  as  it  in  fact  and  in  law  exists,  and 
an  affirmative  finding  renders  it  inapplicable  and  inoperative.  In 
the  case  at  bar  there  were  not  statutory  conditions  upon  which  the 
shares  might  be  owned.  The  agreement  between  the  defendant  and 
the  corporation  expressed  with  completeness  the  obligation  and  lia- 
bility of  the  defendant  for  his  shares.  He  has  fulfilled  the  obligation 
and  thereby  destroyed  the  liability.  The  trust  fund  doctrine  is  in- 
applicable and  the  findings  of  fact  do  not  constitute  a  cause  of  action. 
We  have  not  considered  or  determined  either  the  manner  or  the 
extent  in  which  a  statute  of  New  Jerse}'',  inimical  to  the  express 
agreement  of  the  corporation  and  the  defendant,  would  thi'ough  im- 


230  COFFIN    V.  RANSDELL.  [qilAP.  III. 

plication  affect  it,  or  the  effect  of  the  statement  of  the  corporation 
that  it  would  locate  its  plant  and  carry  on  its  business  at  llion,  be- 
cause the  record  submitted  to  us  does  not  present  those  tjuestions. 

The  judgment  should  be  reversed  and  a  new  trial  granted,  costs 
to  abide  the  event. 

Haigiit,  Vann,  Willard  Bartlett,  Hiscock  and  Chase,  JJ., 
concur;  Cullen,  Ch.J.,  concurs  in  memorandum,  as  follows: 

CuLLEN,  Ch.J.  I  concur  on  the  sole  ground  that,  as  shown  in  the 
opinion  of  Collin,  J.,  the  question  involved  in  the  appeal  is  settled 
by  the  authority  of  the  previous  decisions  of  this  court.  Were  it  an 
original  one  I  should  reach  a  contrary  conclusion. 

Judgment  reversed,  etc. 

Note.  —  See  Bent  v.  Underdown,  156  Ind.  516  (creditors  affected 
with  notice  of  a  provision  in  articles  of  association);  Ross  v.  Kelly, 
36  Minn.  38  (mining  corporation). 


COFFIN   V.   RANSDELL. 

linliid.  417.      1K.S6. 

Mitchell,  J.  Daniel  ^L  Ransdcll,  as  receiver  of  the  L'nthank 
Plow  Company,  a  corporation  organized  under  the  law  of  the  State 
of  Indiana,  brought  this  suit  against  Francis  A.  Coffin,  a  shareholder, 
to  recover  an  alleged  balance  due  upon  his  stock  subscrijjtion.  He 
alleges  that  he  brings  the  suit  by  the  especial  direction  of  the  court, 
under  whose  appointment  he  is  acting  as  receiver. 

From  the  facts  put  forward  in  the  complaint,  and  reUed  on  as  a 
ground  of  recovery,  it  appeai-s  that  the  Unthank  Plow  Company  was 
organized  on  the  13th  day  of  July,  1881,  by  Daniel  L'nthank,  Francis 
A.  Coffin  and  William  E.  Coffin.  The  capital  stock  was  fixed  at 
$50,000,  divided  into  1,000  shares  of  S50  each.  Articles  of  a.ssociation 
were  filed,  as  required  l)y  law.  These  are  embodictl  in  the  complaint. 

"The  object  and  business  of  the  corporation,"  as  set  forth  in  its 
articles  of  association,  "is  the  manufacture  and  sale  of  agricultural 
implements,  and  other  articles  and  machinery,  and  also  to  acquire, 
purchase,  and  hold  letters-patent  for  such  patented  articles  as  it  may 
desire  to  manufacture." 

The  three  corporators  were  named  in  the  articles  as  directors.  The 
articles  of  association  concluded  as  follows:  "  The  undersigned  hereby 
associate  themselves  together  for  the  purpose  of  forming  this  cor- 
poration, and  severally  subscribe  the  amount  of  stock  set  opposite 

(Signed)  "Daniel  Unthank,       499  shares. 

"Francis  A.  Coffin,     499  shares. 
"William  E.  Coffin,      2  shares." 


CHAP.  III.]  COFFIN    V.  RANSDELL.  231 

These  articles  were  signed  July  13th,  1881. 

The  complaint  avers  that  the  corporation  was  organized  as  the 
successor  of  Unthank  &  Coffin,  a  partnership,  engaged  in  the  same 
business  as  that  proposed  to  be  conducted  by  the  corporation,  and 
that  the  members  of  the  late  firm  were  Daniel  Unthank  and  Francis 
A.  Coffin. 

It  is  charged  that  the  only  manner  in  which  there  was  ever  any 
payment,  or  pretence  of  payment,  of  the  stock  severally  subscribed 
by  Daniel  Unthank  and  Francis  Coffin,  or  either  of  them,  was  bj'' 
turning  over  to  the  corporation  the  property  and  assets  of  the  firm  of 
Unthank  &  Coffin,  which  property  and  assets,  the  plaintiff  avers,  the 
subscribers,  Unthank  and  Coffin,  well  knew  were  no  more  than  one- 
fourth  the  amount  of  the  stock  so  subscribed  by  them. 

Unthank  and  Coffin,  it  is  alleged,  each  owned  one-half  of  the 
property  so  turned  over  in  payment  of  their  respective  subscrip- 
tions. It  is  averred  that  the  property  so  transferred  consisted  in 
part  of  letters-patent,  securing  the  right  to  manufacture  plows  of  a 
certain  kind,  which  letters-patent,  it  is  alleged,  were  turned  in  at  a 
valuation  of  $27,000,  each  of  the  late  partners  taking  credit  on  his 
subscription  for  one-half  that  amount.  Plows,  and  material  on  hand 
for  the  manufacture  of  plows,  estimated  at  $3,000,  were  in  like  man- 
ner applied,  as  were  also  bills  receivable,  and  credit  accounts  of  the 
late  firm,  amounting  to  $9,000.  The  balance  of  the  subscription  was 
paid,  the  complaint  avers,  "by  turning  in  other  alleged  assets  of 
Unthank  &  Coffin,  which  were  not  assets  at  all."  What  these  al- 
leged assets  were,  or  their  value,  is  not  stated.  It  is  charged  in  gen- 
eral terms,  that  the  letters-patent,  and  other  articles  and  assets 
so  turned  in  and  applied,  were  vastly  overestimated  in  value;  that 
the  bills  receivable  were  worth  less  than  one-half  the  amount  they 
were  credited  for  on  the  subscriptions,  all  of  which  it  is  alleged  was 
well  known  to  the  defendant. 

From  the  facts  as  set  forth,  and  which  are  substantially  stated 
above,  the  conclusion  is  drawn,  that  the  defendant  is  indebted  for 
at  least  75  per  cent,  of  his  original  stock  subscription.  An  accounting 
and  judgment  are  prayed. 

The  appellant  contends  that  the  facts  stated  do  not  constitute  a 
cause  of  action  against  him,  and  hence  that  the  court  below  erred 
in  overruling  his  demurrer  to  the  complaint. 

It  is  fairly  inferable  from  the  facts  disclosed,  that  at  or  subsequent 
to  the  incorporation  of  the  company,  it  was  agreed  between  the 
directors  of  the  corporation  and  the  defendant,  that  his  interest  in 
the  property  and  assets  of  the  firm  of  Unthank  &  Coffin  should  be 
transferred  and  accepted  in  full  payment  of  his  subscription  to  the 
stock  of  the  Unthank  Plow  Company,  and  that  it  was  so  transferred 
and  accepted.  The  gravamen  of  the  plaintiff's  case  is,  that  because 
there  was  an  overvaluation  of  the  property,  the  transfer  and  accept- 


232  COFFI.V    V.  RANSDELL.  [ciIAP.   III. 

ance  constituted,  as  against  subsequent  creditors  of  the  corporation, 
payment  pro  tanto  only. 

Assuming  as  receiver  to  represent  the  creditors  of  the  cori)oration, 
the  plaintiff,  in  his  official  or  representative  character,  asserts  the 
right  to  ascertain  the  real  value  of  the  property  and  assets  t  ransferred. 
and  to  recover  from  liie  defendant  the  ditTerenec  hetween  such  value 
and  the  amount  suhseriWed  by  him,  as  unpaid  subscription. 

It  is  to  be  noted  that  there  is  an  entire  absence  of  any  charge  or 
suggestion  that  the  corporation  was  in  any  way  misled  or  over- 
reached by  the  defentlant,  as  to  the  situation  or  value  of  the  jirop- 
erty;  nor  does  it  appear  that  the  transaction  was  merely  eoloraide. 
or  a  mere  device  on  the  part  of  the  corporators  to  absorb  the  capital 
stock  of  the  corporation  without  making  what  was  regarded,  and 
agreed  upon,  as  an  equivalent  in  payment. 

The  inference  is,  tliat  the  board  of  directors,  comprising  all  the 
stoekholdei-s,  with  full  knowledge  of  all  th(>  facts,  accei)te(l  the  prop- 
erty and  assets  in  question  as  payment,  and  without  any  fraudulent 
intent  consununated  the  transaction,  which  stood  without  question 
until  it  was  assailed  by  the  receiver  in  the  manner  stated. 

It  is  to  be  observed,  further,  that  this  is  not  a  suit  to  rescind  or 
set  aside  the  transfer  and  acceptance  of  the  property,  or  any  part  of 
it,  as  fraudulent,  nor  is  there  any  pretence  that  the  transaction  was 
ultra  rircs  and  void.  From  the  frame  of  the  complaint,  and  in  all  its 
distinctive  features,  the  action  is  i)urely  a  suit  at  law  to  collect  un- 
paid subscription  to  stock. 

Accepting  the  situation,  and  the  property  as  he  found  it,  the  re- 
ceiver simply  says,  that  the  only  payment,  or  pretence  of  payment, 
which  the  defendant  ever  made  of  his  subscription,  was  in  the  man- 
ner stated,  and  that  because  the  projierty  taken  in  payment  was 
knowingly  overvalued  by  the  defendant,  and  the  other  corporators, 
the  difference  between  the  actual  value  of  the  property  and  assets 
so  taken,  and  the  amount  of  the  defendant's  subscription,  remains 
unpaid. 

The  argument  in  support  of  the  judgment  of  the  court  below, 
which  was  for  the  plaintiff,  rests  upon  the  proposition  that  the  capi- 
tal stock  of  a  corporation,  especially  the  unpaid  subscriptions  to  such 
stock,  constitutes  a  trust  fund  for  the  benefit  of  the  general  creditors 
of  the  corjioration.  This  being  so,  it  is  argued  that  the  representative 
of  the  creditors  "has  the  right  as  against  anybody,  and  as  against 
any  settlement  or  contract  to  which  they  were  not  parties,  to  in- 
quire into  the  state  of  the  fund,  and  to  insist  that  all  who  are  really 
indebted  be  compelled  to  pay." 

That  subscriptions  to  the  capital  stock  of  a  corporation  are  re- 
quired to  be  made  in  good  faith,  can  not  be  doubted.  Simulated  sub- 
scriptions by  persons  who  have  neither  the  ability  nor  purpose  to 
pay,  and  arrangements  between  the  subscribers  and  the  agents  or 


CHAP.  III.]  COFFIN    V.  RANSDELL.  233 

promoters  of  a  corporation,  that  subscriptions  shall  be  merely  color- 
able, are  a  fraud  upon  the  law.  This  much  was  decided  in  the  recent 
case  of  Holman  v.  State,  ex  rel.,  105  Ind.  569. 

The  legislative  purpose  in  maldng  provision  for  corporate  or- 
ganizations was,  that  subscriptions  to  the  capital  stock  should  con- 
stitute a  fund,  or  capital,  with  which  to  purchase  property  necessary 
for  the  corporate  business,  and  to  enable  the  corporation  to  engage 
in  and  carry  out  the  purpose  of  its  organization.  It  is  upon  the  faith 
of  its  capital  stock,  either  paid  in  and  invested  in  available  property 
and  corporate  assets,  or  to  be  paid  in,  that  credit  may  be  extended 
to  the  corporation.  Having  paid,  or  agreed  to  pay,  their  subscrip- 
tions for  stock,  is  the  consideration  upon  which  the  several  corpora- 
tors enjoy  exemption  from  personal  liability  for  corporate  debts, 
except  as  such  liability  may  be  imposed  by  statute. 

It  follows  necessarily  that  unpaid  subscriptions  to  the  capital 
stock  of  a  corporation  constitute  a  trust  fund  for  the  benefit  of  credi- 
tors; and  it  follows  also,  that  the  officers  of  the  corporation,  who 
are  trustees  in  respect  to  its  property  and  funds,  can  not  purposely 
or  fraudulently  waste  or  dissipate  the  corporate  assets,  nor  can  they 
defeat  or  impair  the  trust,  by  accepting  merely  simulated  or  ficti- 
tious payment  of  stock  subscriptions,  or  by  any  other  device  short  of 
an  actual  payment  of  that  which  is  in  good  faith  taken  as  an  equiva- 
lent for  the  stock.  Scodll  v.  Thayer,  105  U.S.  143;  Sawyer  v.  Hoag, 
17  Wall.  610;  Osgood  v.  King,  42  Iowa,  478;  Wetherhee.Y.  Baker, 
35  N.J.  Eq.  501;  Boynton  v.  Hatch,  47  N.Y.  225;  Crawford  v.  Rohrer, 
59  Md.  599;  Thompson  Stockholders,  §  129;  Morawetz  Corp.,  §§  423, 
824,  825. 

Any  arrangement,  therefore,  between  a  stockholder- and  the  of- 
ficers or  agents  of  a  corporation,  by  which  paid-up  shares  of  stock 
are  issued  upon  merely  simulated  or  nominal  payment,  whether  such 
payment  be  made  in  money  or  property,  is  regarded,  as  between  the 
stockholders  and  the  creditors  of  the  corporation,  as  a  sham,  and 
hence  no  payment  at  all.  Such  pajanents,  like  simulated  subscrip- 
tions, are  an  evasion  of  the  law,  and  are,  therefore,  fraudulent  and 
void. 

The  affirmation  of  the  foregoing  propositions  does  not,  however, 
meet  the  exigencies  of  the  plaintiff's  case.  Having  averred  an  actual 
substantial  payment  to,  and  acceptance  bj^,  the  corporation  of  valu- 
able property,  while  that  transaction  remains  unimpeached  and  un- 
rescinded,  the  necessities  of  the  plaintiff's  case  required  that  he  should 
show  a  state  of  facts  which  rendered  the  transaction  ultra  vires  and 
void,  or  that  it  was  so  infected  with  fraud  and  bad  faith,  as  that  the 
creditors  might  treat  it  as  void,  without  setting  it  aside. 

Whatever  may  have  been  formerly  held,  it  is  now  estabhshed  that 
subscriptions  to  corporate  stock  need  not,  in  the  absence  of  statutory 
provisions  requmng  it,  be  paid  for  in  cash.  The  principle  is  now  gen- 


234  COFFIN    V.  RANSDELL.  [CHAP.   111. 

erally  accepted,  both  in  England  and  America,  that  any  property 
which  the  corporation  is  authorized  to  purchase,  or  which  is  neces- 
sary for  tiie  purjioses  of  its  legitimate  business,  may  be  received  in 
payment  for  its  stock.  Any  payment,  whether  it  be  in  money  or 
money's  worth,  so  that  it  be  made  in  good  faith,  will  give  the  shares 
so  paid  for  the  status  of  paid-up  stock.  In  the  language  of  Lord 
Justice  GiFFAUD,  in  Druintnoiurs  Case,  L.ll.  4  Ch.  Ap.  772:  "If  a 
man  contracts  to  take  shares  he  nmst  pay  for  them,  to  use  a  homely 
phrase,  *in  meal  or  in  malt;'  he  must  either  pay  in  money  or  in 
money's  worth.  If  he  pays  in  one  or  the  other,  that  will  be  a  satis- 
faction." Fletcher  v.  McGill,  ante,  p.  395;  Ci7ic}nnati,  etc.,  R.R.  Co. 
V.  Clarkson,  7  Ind.  595;  State  v.  Bailij,  10  Ind.  40;  Phelan  v.  Hazard, 
5  Dill.  45;  Van  Cutt  v.  Van  Brunt,  82  N.Y.  535;  Lorillard  v.  Clyde, 
86  N.Y.  384;  Carr  v.  Le  Fevre,  27  Pa.  St.  413;  Philadelphia,  etc.,  R.R. 
Co.  V.  Hickman,  28  Pa.  St.  318;  Pitt.^lnirgh,  etc.,  R.R.  Co.  v.  Stewart, 
41  Pa.  St.  54;  Foreman  v.  Bigeloic,  4  C  liff.  508;  Liebkc  v.  Knapp, 
79  jVIo.  22;  Foster  v.  Seymour,  6  Am.  &  Eng.  Corp.  Cases,  533;  Craw- 
ford V.  Rohrer,  s^upra;  In  re  Bagla7i  Hall  Colliery  Co.,  L.R.  5  Ch.  Ap. 
346;  PeWs  Case,  L.R.  5  Ch.  Ap.  11 ;  Spargo's  Case,  L.R.  8  Ch.  Ap. 
407;  In  re  Cape  Breton  Co.  Limited,  50  Law  Times,  N.S.  390;  18  Am. 
Law  Rev.  250;  Thompson  Stockholders,  §§  127-130;  ^loruwetz 
Corp.,  §§  425,  428,  825,  820. 

The  foregoing,  and  many  other  cases  which  might  be  cited,  af- 
foril  examples  of  transactions,  such  as  that  here  involved,  between 
the  owners  of  property  and  coi-porations  which  they  formed,  which, 
in  the  absence  of  fraud,  have  been  sustained  by  the  courts. 

As  shown  by  the  articles  of  association,  the  Unthank  Plow  Com- 
pany was  organized  for  the  purpose  of  engaging  in  the  manufacture 
of  plows  antl  other  agricultural  implements,  and  also  to  acquire, 
purchase,  and  hold  letters-patent,  for  such  articles  as  it  should  en- 
gage in  the  manufacture  of. 

The  contract  to  receive  in  pajment  the  letters-patent,  plows, 
material,  and  other  assets  of  its  predecessor,  L'nthank  &  Coffin,  was, 
therefore,  not  ultra  vires.  Lyon  v.  Ewings,  17  \\'is.  63;  Clark  v. 
Farrington,  11  Wis.  306;  Blunt  v.  Walker,  11  \Ms.  334;  Cornell  v. 
Hichens,  11  Wis.  353. 

Does  the  fact  that  the  property  was  received  at  an  overvaluation, 
enable  the  receiver  to  maintain  this  suit  without  impeaching  or  set- 
ting the  transaction  aside,  if  it  can  be  set  aside?  No  proposition  can 
be  plainer,  upon  the  facts  as  stated,  than  that  the  title  to  the  prop- 
erty and  assets  which  were  transferred  to  the  corporation  passed  to 
and  remains  in  it,  or  in  the  receiver,  and  that  the  title  and  ownership 
of  the  stock  thereby  paid  for  vested  in  the  defendant.  The  transac- 
tion having  been,  so  far  as  appears,  fully  executed  years  before  the 
receiver  was  appointed,  may  he  permit  it  to  stand  and  now  treat  it 
as  so  far  void  as  to  ask  for  a  new  valuation  of  the  property?  May 


CHAP,  in.]  COFFIN    V.  RANSDELL.  235 

he  disaffirm  the  contract  in  part,  and  affirm  as  to  the  residue?  We 
have  been  unable  to  discover  any  principle  or  well  considered  au- 
thority which  affirms  this  proposition. 

The  principle  deducible  from  the  authorities  already  cited  is,  that 
even  in  case  of  an  overvaluation  of  property  transferred  to  a  corpora- 
tion in  payment  of  shares,  the  transaction,  unless  void  for  some  rea- 
son, is  binding  so  long  as  it  is  not  impeached  by  the  corporation,  or  its 
assignee;  and  it  can  be  impeached  only  for  fraud  upon  the  corpora- 
tion. Coit  V.  Gold  Amalgamating  Co.,  119  U.S.  343;  P/ieZaw  v.  Hazard, 
supra;  Brant  v.  Ehlen,  59  Md.  1. 

Thus  it  has  been  held  that  a  mining  corporation  may  issue  shares 
to  its  creditors  as  fully  paid  up,  in  consideration  of  mining  lands,  and 
although  these  lands  be  greatly  overvalued,  the  assignee  in  bank- 
ruptcy of  the  corporation  can  not,  without  disaffirming  the  contract, 
set  up  the  claim  that  the  property  was  not  worth  what  it  was  valued 
at.  Foreman  v.  Bigelow,  supra.  So  in  Phelan  v.  Hazard,  supra,  a  case 
closely  analogous  in  its  facts  to  the  one  under  consideration,  Judge 
Dillon  said:  "While  the  contract  stands  unimpeached,  the  courts, 
even  where  the  rights  of  creditors  are  involved,  will  treat  that  as  a 
payment  which  the  parties  have  agreed  should  be  paj^ment." 

A  standard  author  concludes  a  careful  and  exhaustive  examination 
of  this  subject  thus:  "The  whole  discussion  resolves  itself  into  the 
following  conclusions:  A  corporation  may  take  in  payment  of  its 
shares  any  property  which  it  may  lawfully  purchase.  Such  a  transac- 
tion is  not  idtra  vires  or  void,  but  is  valid  and  binding  upon  the  orig- 
inal share-takers  and  upon  the  corporation,  unless  it  is  rescinded  or 
set  aside  for  fraud.  While  such  a  contract  stands  unimpeached,  the 
courts,  even  where  the  rights  of  creditors  are  involved,  will  treat  that 
as  payment  which  the  parties  have  agreed  should  be  payment." 
Thompson  Stock.,  §  134. 

"  Many  attempts,"  says  another  learned  author,  "have  been  made, 
in  cases  where  stock  was  issued  for  property  taken  at  an  overvalua- 
tion, to  hold  the  party  receiving  such  stock  liable  for  its  full  par 
value,  less  the  actual  value  of  the  property  received  from  him.  These 
attempts  have  not  been  successful.  As  already  seen,  the  transaction 
is  upheld  as  legal,  valid,  and  binding  on  all  parties  and  persons,  un- 
less there  is  an  overvaluation,  and  that  overvaluation  is  shown  to 
have  been  fraudulent.  When  this  is  proved,  then  the  contract  is  to 
be  treated  like  other  fraudulent  contracts.  It  is  to  be  adopted  in 
toto,  or  rescinded  in  toto  and  set  aside.  Each  party  is  to  be  restored 
as  nearly  as  possible  to  their  original  positions.  The  property  or  its 
value  is  to  be  returned  to  the  person  receiving  the  stock,  and  he  must 
return  the  stock  or  its  real  value.  Its  real  value  is  ascertained,  not 
by  its  par  value,  but  by  its  selling  market  value."  Cook,  Stock  and 
Stockholders,  §  47. 

The  contract,  not  being  void,  must  be  disaffirmed  and  set  aside, 


236  COFFIN    V.  RANSDELL.  [CHAP.  III. 

before  the  rccf*iver  can  maintain  an  action  at  law  as  for  unpaid 
subscriptions.  Scov^ill  v.  Thayer,  supra. 

Suppose  it  be  true,  that  in  consummating  the  arrangement,  the 
property  of  Unthank  &  Coffin  was  turned  in  to  the  corporation  at 
an  overvaluation,  and  that  the  defendant  antl  the  other  cor{)oralors 
participatctl  in  the  alleged  wrong.  The  transaction  was  the  result  of 
an  agreement  which  the  parties  had  the  right  as  between  themselves 
to  make.  Being  corporators,  they  had  the  right  to  fix  the  amount  of 
the  capital  stock.  It  was  competent  for  them  to  estimate  the  value 
of  their  own  property.  The  property  was  such  as  was  suited  to  the 
proposed  business  of  the  corporation.  Can  the  court  now  arbitrarily 
say  that  because  they  estimated  their  property  too  high,  the  de- 
fendant shall  now  be  compelled  to  pay  par  for  his  stock,  and  yet 
take  a  price  for  his  property  which  he  never  agreed  to?  Shall  he  be 
capriciously  punished,  In'  being  made  liable  ex  eontraetu,  upon  a 
contract  which  he  never  made?  If  the  defenilant  has  participated  in 
a  fraud,  whereby  the  creditors  of  the  corporation,  who  exercised 
ordinary  business  sagacity,  have  suffered  damage,  whatever  reilress 
such  cre;litors  may  now  obtain,  while  their  representative  retains 
the  defendant's  property,  must  be  sought  by  an  action  ex  delicto. 

In  the  case  of  In  re  Baglan  Hall  Colliery  Co.,  supra,  where  a  col- 
liery had  been  turned  over  to  a  corporation  in  payment  for  stock 
subscriptions,  and  where  a  question  of  overvaluation  was  made, 
Lord  Justice  Giffaud  said:  "The  test  to  be  applied  is  this:  could  the 
company  by  any  proceeding  have  set  aside  the  transaction  by  which 
it  was  arranged  that  the  owners  of  the  colliery  were  to  have  paid-up 
shares  as  the  price  of  their  interests  in  the  colliery?  .  .  .  There  is  noth- 
ing in  the  evidence  to  show  that  any  person  has  been  deceived.  .  .  . 
The  case  is  precisely  the  same  as  Pell's  Case,  .  .  .  and  it  must  be 
held  that  the  persons  who  subscribed  the  memorandum  of  associa- 
tion have  paid  all  that  they  were  bound  to  pay.  Creditors  have  no 
ground  for  complaint,  for  persons  who  are  about  to  enter  into  trans- 
actions of  magnitude  with  an  indivitlual,  make  inquiry  into  the 
state  of  his  circumstances;  and  so,  if  they  enter  into  them  with  a 
limited  company,  it  is  their  own  fault  if  they  do  not  inquire  into  the 
nature  of  the  memorandum  and  articles,  and  look  to  the  register  of 
shareholders." 

Examination  of  the  articles  of  the  corporation  here  involved 
would  have  disclosed  that  the  business  of  the  company  was  the  man- 
ufacture of  plows  and  other  implements,  and  to  acquire  and  own 
patent  rights. 

The  register  of  stockholders  doubtless  would  have  disclosed  to  any 
one  examining  it,  that  the  stock  subscribed  had  been  paid  up.  In- 
quiry doubtless  would  have  disclosed  the  manner  of  paA-ment.  The 
solvency  of  the  company  depended  then  upon  the  nature  and  value 
of  its  property  and  assets.  If  there  was  no  fraud  or  concealment  after 


CHAP.  III.]  MONK    V.  BARNETT.  237 

the  transaction  in  question  was  consummated,  it  is  not  perceived 
how  the  creditors  were  defrauded  by  reason  of  an  overvaluation  of 
the  propert}^,  which  was  turned  over  in  payment  of  the  stock,  any 
more  than  they  would  have  been  if  the  subscribers  had  paid  in  cash 
for  their  stock,  and  the  corporation  had  then  invested  the  money  in 
patents  and  other  property,  which  could  now  be  shown  was  pur- 
chased at  a  price  in  excess  of  their  value. 

The  fact  is  well  known  that  many  of  the  corporate  enterprises 
now  in  progress  have  been  projected  by  persons  who  contributed 
their  inventions,  or  their  skilled  services  and  experience  in  business 
at  a  fixed  price,  or  perhaps  what  was  rescued  from  the  wreck  of  some 
previous  enterprise,  and  nothing  else,  in  payment  of  subscriptions  to 
capital  stock.  It  could  not  be  tolerated,  in  the  event  of  an  adverse 
outcome,  that,  notwithstanding  the  utmost  good  faith  may  have 
been  observed  in  making  such  contribution  or  payment,  and  in  dis- 
closing all  the  facts,  creditors,  who  were  in  no  way  misled,  could  now, 
b}'-  simply  asserting  an  overvaluation  of  what  had  been  agi-eed  upon 
and  accepted  as  payment  of  subscriptions,  enforce  contracts  which 
were  never  made. 

Patent-rights  and  mining  and  manufacturing  property,  which  are 
embarked  in  enterprises,  are  frequently  valued  by  their  owners  and 
others  at  a  prospective  value,  which  may  or  may  not  be  reaUzed, 
dependent  upon  future  contingencies.  If  the  owners,  who  put  such 
valuations  thereon,  act  in  good  faith,  and  yet  suffer  disappointment, 
we  can  see  no  reason  why  they  should  suffer  further,  unless  they  have 
been  guilty  of  fraud  or  concealment,  which  has  resulted  in  damage 
to  others. 

Our  conclusion  is,  that  the  complaint  states  no  cause  of  action, 
and  that  the  court  erred  in  overruling  the  appellant's  demurrer. 
This  renders  it  unnecessary  that  we  should  consider  other  questions 
discussed. 

Judgment  reversed,  with  costs. 

Note.  —  See,  accord,  Horton  v.  Sherrill-Russell  Lumber  Co.,  147 
Ky.  226  (the  corporation  was  not  a  Kentucky  corporation) ;  Brant 
V.  Ehlen,  59  Md.  1  (but  cf.  Crawford  v.  Rohrer,  59  Md.  599) ;  Bank 
v.  Belington  Coal  Co.,  51  W.Va.  60. 


MONK  V.   BARNETT. 

113  Va.  635.     1912. 

Card  WELL,  J.,  delivered  the  opinion  of  the  court. 
This  case,  which  is  now  before  us  for  the  second  time,  originated 
in  a  bill  in  equity  filed  by  appellants  against  the  Exposition  Deep- 


238  MONK    V.  BARNETT.  [CIIAP.  III. 

water  Pier  Corporation  and  appellees,  C.  M.  Bamett,  J.  W.  Hough, 
and  H.  B.  Goodridge,  who  were  the  only  stockholdoi-s  and  incor- 
porators of  saitl  corporation;  the  purpose  of  the  bill  Ijcing  to  enforce 
the  mechanic's  lien  of  the  appellants  against  the  pier  and  land  of 
the  Exposition  Deepvvater  Pier  Corporation,  and  to  recjuire  the 
stocklioldcrs  of  the  corporation  to  pay  in  full  their  subscriptions  to 
the  capital  stock  of  the  company. 

There  were  two  questions  presented  upon  the  former  appeal,  antl 
upon  the  fn-st  of  these  questions  this  court  reversed  the  decree  of  the 
circuit  court  appealed  from,  and  remanded  the  cause,  declining  to 
pass  upon  the  second  question,  for  the  reason  that  it  appearetl  from 
the  evidence  in  the  record  that  the  property  of  the  corporation  was 
sufficient  to  pay  appellants'  lien  debt  thereon;  but  the  opinion 
added:  "If,  however,  the  real  estate  should  prove  inadequate  to 
satisfy  the  lien,  the  appellants  are  not  to  be  concluded  by  the  <lecree 
under  review  from  seeking  such  relief  as  they  may  be  entitled  to, 
if  any,  against  the  stockholders."  Monk  v.  Exposition  Deepwater 
Pier  Corp.,  Ill  Va.  121,  68  S.E.  280. 

It  appears  that  when  the  evidence  in  the  cause  was  taken  the  pier 
was  comparatively  new,  and  was  sujiposed  to  be  worth  the  amount 
named  by  the  witnesses  —  S10,000;  but,  from  various  causes  oper- 
ating during  the  delay  because  of  litigation  as  to  the  rights  of  the 
respective  creditors  in  the  property,  it,  after  full  advertising  and 
active  bidding,  brought  at  public  auction,  on  Scjjtember  17,  1910, 
only  $2,400,  leaving  about  $4,000  still  due  appellants.  Thereupon, 
appellants  proceeded  in  their  effort  to  obtain  a  decree  against  said 
stockholders  for  an  amount  sufficient,  out  of  what  remained  un- 
paid of  their  subscriptions,  to  discharge  the  balance  of  the  debt 
alleged  to  be  due  appellants;  l)ut,  upon  a  final  hearing  of  the  cause, 
the  circuit  court  entered  its  decree,  now  under  review,  holding  that 
said  stockholders  had  substantially  complied  with  the  pro\'isions 
of  the  Constitution  and  statutes  of  the  State  "enacted  for  the  for- 
mation and  regulation  of  corporations  in  this  State,  and  that  said 
stockholdei-s  (appellees  here)  had  paid  in  full  their  subscriptions 
to  the  stock  of  the  Exposition  Deepwater  Pier  Corporation,  and 
that  there  was  no  further  hability  upon  them,  or  either  of  them," 
dismissing  appellants'  bill  as  to  said  stockholders. 

Appellees,  Bamett,  Hough,  and  Goodridge,  who,  as  has  been 
stated,  were  all  the  stock  subscribers  and  incorporators  of  said 
Deepwater  Pier  Corporation  at  the  time  of  its  organization,  filed 
W'ith  the  State  Corporation  Commission,  in  ]\Iarch,  1907,  a  state- 
ment of  the  financial  plan  upon  the  basis  of  which  the  stock  or  bonds 
of  the  corporation  were  to  be  issued,  and  the  contention  of  appellants 
is  that  said  statement  filed  by  appellees  was  not  such  a  compliance 
with  the  provisions  of  §  167  of  the  Constitution  of  Virginia,  and 
of  §  llOoe,  paragraph  9,  of  the  Code  of  1904,  as  would  avail  ap- 


CHAP.   III.]  MONK    V.  BARNETT.  239 

pelles  of  the  privilege  extended  by  the  statute  of  avoiding  their  com- 
mon law  liability  to  pay  into  the  treasmy  of  the  company  so  much 
of  their  stock  subscriptions,  up  to  the  par  value  thereof,  as  might 
be  necessary  to  discharge  the  indebtedness  of  the  corporation. 

Section  167  of  the  Constitution,  supra,  confers  upon  the  General 
Assembly  power  to  make  general  laws  regulating  and  controlling 
all  issues  of  stock  and  bonds  by  corporations,  and  further  provides: 
"Whenever  stock  or  bonds  are  to  be  issued  by  a  corporation  it 
shall,  before  issuing  the  same,  file  w^ith  the  State  Corporation  Com- 
mission a  statement  (verified  by  the  president  or  secretary  of  the 
corporation,  and  in  such  form  as  may  be  prescribed  or  permitted 
by  the  commission),  setting  forth  fully  and  accurately  the  basis, 
or  financial  plan,  upon  which  such  stock  or  bonds  are  to  be  issued; 
and  where  such  basis  or  plan  includes  services  or  property  (other 
than  money),  received  or  to  be  received  by  the  company,  such 
statement  shall  accurately  specify  and  describe,  in  the  mamier 
prescribed  or  permitted  by  the  commission,  the  services  and  prop- 
erty, together  with  the  valuation  at  which  the  same  are  received, 
or  to  be  received ;  and  such  corporation  shall  comply  with  any  other 
requirements  and  restrictions  w^hich  may  be  imposed  by  law." 
Said  section  of  the  Constitution  then  required  the  General  As- 
sembly to  provide  adequate  penalties  for  the  violation  of  the  sec- 
tion, or  any  laws  passed  in  pursuance  thereof. 

The  statute  (paragraph  9,  §  1105e,  supra)  proxides:  "Subscrip- 
tions to  the  capital  stock  of  any  corporation  may  be  paid  in  money, 
land,  or  other  property,  real  or  personal,  leases,  options,  mines, 
mineral  rights,  patent  rights,  rights  of  way,  or  other  rights  or  ease- 
ments, contracts,  labor,  or  services;  and  there  shall  be  no  individual 
or  personal  liability  on  any  subscriber  beyond  the  obligation  to 
comply  with  such  terms  as  he  may  have  agreed  to  in  his  contract 
of  subscription;  and  any  corporation  may  adopt  such  plan  of 
financial  organization  and  may  dispose  of  its  stock  or  bonds  for 
the  purposes  of  its  incorporation  at  such  prices,  for  such  considera- 
tion, and  on  such  terms  and  conditions  as  it  sees  fit;  provided,  how- 
ever, that  before  making  any  issue  of  its  stock  or  bonds  it  shall  file 
with  the  State  Corporation  Commission  a  statement  (verified  by 
oath  of  the  president  or  secretary  of  the  corporation,  and  in  such 
form  as  may  be  prescribed  or  permitted  by  the  commission) ,  setting 
forth  fully  and  accurately  the  basis  or  financial  plan  upon  which 
such  stock  and  bonds  are  to  be  issued ;  and  where  such  basis  or  plan 
includes  services  or  property  (other  than  money) ,  received  or  to  be 
received  by  the  corporation,  such  statement  shall  accurately  spe- 
cify and  describe,  in  the  manner  prescribed  or  permitted  by  the 
commission,  the  services  and  property,  together  with  the  valuation 
at  which  the  same  are  received,  or  to  be  received,  and  the  judgment 
of  the  directors  as  to  the  value  of  such  land  or  other  property,  real 


240  MONK    V    BARNETT.  [cHAP.  III. 

or  personal,  leases,  options,  mines,  mineral  rights,  patent  rights, 
rights  of  way,  or  other  rights  or  easements,  contracts,  labor,  or 
services,  in  the  absence  of  fraud,  participated  in  by  both  parties  to 
the  transaction,  shall  be  conclusive. 

"For  any  violation  of  this  section  the  offending  cori)oration  shall 
be  liable  to  a  fine  of  not  exceeding  one  thousantl  doliai-s,  to  be  im- 
posed and  judgment  entered  therefor  by  the  State  Corporation 
Commission,  and  shall  be  enforced  by  its  process." 

The  financial  plan,  filed  with  the  State  Corporation  Commission 
in  this  instance,  is  as  follows:  "Four  hundred  shares,  valued  at  four 
thousand  dollars,  are  to  be  issued  to  J.  \V.  Hough,  II.  B.  (lood- 
ridge,  and  C.  M.  Bamett,  as  fully  paid,  in  consideration  of  their 
turning  over  to  said  company  their  options,  rights,  anil  contracts 
to  ac(iuire  lantl  antl  build  a  pier  near  the  exposition  gi-ounds,  and 
their  contracts  with  various  steamboat  lines  to  use  said  pier  exclu- 
sively in  taking  pas.sengers  to  said  grounds,  and  contracts  with  said 
steamboat  companies,  and  with  the  Jamestown  Exposition  Comjiany 
to  take  and  pay  cash  for  certain  bonds  of  this  company,  said  rights, 
options,  and  contracts  being  valued  at  four  thousand  dollai-s." 

It  appears  that  appellees  subscribed  to  $40,000  of  the  stock  of 
the  Deepwater  Pier  Corporation,  and  paid  for  it  with  the  contracts 
and  options  named  in  said  plan  of  organization,  all  of  which  were 
worth,  according  to  their  own  valuation,  but  $4,000;  and  it  is  con- 
ceded in  the  argument  of  this  appeal  that  "the  very  object  of  sec- 
tion 1G7  of  the  Constitution  was  to  do  away  with  the  common  law 
hability  of  stockholders,"  under  which  they  could  be  required  to 
pay  (in  money)  for  their  stock,  up  to  the  par  value  thereof,  until 
the  debts  of  the  company  were  satisfied. 

Very  clearly,  the  provisions  of  the  Constitution  and  statute 
change  the  former  rule,  and  persons  organizing  a  corporation  can 
subscribe  to  its  capital  stock,  and  paj^  therefor  in  anything  which 
the  board  of  directors  may  determine  to  accept,  and  at  any  price 
which  may  be  agreed  upon,  and  the  stock  may  be  paid  for  at  any 
price  at  which  it  may  be  offered  by  the  company,  and  no  one  can 
complain  —  provided  the  requirements  of  the  Constitution  and 
statute  are  complied  with;  therefore,  the  sole  question  for  our  de- 
termination in  this  case  is,  where  no  fraud  or  deception  has  been 
practiced,  does  the  financial  plan  of  organization  in  question  meet 
the  requirements  of  the  provisions  of  the  Constitution  and  statute, 
and  thereby  relieve  the  appellees  of  their  common  law  liability  to 
pay  for  the  stock  subscribed  to  bj^  them,  up  to  the  par  value  there- 
of, until  the  debts  of  the  company  are  satisfied? 

It  is  very  true,  as  appellants  contend,  that  the  statute,  supra, 
enacted  pursuant  to  section  167  of  the  Constitution,  with  respect 
to  the  liability  of  subscribers  to  the  capital  stock  of  a  corporation 
chartered  under  the  laws  of  this  State,  is  in  derogation  of  the 


CHAP.  III.]  MONK    V.  BARNETT.  241 

common  law,  and  has  to  be  given  a  strict  construction;  but  it  will 
readily  be  observed  that  the  statute,  in  language  plain  and  unam- 
biguous, provides  that  subscriptions  to  the  capital  stock  of  any 
corporation  may  be  paid,  not  only  in  money,  but  in  every  or  any 
species  of  property  or  property  rights  that  could  be  suggested,  in- 
cluding leases,  options,  contracts,  labor  or  services,  etc.,  and  there 
shall  be  no  individual  or  personal  liability  on  any  subscriber  beyond 
the  obligation  to  comply  with  such  terms  as  he  may  have  agreed 
to  in  his  contract  of  subscription;  that  any  corporation  may  adopt 
such  plan  of  financial  organization,  and  may  dispose  of  its  stock  or 
bonds  for  the  purposes  of  its  incorporation  at  such  prices,  for  such 
consideration,  and  on  such  terms  and  conditions  as  it  sees  fit;  pro- 
vided a  statement  of  its  financial  plan  of  organization  is  first  filed 
with  the  State  Corporation  Commission,  in  such  form  as  may  be 
prescribed  or  permitted  by  the  commission,  setting  forth  fully  and 
accurately  the  basis  or  financial  plan  upon  which  such  stock  or  bonds 
are  to  be  issued;  and  where  such  basis  or  plan  includes  services  or 
property  (otner  than  money),  received  or  to  be  received  by  the  cor- 
poration, such  statement  shall  accurately  specify  and  describe,  in 
the  manner  prescribed  or  permitted  by  the  commission,  the  serv- 
ices and  property,  together  with  the  value  at  which  the  same  are 
received,  or  to  be  received,  and  the  judgment  of  the  directors  as  to 
the  value  of  the  services  or  property,  real,  or  personal,  leases,  options, 
.  .  .  contracts,  etc.,  in  the  absence  of  fraud,  shall  be  conclusive. 

In  this  case  appellees  subscribed  to  $40,000  of  the  stock  (400 
shares)  of  the  Exposition  Deepwater  Pier  Corporation,  and  agreed 
with  themselves,  as  the  incorporators  and  directors  of  the  com- 
pany, that  said  stock  be  issued  to  them  fully  paid,  in  consideration 
of  their  tln*ning  over  to  the  company  "their  options,  rights,  and 
contracts  to  acquire  land  and  build  a  pier  near  the  exposition 
grounds,  and  their  contracts  with  various  steamboat  lines  to  use 
said  pier  exclusively  in  taldng  passengers  to  said  grounds,  and  con- 
tracts with  said  steamboat  companies  and  with  the  Jamestown 
Exposition  Company  to  take  and  pay  cash  for  certain  bonds  of  this 
company,  said  rights,  options,  and  contracts  being  valued  at  four 
thousand  dollars." 

A  more  indefinite,  vague,  and  unsatisfactory  specification  and 
description  of  the  options  and  contracts  agreed  to  be  turned  over 
to  the  company  by  appellees  in  payment  for  the  $40,000  of  stock, 
fully  paid,  to  be  issued  to  them  by  the  company,  is  hardly  to  be 
conceived,  but  the  statement  of  the  financial  plan  of  the  organiza- 
tion of  the  corporation,  filed  with  the  Corporation  Commission, 
was  in  the  form  prescribed  by  the  commission,  and  was  by  the  com- 
mission permitted  when  it  received,  approved,  and  ordered  the 
same  to  be  filed  and  to  become  a  matter  of  record  in  the  office  of 
the  commission. 


242  COIT   V.  GOLD    AMALGAMATING    CO.  [cHAP.  III. 

By  the  adoption  of  our  present  Constitution,  and  the  enactment 
of  statutes  pui-suant  thereto,  relating  to  the  issue  of  stocks  and 
bonds  by  corporations,  the  pohcy  of  granting  charters  of  incor- 
poration to  ahnost  every  conceivable  business  undertaking  then  in 
existence,  or  that  might  be  undertaken  within  the  State,  was  in- 
augurated, and,  though  the  policy  may  be  fraught  with  ever  so 
many  possil)ilities  —  indeed,  probabilities  —  of  fraud  and  imposi- 
tion upon  individuals,  firms,  or  other  corporations  dealing  with  or 
becoming  creditors  of  a  corporation  chartered  in  the  State,  the 
courts,  in  the  absence  of  the  charge  and  proof  of  fraud  in  the 
obtaining  of  the  charter,  or  the  organization  of  the  corporation,  or 
the  issuing  of  its  stock,  are  powerless  to  prevent  or  to  redress  svich 
wrongs  or  impositions. 

This  new  policy  now  in  vogue  in  this  State  has  not  only  in  view 
the  granting  of  a  charter  to  any  three  or  more  individuals  to  con- 
duct, as  a  corporation,  any  business  that  might  i)e  conducted  by 
an  individual  or  individuals  within  the  State,  but  invites  the  appli- 
cation for  such  charters,  and  provides  that  all  persons,  firms,  j)art- 
nerships,  or  other  corporations^  contracting  with  the  coij)oration 
chartered  in  the  State,  nmst  look  to  the  records  of  the  State  Cor- 
poration Commission  for  information  there  to  be  found,  or  suggested, 
as  to  the  character,  location,  and  value  of  the  assets  of  the  corpora- 
tion, and  if  they  fail  to  look  to  said  records,  or  fail  to  make  proper 
inquiry  along  lines  suggested  by  these  records,  and  sustain  a  loss 
or  injury  in  consocjuence  of  such  neglect  of  duty,  they  shall  have  no 
remedy  in  the  courts  against  the  stockholdci-s  having  certificates 
of  fully  paid  stock  for  such  loss  or  injury. 

One  who  is  advised,  or  might  have  been  advised,  as  to  the  charac- 
ter and  value  of  the  assets  of  a  corporation,  and  extends'  credit  to 
the  corporation,  cannot,  in  the  absence  of  fraud  in  the  organiza- 
tion of  the  company,  or  the  issuing  of  its  stock  or  bonds,  complain 
that  the  assets  of  the  company  were  not  as  valuable  as  he  expected 
them  to  be,  and  he  has  no  remedy  or  right  of  action  against  the 
stockholdere  of  the  corporation  holding  its  fully  paid  stock. 

Such  is  the  case  before  us,  and  we  are  of  opinion,  therefore,  that 
the  decree  appealed  from  is  right,  and  it  is  affirmed. 

Affirmed. 


COIT  V.  GOLD   AMALGAMATING  CO. 

119  U.S.  343.     1886. 

Mr.  Justice  Field  delivered  the  opinion  of  the  court. 

The  defendant,  the  North  Carohna  Gold  Amalgamating  Com- 
pany, was  incorporated  under  the  laws  of  North  Carolina,  on  the 
30th  of  January,  1874,  for  the  purpose,  among  other  things,  of 


CHAP.  III.]  COIT  V.  GOLD    AMALGAMATING    CO.  243 

working,  milling,  smelting,  reducing,  and  assaying  ores  and  metals, 
with  the  power  to  purchase  such  property,  real  and  personal,  as 
might  be  necessary  in  its  business,  and  to  mortgage  or  sell  the  same. 

The  plaintiff  is  the  holder  of  a  judgment  against  the  company 
for  S5489,  recovered  in  the  Court  of  Common  Pleas  of  Philadelphia, 
on  the  18th  of  May,  1879,  upon  its  two  drafts,  one  dated  June  1st, 
1874,  and  the  other  August  15th,  1874,  each  payable  four  months 
after  its  date.  Unable  to  obtain  satisfaction  of  this  judgment  upon 
execution,  and  finding  that  the  company  was  insolvent,  the  plain- 
tiff brought  this  suit  to  compel  the  stockholders  to  pay  what  he 
claims  to  be  due  and  unpaid  on  the  shares  of  the  capital  stock  held 
by  them,  alleging  that  he  had  frequently  applied  to  the  officers  of 
the  company  to  institute  a  suit  for  that  purpose,  but  that  under 
various  pretences  they  refused  to  take  any  action  in  the  premises. 

By  its  charter  the  minimum  capital  stock  was  fixed  at  $100,000, 
divided  into  1000  shares  of  $100  each,  with  power  to  increase  it  from 
time  to  time,  by  a  majority  vote  of  the  stockholder,  to  two  million 
and  a  half  of  dollars.  The  charter  provided  that  the  subscription 
to  the  capital  stock  might  be  paid  "in  such  instalments,  in  such 
manner  and  in  such  property,  real  and  personal,"  as  a  majority 
of  the  corporators  might  determine,  and  that  the  stockholders 
should  not  be  liable  for  any  loss,  or  damages,  or  be  responsible 
beyond  the  assets  of  the  company. 

Previously  to  the  charter,  the  corporators  had  been  engaged  in 
mining  operations,  conducting  their  busmess  under  the  name  and 
title  which  they  took  as  a  corporation.  Upon  obtaining  the  charter, 
the  capital  stock  was  paid  by  the  property  of  the  former  association, 
which  was  estimated  to  be  of  the  value  of  $100,000,  the  shares  being 
divided  among  the  stockholdere  in  proportion  to  their  respective 
interests  in  the  property.  Each  stockholder  placed  his  estimate 
upon  the  property;  and  the  average  estimate  amounted  to  $137,- 
500.  This  sum  they  reduced  to  $100,000,  inasmuch  as  the  capital 
stock  was  to  be  of  that  amount. 

The  plaintiff  contends,  and  it  is  the  principal  basis  of  his  suit, 
that  the  valuation  thus  put  upon  the  property  was  illegally  and 
fraudulently  made  at  an  amount  far  above  its  actual  value,  aver- 
ring that  the  property  consisted  only  of  a  machine  for  crushing  ores, 
the  right  to  use  a  patent  called  the  Crosb}''  process,  and  the  charter 
of  the  proposed  organization;  that  the  articles  had  no  market  or 
actual  value,  and,  therefore,  that  the  capital  stock  issued  thereon 
was  not  fully  paid,  or  paid  to  any  substantial  extent,  and  that  the 
holders  thereof  were  still  liable  to  the  corporation  and  its  creditors 
for  the  unpaid  subscription. 

If  it  were  proved  that  actual  fraud  was  committed  in  the  pay- 
ment of  the  stock,  and  that  the  complainant  had  given  credit  to 
the  company  from  a  beHef  that  its  stock  was  fully  paid,  there  would 


244  PEXFIELD    V.  DAWSON   TOWN    &    GAS    CO.  [ciIAP.   III. 

undoubtedly  be  substantial  ground  for  the  relief  asked.  But  where 
the  charter  authorizes  capital  stock  to  be  paid  in  pioperty,  and  the 
shareholder  honestly  and  in  good  faith  put  in  property  instead  of 
money  in  payment  of  their  subscriptions,  third  parties  have  no 
ground  of  complaint.  The  case  is  very  different  from  that  in  which 
subscriptions  to  stock  are  payable  in  cash,  and  where  only  a  part 
of  the  instalments  has  been  paid.  In  that  case  there  is  still  a  debt 
due  to  the  corporation,  which,  if  it  become  insolvent,  may  be  se- 
questered in  equity  by  the  creditors,  as  a  trust  fund  hable  to  the 
payment  of  their  debts.  But  where  full  paid  stock  is  issued  for  prop- 
erty received,  there  must  be  actual  fraud  in  the  ti-ansaction  to  en- 
able creditors  of  the  corporation  to  call  the  stockliolders  to  account. 
A  gross  and  obvious  overvaluation  of  property  would  be  strong  evi- 
dence of  fraud.  Boynton  v.  Hatch,  47  N.Y.  225;  Van  Cott  v.  Van 
Brunt,  82  N.Y.  535;  Carr  v.  Le  Fevre,  27  Penn.  St.  413. 

But  the  allegation  of  intentional  and  fraudulent  overvaluation 
of  the  proj^erty  is  not  sustained  l)y  the  evidence.  The  patent  and 
the  machinery  had  been  used  by  the  corporatoi-s  in  their  business, 
which  was  continued  under  the  charter.  They  were  immediately 
serviceable,  and  therefore  had  to  the  company  a  present  value. 
The  corporators  may  have  placed  too  high  an  estimate  upon  the 
property,  but  the  court  below  finds  that  its  valuation  was  honestly 
and  fairly  made;  and  there  is  only  one  item,  the  value  of  the  char- 
tered privileges,  which  is  at  all  liable  to  any  legal  objection.  But  if 
that  were  deducted,  the  remaining  amount  would  be  so  near  to  the 
aggregate  capital,  that  no  implication  could  Ije  raised  against  the 
entire  good  faith  of  the  parties  in  the  transaction. 

Judgment  affirmed. 

Note. — See,  accord,  Graves  v.  Brooks,  117  Mich.  424  (but  cf. 
Dieterle  v.  Paint  &  Etiamel  Co.,  143  Mich.  416);  Medler  v.  Hotel 
Co.,  6  N.M.  331,  344;  Jones  v.  Whitworth,  94  Tenn.  602. 


PENFIELD  V.  DAWSON  TO^VN  &  GAS  CO. 

57  Neb.  231.     1898. 

Ryan,  C.  This  equitable  action  was  brought  by  certain  judgment 
creditors  of  the  Dawson  Town  &  Gas  Company,  and  by  plaintiffs 
and  certain  interveners  was  prosecuted  to  judgment  in  the  district 
court  of  Douglas  county  against  certain  stockliolders  in  said  cor- 
poration. In  the  petition  —  in  which  there  were  averments  of  the 
corporate  character  of  the  Dawson  Town  &  Gas  Company,  the 
ownership  by  defendants  respectively  of  certain  shares  of  its  capital 
stock,  and  the  rendition  of  judgments  against  said  corporation  — 


CHAP.   III.]  PENFIELD    V.  DAWSON    TOWN    &    GAS    CO.  245 

there  were  the  following  averments:  "That  said  corporation  is  in- 
solvent and  has  no  property  out  of  which  plaintiff  can  make  said 
judgment;  that  the  authorized  capitalized  stock  of  said  corporation 
was  8300,000;  that  said  stock  was  issued  to  each  of  the  defendants 
Arthur  B.  Cooley  and  J.  T.  Hoile  to  the  amount  and  of  the  par 
value  of  $120,000  each,  and  as  paj^ment  therefor  said  defendants 
fraudulently  turned  in  to  said  corporation  certain  real  estate  situ- 
ated in  the  state  of  Iowa  at  a  false  and  fictitious  value  of  $205,000; 
that  no  payment  was  ever  made  on  such  stock,  except  said  real 
estate;  that  said  real  estate  was  v/orth,  at  the  time  of  said  transac- 
tion, not  to  exceed  $20,000;  that  the  said  defendants  and  the  direc- 
tors of  said  corporation  knew  the  value  of  said  real  estate,  and  that 
said  real  estate  was  fraudulently  received  in  payment  of  said  stock; 
that  said  real  estate  was  largely  incumbered."  The  holders  of  stock 
other  than  Hoile  and  Cooley,  it  was  in  effect  alleged,  became  such 
stockholders  by  assignments  from  Hoile  and  Cooley  and  were  there- 
fore Hable  ratabl}^,  as  were  also  Hoile  and  Cooley,  for  the  difference 
between  the  par  value  of  the  stock  at  any  time  held  by  them  and 
the  actual  value  of  the  real  property  which  formed  the  consideration 
for  the  issue  of  the  stock  as  fully  paid  up. 

In  the  light  of  subsequent  developments  it  is  not  difficult  to  ap- 
prove the  finding  of  the  district  court  that  the  real  property,  in 
consideration  of  which  the  capital  stock  of  the  companj'"  was  issued, 
was  received  by  the  Dawson  Town  &  Gas  Company  at  a  great  over- 
valuation. There  was  testimony  by  parties  who  owned  farm  lands 
in  the  vicinity  of  the  town  of  Dawson,  Iowa,  that  the  lands  turned 
in  to  the  company  in  payment  for  its  stock  was,  as  farm  lands, 
worth  only  from  $30  to  $50  per  acre.  These  witnesses,  however, 
expressly  limited  their  estimates  to  the  value  of  these  lands  for  farm- 
ing purposes.  On  the  other  hand,  the  witnesses  who  testified  as  to 
the  enhanced  value  of  the  property  by  reason  of  the  shale,  the  coal, 
the  fire-clay,  and  the  natural  gas  found  beneath  its  surface  placed 
a  much  higher  valuation  upon  it,  two  of  them  fixing  the  value  of 
this  property  at  from  $400,000  to  $500,000.  It  is  true  they  were 
interested  witnesses,  for  they  were  defendants,  but  the  testimony 
serves  to  illustrate  what  considerations  might  have  led  them  and 
their  associates  into  honestly  making  an  estimate  of  the  value  of 
the  lands  turned  in,  which  now  seems  absurdly  excessive.  Their 
testimony  was  uncontradicted  that  there  were  at  least  four  veins 
of  coal,  two  of  which  could  be  profitably  worked,  on  300  acres  of 
this  land;  that  tliis  coal  was  overlaid  with  a  stratum,  six  to  thirt^y 
feet  thick,  of  shale  suitable  for  the  manufacture  of  paving  bricks, 
and  that  beneath  the  coal  was  a  stratum  of  fire-clay.  It  was  testi- 
fied that  at  Dawson  alone  was  there  to  be  found  coal  on  the  line  of 
the  Chicago,  Milwaukee  &  St.  Paul  railroad  between  Omaha  and 
Chicago.   On  the  other  tract  turned  in,  which  contained  320  acres, 


246  PENFIELD    V.  DAWSON    TOWN    &    GAS    CO.  [ciIAP.   III. 

it  was  testified,  without  contradiction,  that  there  were  three  wells 
which  produced  natural  gas;  that  the  company  used  this  gas  for 
burning  bricks;  and  that  its  pressure  was  120  pounds  to  the  square 
inch.  The  town  of  Dawson,  containing  about  300  inhabitants,  was 
located  on  one  of  these  tracts,  and  it  was  expected  that,  with  the 
success  of  the  various  manufacturing  projects,  a  considerable  por- 
tion of  the  surface  could  be  sold  at  a  high  valuation  for  residence 
lots.  The  faith  which  these  parties  had  in  the  realization  of  their 
hopes  is  evidenced  by  their  investment  in  improvements  of  S40,- 
000,  of  which  $38,000  was  in  a  brick  plant  and  $2,000  was  in  piping 
for  the  gas  wells.  The  valuation  by  these  men  was  largely  specula- 
tive, and  in  their  ardor  it  is  possible  thej^  may  have  deceived  them- 
selves. In  connection  with  its  finding  of  overvaluation  the  district 
court  found:  '.'That  the  defendants  acted  in  good  faith  and  without 
any  attempt  to  defraud  said  corporation  or  its  creditors."  In  other 
words,  the  court,  upon  evidence  which  justified  both  conclusions, 
found  that  the  property  at  excessive  overvaluation  was  exchanged 
for  stock  by  the  promoters  of  the  corporation,  but  that  this  was  done 
in  good  faith  and  with  no  intent  to  defraud  the  corporation  or  its 
creditors.  On  the  hearing  of  another  case  which  grew  out  of  these 
same  transactions  it  was  found  by  the  district  court  that  the  prop- 
erty turned  in  for  stock  had  been  excessively  overvalued,  and,  in 
addition,  that  the  exchange  was  fraudulent  in  law,  and  on  appeal 
to  this  court  the  judgment  of  the  district  court,  based  upon  these 
findings  against  the  stockholders,  was  accordingly  affirmed.  Gilkie 
&  Anson  Co.  v.  Dawson  Town  &  Gas  Co.,  46  Neb.  333.  The  ulti- 
mate inquiry  in  this  case  was  whether  or  not  the  issuance  of  the 
stock  was  fraudulent.  The  overvaluation  was  a  circumstance  tend- 
ing to  establish  fraud,  and  yet  it  was  not  of  such  controlling  force 
that  a  finding  that  there  was  no  fraud  could  not  be  sustained. 

In  Gilkie  &  Anson  Co.  v.  Dawson  Town  &  Gas  Co.,  supra,  it  was 
said:  "In  this  state  there  were  no  specific  requirements  or  restric- 
tions in  relation  to  the  manner  of  payment  for  the  stock  purchased, 
and  no  doubt  the  land,  being  such  as  it  was  within  the  province  of 
the  company  to  hold  and  appropriate  for  use  in  its  business,  could 
be  received  in  payment  for  stock.  There  was  no  statutory  require- 
ment that  pajanent  should  be  in  money  or  the  money's  worth;  but 
without  such  an  enactment,  we  think  there  is  a  rule  of  honesty  and 
fair  deahng,  which  should  and  will  be  recognized  by  the  courts, 
which  required  it.  .  .  .  It  must  be  true  that  where  a  number  of  per- 
sons have  organized  themselves  as  a  body  corporate  and  enter  the 
business  arena  as  such  and  invite  and  entertain  deahngs  on  the  faith 
and  credit  of  a  fund,  which,  increased  by  gains  or  decreased  by 
losses,  will  alone  be  available  for  the  liquidation  or  pajTnent  of  debts, 
they  will  be  held  to  fairness  and  good  faith  in  fulfilling  the  promise 
they  made  to  contribute  to  the  fund  which  they  hold  out  to  the 


CHAP.  III.]  PENFIELD    V.  DAWSON    TOWN    &    GAS    CO.  247 

business  world  as  the  basis  for  credit.  It  is  upon  the  faith  of  the 
amount  of  capital  stock,  either  fully  paid  in  and  existing  in  the  form 
of  assets  of  the  corporation,  or  to  be  paid  in,  that  the  creditor  has 
dealt  with  and  allowed  the  corporation  to  incur  the  liability,  or  has 
extended  to  it  the  credit,  and  it  seems  but  just  and  right  to  require 
that  payment  for  stock  in  other  than  money  be  required  to  be  made 
in  the  money's  worth  in  good  faith  and  honesty  of  purpose,  and 
when  the  circumstances  and  facts  of  a  sale  and  purchase  of  stock 
disclose  that  there  has  been  knowingly  less  than  these,  that  it  shall 
not  be  upheld  against  creditors,  but  the  parties  be  compelled  to 
right  what  is  wrong,  to  pay  and  make  good  that  which,  through 
any  device  or  scheme,  has  been  withheld.  ...  It  may  be  conceded 
that  when  the  power  exists  to  accept  property  in  payment  for  stock 
the  corporation  and  subscriber  may  agree  upon  the  value  of  prop- 
erty to  be  received  in  payment  for  stock  in  such  manner  as  to  be 
binding  upon  creditors,  if  there  is  no  considerable  advised  and  de- 
liberate excessive  overvaluations  of  the  property,  and  that  the  stock- 
holders will  not  be  liable  where  the  valuation  was  in  good  faith, 
although  the  property  may  subsequently  prove  to  be  of  a  less  value 
than  that  placed  upon  it,  or  if  there  was  nothing  more  than  an  hon- 
est mistake  of  judgment;  but  'a  gross  and  obvious  overvaluation 
of  property  would  be  strong  e\ddence  of  fraud,'  in  an  action  by  a 
creditor  to  enforce  a  personal  liability.  Coit  v.  North  Carolina  Gold 
Amalgaynating  Co.,  119  U.S.  343,  7  Sup.  Ct.  Rep.  231.  Where  prop- 
erty is  conveyed  to  a  corporation  as  payment  of  a  subscription  for 
stock,  it  is  insufficient  to  satisfy  the  liability  of  subscribers  to  the 
creditors  of  the  corporation,  if  there  has  been  a  fraudulent  overval- 
uation of  the  property,  —  an  overvaluation  knowingly  and  advisedly 
made."  In  the  opinion  from  which  the  above  quotations  have  been 
made  it  was  said  that  the  decisions  of  the  courts  are  apparently 
irreconcilable  as  to  the  liability  of  stockholders  to  creditors  on  stock 
issued  for  property  received  at  an  overvaluation.  That  it  may  be 
clear  that  the  position  adopted  by  this  court  is  sustained  by  a  very 
strong  array  of  adjudications  we  shall  now  proceed  to  demonstrate. 

In  Du  Pont  v.  Tilden,  42  Fed.  Rep.  87,  the  syllabus  thus  correctly 
reflects  the  scope  of  the  opinion  of  Judge  Blodgett:  ''Where  a  cor- 
poration which  is  authorized  by  its  pharter  to  buy  land  and  pay  for 
it  in  full-paid  stock,  issues  such  stock  in  payment  for  land  to  an 
amount  greatly  in  excess  of  the  value  of  the  land,  and  the  stock  is 
sold  to  a  purchaser  for  value,  such  purchaser  is  not  liable  to  the 
creditors  of  the  corporation  on  the  ground  that  his  stock  is  not  fully 
paid  for,  where  there  was  no  fraud  in  the  original  transaction  and 
the  corporation  has  taken  no  steps  to  rescind  it." 

In  the  state  of  New  York  there  was  a  statute  which  expressly 
authorized  the  trustees  of  manufacturing  corporations,  in  good 
faith,  to  purchase  property  necessary  to  their  business  and  issue 


248  PENFIELD    V.  DAWSON    TOWN    &    GAS    CO.  [cHAP.   III. 

stock  to  the  amount  of  the  value  thereof  in  payment  therefor  and, 
in  event  of  such  purchase  in  comphance  with  the  law,  exempting 
such  trustees  from  personal  liability.  This  is  the  condition  of  the 
law  in  this  state  without  statutory  provisions,  as  has  already  been 
shown  by  the  quotations  from  the  case  of  Gilkie  &  A7is()7i  Co.  v. 
Dawson  Town  &  Gas  Co.,  supra. 

In  Douglas  v.  Ireland,  73  N.Y.  100,  it  was  held  that  to  charge  the 
holder  of  stock  of  a  manufacturing  corporation,  issued  upon  and 
for  the  purchase  of  property,  individuall}^  for  the  debts  of  the  com- 
pany it  is  not  enough  to  prove  that  the  pro])erty  was  puichased  at 
an  overvaluation  through  a  mere  mistake  or  error  of  judgment  on 
the  part  of  the  trustees,  and  that  it  must  be  shown  that  the  purchase 
was  in  bad  faith  and  to  evade  the  statute. 

In  Boynton  v.  Andrews,  63  N.Y.  93,  it  was  held  in  an  action  to 
enforce  the  individual  liability  of  trustees  of  a  manufactui'ing  cor- 
poration because  of  the  exchange  of  stock  for  property  that  the  ques- 
tion is  whether  the  purchase  was  in  good  faith  or  at  a  high  valuation 
with  a  fraudulent  intent  to  evade  the  statute,  and  that  an  honest 
overvaluation  of  the  property  received  will  not  of  itself  sul)ject  tht 
owner  of  the  stock  to  a  personal  liability.  (See,  also,  Schenck  v 
Andrews,  57  N.Y.  133,  to  the  same  effect.) 

In  Carr  v.  Le  Fevre,  27  Pa.  St.  413,  it  was  held  that  where  a  stock- 
holder produced  receipts  for  the  amount  of  the  consideration  fo' 
land  by  him  conveyed  to  the  corporation  for  a  legitimate  purchase, 
it  formed  the  basis  for  a  credit  on  stock  of  the  corporation  pur- 
chased, and  the  sufficiency  of  the  payment  was  not  affected  by  after- 
discovered  error  in  the  judgment  of  the  company  as  to  the  value  of 
the  land. 

In  Young  v.  Erie  Iron  Co.,  65  Mich.  Ill,  Morse,  J.,  said:  "It 
must  be  considered  as  well  settled  that  corporators  cannot  agree 
among  themselves  that  property  worth  only  $80,000  shall  be 
treated  as  worth  S422,000  and  count  at  that  sum  as  so  much  capital 
stock  paid  in,  and  then  proceed  to  make  their  shares  as  fully  paid 
up  and  non-assessable  upon  such  false  basis,  as  such  action  would 
be  clearly  a  fraud  upon  the  creditors.  But  it  is  equally  well  settled 
that  such  corporators  are  not  responsible  for  an  honest  error  of  judg- 
ment, or  a  mistake  in  placing  a  valuation  upon  property  appropri- 
ated or  used  as  capital  by  a  manufacturing  or  mining  company. 
Nor  can  the  fact  that  a  jury  or  court  finds  property  of  the  nature  of 
this  leasehold,  necessarily  fluctuating  and  speculative  in  value, 
worthless  now,  and  of  but  little  actual  value  at  the  time  of  its  ap- 
propriation as  capital,  be  controlling  in  deciding  whether  or  not 
such  appropriation  was  fraudulent  as  against  the  creditors  of  the 
corporation.  Such  finding  will  be  presumptive  evidence  of  fraud; 
but  if  it  is  shown  that  those  forming  the  company  honestly  believed 
it  to  be  worth  the  amount  specified  in  the  articles,  and  that  their 


CHAP.  III.]  PENFIELD    V.  DAWSON    TOWN    &    GAS    CO.  249 

mistake  was  one  of  judgment  only,  their  action  cannot  be  consid- 
ered fraudulent  either  in  fact  or  in  law.  The  law  imposes  no  penalty 
of  this  land  upon  a  stockholder  or  trustee  of  a  company  for  a  mis- 
take or  erroneous  judgment  in  the  honest  and  faithful  discharge  of 
his  duties." 

In  Phelan  v.  Hazard,  5  Dil.  [U.S.  C.C.]  45,  it  was  held  that,  unless 
prohibited  by  statute,  an  agreement  between  the  incorporatoi-s  of 
a  company  and  the  directors,  by  which  the  former  convey  to  the 
company  property  needed  for  the  purpose  of  its  operations  and  re- 
ceive payment  therefor  in  full-paid  shares  of  the  stock  of  the  com- 
pany is,  in  the  absence  of  fraud,  binding  upon  the  parties  and  such 
stock  is  full-paid  stock. 

In  American  Tube  &  Iron  Co.  v.  Hayes,  30  Atl.  Rep.  [Pa.]  937, 
the  facts,  and  the  opinion  of  the  supreme  court  of  Pennsylvania 
thereon,  are  thus  summarized  in  the  syllabus:  "(1.)  The  members 
of  a  firm  engaged  in  operating  gas  wells  formed  a  corporation  under 
the  natural  gas  act  of  1885  with  a  capital  stock  of  S500,000.  They 
agreed  with  the  corporation  to  transfer  the  firm's  property  to  it  in 
payment  of  the  S500,000  of  stock,  and  also  that  they  should  retain 
only  S175,000  of  such  stock  and  turn  into  the  company's  treasury 
the  remainder  as  a  worldng  capital.  The  contracts  were  performed 
in  good  faith.  Held,  that  the  stock  was  paid  up,  and  that  the 
subscribers  were  not  liable  to  creditors  for  the  amounts  subscribed 
by  them.  (2.)  The  facts  that  the  property  transferred  to  the  com- 
pany afterwards  proved  to  be  worth  much  less  than  $175,000,  the 
amount  actually  paid  for  it,  and  that  the  parties  adopted  a  clumsy 
^nd  suspicious  method  of  effecting  the  transfer,  did  not  render  the 
subscribers  liable  as  for  unpaid  stock." 

In  Bickleij  v.  Schlag,  20  Atl.  Rep.  [N.J.]  250,  it  was  held  by  the 
court  of  error  and  appeals  of  New  Jersey  that  when  a  corporation, 
by  virtue  of  its  charter,  pays  for  property  purchased  with  its  capital 
stock,  such  sale  cannot  be  set  aside  in  the  absence  of  fraud,  on  the 
ground  that  the  value  of  such  property  was  not  equal  to  the  value  of 
the  stock. 

In  Clow  V.  Brown,  31  N.E.  Rep.  [Ind.]  361,  it  was  held  by  the  su- 
preme court  of  Indiana  that  where  it  appears  that  the  full  amount  of 
the  capital  stock  of  a  corporation  was  paid  to  the  satisfaction  of  the 
contracting  parties,  such  payment  can  be  impeached  by  a  creditor 
only  on  the  ground  of  fraud  which  must  be  charged  in  the  pleadings. 

In  Kelhy  v.  Fletcher,  28  S.W.  Rep.  [Tenn.]  1099,  the  views  of  the 
supreme  court  of  Tennessee  are  thus  condensed  in  the  syllabus:  "A 
bill  by  a  corporate  creditor  to  enforce  liability  on  the  part  of  the 
stockholders  for  the  difference  between  the  amounts  of  their  sub- 
scriptions and  the  value  of  the  property  conveyed  by  them  to  the 
corporation  in  payment  of  the  subscriptions  must  allege  an  inten- 
tional or  fraudulent  overvaluation  of  such  property." 


250  LAKE    SUPERIOR    IRON    CO.  V.  DREXEL.  [CHAP.   III. 

The  necessity  of  averment  of  a  fraudulent  intent,  in  conjunction 
with  an  overvaluation  of  property  exchanged  for  the  capital  .stock 
of  a  corporation,  has  been  recognized  and  enforced  in  Troup  v. 
Horbach,  53  Neb.  795,  and  our  conviction  with  reference  to  the  cor- 
rectness of  our  views  therein  announced  is  strengthened  by  a  re- 
examination of  the  question,  rendered  necessary  in  this  case.  It 
is  true,  generally,  that  the  securing  of  an  advantage  by  a  stockholder 
to  himself  by  reason  of  his  relations  with  the  corporation  with  which 
he  is  connected  subjects  his  conduct  to  a  species  of  criticism  from 
which  he  would  be  free  but  for  his  confidential  relation;  but,  even 
in  the  face  of  the  presumptions  against  a  stockholder,  he  may  show 
that  the  transaction  to  which  he  was  a  party  was  bona  fide.  {Gorder 
V.  Plattsmouth  Canning  Co.,  36  Neb.  548.)  The  burden  of  proof  is, 
doubtless,  more  strongly  devolved  upon  a  stockholder  to  show  good 
faith  with  the  corporation  than  it  would  be  if  he  were  a  stranger. 
So  it  is  in  transactions  between  relatives  or  others  sustaining  con- 
fidential relations  in  matters  involving  the  rights  of  creditors,  and 
yet  it  often  happens  that  such  transactions  are  found  valid  and  the 
rights  of  the  parties  enforceable.  The  relation  of  a  stockholder  to 
a  corporation  is  no  exception  to  the  class  of  cases  involving  confi- 
dential relations  or  such  that  a  fraud  might  be  more  likely  to  take 
place  than  between  strangers.  In  the  case  at  bar  the  district  court, 
upon  consideration  of  all  the  evidence,  found  that  while  the  property 
exchanged  for  capital  stock  was  exchanged  at  an  excessive  valua- 
tion, yet  that  this  was  done  in  good  faith  and  with  no  intent  to  de- 
fraud the  corporation  or  its  creditors.  There  was  therefore  by  the 
last  finding  eliminated  a  very  essential  ingredient  to  the  establish-* 
ment  of  a  cause  of  action  for  a  money  judgment  against  the  stock- 
holders, and  the  judgment  of  the  district  court  is  reversed  and  the 
cause  dismissed. 

Reversed  and  dismissed. 

Note.  —  For  further  authorities  that  it  is  not  improper  to  value 
property  at  a  prospective  value,  see  Buck  v.  Jones,  18  Col.  App. 
250  (dictum);  Finletter  v.  Acetylene  Light  Co.,  215  Pa.  86;  Richard- 
son V.  Mining  Co.,  23  Utah  366  (mining  corporation). 


LAKE  SUPERIOR  IRON  CO.  v.   DREXEL. 

90  N.Y,  87.     1882. 

Earl,  J.  This  is  an  action  against  the  defendant  as  a  stockholder 
of  the  Blair  Iron  and  Steel  Company  to  recover  the  amount  of  a 
debt  due  from  that  company  to  the  plaintiff,  on  the  ground  that  the 
company  was  not  so  organized  as  to  protect  its  stockholders  from 


CHAP.   III.]  LAKE    SUPERIOR    IRON    CO.  V.  DREXEL.  251 

individual  liability.  The  company  was  organized  January  6,  1873, 
under  the  General  Manufacturing  Act  (Chap.  40  of  the  Laws  of 
1848),  with  a  nominal  capital  of  S2,500,000,  divided  into  twenty- 
five  thousand  shares  of  SlOO  each.  The  certificate  of  incorporation 
was  signed  by  Blair,  Struthers,  Hall,  Smith,  and  Miller,  who  were 
also  designated  as  trustees  to  manage  the  affairs  of  the  company  for 
the  first  year.  The  objects  of  the  corporation,  as  stated  in  the  certi- 
ficate, were  "the  manufacturing  of  iron  and  steel  and  of  such  articles 
as  may  be  used  in  such  manufacture;  also  the  mining  and  transport- 
ing of  such  minerals  as  may  be  used  in  such  manufacture."  The 
five  trustees  met  in  New  York  city  on  the  20th  day  of  January,  and 
elected  Blair  president  and  Smith  secretary  and  treasurer  of  the 
compan}^  At  that  meeting  Struthers,  one  of  the  trustees,  in  behalf 
of  the  firm  of  Blair,  Foster  &  Struthers,  of  which  firm  he  was  a  mem- 
ber, submitted  a  wi'itten  proposition  to  the  company  to  sell  to  it 
certain  patents  for  the  manufacture  of  iron  and  steel  and  certain 
works  at  Pittsburgh,  Pennsylvania,  for  the  price  of  $2,500,000,  and 
to  receive  in  pajmient  therefor  the  whole  capital  stock  of  the  com- 
pany. The  proposition  also  contained  this  provision :  "  Of  the  twenty- 
five  thousand  shares  of  stock,  however,  so  delivered  to  us  in  pay- 
ment for  said  patents  and.  property,  we  agree  to  place  six  thousand 
shares  in  the  hands  of  Gen.  A.  S.  Diven,  as  mutual  trustee  for  us, 
the  Blair  Iron  and  Steel  Company,  and  the  persons  who  may  be- 
come purchasers  of  said  six  thousand  shares;  it  being  understood 
that  said  shares  may  be  sold  for  S50  per  share,  one-third  thereof  to 
be  paid  down  when  the  whole  of  said  six  thousand  shares  shall  be 
subscribed  for  and  taken,  half  of  which  first  payment  shall  be 
paid  over  by  said  trustee  to  us  when  received  by  him,  and  the  other 
half  to  the  treasurer  for  the  use  of  the  company,  and  the  whole 
amount  of  the  remaining  two-tliirds  thereof  shall  be  paid  over  by 
him,  when  received,  to  the  treasurer,  for  the  use  of  said  company. 
And  we  agi-ee  further  to  transfer  to  said  A.  S.  Diven,  as  trustee, 
three  thousand  of  the  said  twenty-five  thousand  shares,  for  the  fu- 
ture use  and  benefit  of  said  company,  and  the  whole  of  the  proceeds 
thereof  when  sold  to  be  paid  and  accounted  for  by  him  to  said  com- 
pany; the  trustees  to  direct  the  sale  of  said  three  thousand  shares 
at  such  time  and  on  such  terms  as  they  may  think  best  for  the  in- 
terest of  the  company."  This  proposition  was,  by  a  resolution  of  the 
trustees,  accepted,  and  a  direction  was  made  that  the  stock  be  issued 
to  Blair,  Foster  &  Struthers,  the  certificates  thereof  to  be  signed  by 
the  president  and  secretary.  On  the  same  day  a  subscription  paper 
was  prepared,  to  be  signed  by  persons  who  wished  to  subscribe  for 
the  six  thousand  shares  at  fifty  per  cent  of  their  par  value.  That 
paper  recited  that  the  whole  capital  stock  of  the  company  had  been 
paid  up  by  the  transfer  of  the  patents  and  the  works,  and  all  issued 
to  Blair,  Foster  &  Struthers,  who  agreed  to  place  in  the  hands  of 


252  LAKE    SUPERIOR    IRON    CO.  V.  DREXEL.  [CHAP.  III. 

Diven,  as  trustee,  nine  thousand  shares,  to  be  used  as  working  capital 
for  the  company,  excepting  S50,000  of  the  proceeds  thereof,  which 
was  first  to  be  paid  to  them,  and  that  the  trustees  of  the  company 
had  ordered  the  sale  of  six  thousand  shares  at  $50  per  share.  The 
defendant  subscribed  this  paper  for  five  hundred  shares  at  $50  per 
share,  and  all  the  six  thousand  shares  were  subscribed  for  by  the 
12th  day  of  April,  1873,  when  a  formal  transfer  of  the  patents  and 
works  was  made  to  the  company.  On  that  day  a  certificate  of  stock 
for  twenty-five  thousand  shares  numbered  "Zero"  was  issued  to 
Blair,  Foster  &  Struthers,  and  on  the  same  day  it  was  returned  and 
canceled  and  a  certificate  numbered  "  1 "  for  six  thousand  shares 
and  another  numbered  "2"  for  three  thousand  shares  were  issued 
to  Diven  as  trustee,  and  a  certificate  for  the  remaining  sixteen 
thousand  shares  was  issued  to  Blair,  Foster  &  Struthers. 

The  proceeds  of  the  six  thousand  shares  subscribed  for  at  $50  per 
share  were  paid  to  the  treasurer  of  the  company,  and  out  of  the 
same  $50,000  were  paid  to  Blair,  Foster  &  Struthers,  according 
to  the  terms  of  their  proposition  as  above  set  out. 

Section  10  of  the  act  of  1848  provides  that  all  the  stockholders 
of  every  company  incorporated  under  that  act  "shall  be  severally 
individually  liable  to  the  creditors  of  the  company  in  which  they  are 
stockholders  to  an  amount  equal  to  the  amount  of  stock  held  by 
them,  respectively,  for  all  debts  and  contracts  made  by  such  com- 
pany until  the  whole  amount  of  capital  stock  fixed  and  limited  by 
such  company  shall  have  been  paid  in";  and  §  14  provides  that 
"nothing  but  money  shall  be  considered  as  payment  of  anj'  part  of 
the  capital  stock."  In  1853,  by  the  act  chapter  333  of  that  year, 
the  act  of  1848  was  amended,  by  providing  that  the  trustees  of  any 
company  formed  under  that  act  "may  purchase  mines,  manufac- 
tories, and  other  property  necessary  for  their  business,  and  issue 
stock  to  the  amount  of  the  value  thereof  in  paj-ment  therefor;  and 
the  stock  so  issued  shall  be  declared  and  taken  to  be  full  stock  and 
not  liable  to  any  further  calls;  neither  shall  the  holders  thereof  be 
liable  for  any  further  pajTuents  under  the  provisions  of  the  tenth 
section  of  the  said  act."  The  claim  of  the  plaintiff  is  that  the  whole 
amount  of  the  capital  stock  was  not  paid  in,  and  hence  that  the 
defendant  is  liable  to  it  under  section  10  above  set  out;  and  it  con- 
tends that  it  conclusively  appears  that  Blair,  Foster  &  Struthers 
actually  received  only  sixteen  thousand  shares  of  the  stock  and 
$50,000  in  cash  for  the  propert}-  wliich  they  transferred  to  the  com- 
pany. 

All  the  trustees  who  took  from  Blair,  Foster  &  Struthers  the 
transfer  of  the  property  and  caused  the  stock  to  be  issued  to  them, 
were  called  as  witnesses  upon  the  trial,  and  each  testified  that  he 
acted  in  good  faith  in  the  transactions  and  believed  the  property 
received  was  worth  the  sum  of  $2,500,000,  and  the  defendant  also 


CHAP.  III.]  LAKE    SUPERIOR    IRON    CO.  V.  DREXEL.  253 

gave  evidence  tending  to  show  that  the  trustees  had  good  grounds 
for  beheving  that  the  property  was  worth  the  sum  named,  and  that 
the  stock  was  issued  therefor  in  good  faith. 

At  the  close  of  the  evidence  on  both  sides,  plaintiff's  counsel 
moved  the  court  to  direct  a  verdict  for  the  plaintiff  upon  the  ground 
that  "the  capital  stock  of  the  defendant's  corporation  being  fixed 
at  twenty-five  thousand  shares,  and  sixteen  thousand  shares  having 
been  issued  in  payment  for  property,  and  six  thousand  shares  being 
issued  to  cash  subscribers  at  fifty  per  cent  of  their  par,  the  capital 
has  never  been  full}^  paid  as  required  bj^  law."  Defendant's  counsel 
moved  the  court  to  direct  a  verdict  for  the  defendant,  and  to  hold 
that  there  was  nothing  in  the  case  which  would  justify  the  jury, 
if  the  question  were  submitted  to  them,  in  finding  that  the  sale  of 
the  property  was  made  in  bad  faith,  or  with  the  intention  to  evade 
the  requirements  of  the  statute.  The  court  denied  both  motions  and 
held  that  the  case  should  be  submitted  to  the  jury  for  them  to  deter- 
mine whether  the  receiving  the  property  and  issuing  the  stock  there- 
for was  an  honest  transaction,  consummated  in  good  faith,  or 
whether  it  was  a  scheme  devised  to  evade  the  statute.  In  charging 
the  jury  the  court  said:  "The  real  question,  therefore,  is  whether 
the  property  was  placed  and  taken  at  a  higher  valuation  with  a 
fraudulent  purpose,  with  the  intent  of  evading  the  provisions  of  the 
statute." 

We  are  of  opinion  that  the  court  committed  no  error  in  the  sub- 
mission of  the  case  to  the  jury.  In  Douglass  v.  Ireland,  73  N.Y.  100, 
it  was  laid  down  as  the  law  in  this  State  that  to  charge  a  holder  of 
stock,  issued  upon  and  for  the  purchase  of  property,  individually  for 
the  debts  of  the  company,  it  is  not  enough  to  prove  that  the  prop- 
erty was  purchased  and  paid  for  at  an  overvaluation  through  a 
mistake  or  error  of  judgment  on  the  part  of  the  trustees,  but  that 
it  must  be  shown  that  the  purchase  at  the  price  agreed  upon  was  in 
bad  faith  and  to  evade  the  statute;  and  that  all  that  is  necessary  to 
establish  the  legal  fraud  and  take  the  stock  issued  out  of  the  im- 
munity assured  to  stock  honestly  issued  in  pursuance  of  the  act  of 
1853  is  to  prove  two  facts:  (1)  That  the  stock  issued  exceeded  in 
amount  the  value  of  the  property  in  exchange  for  which  it  was  issued  ; 
and  (2)  That  the  trustees  deliberately  and  with  knowledge  of  the 
real  value  of  the  property  overvalued  it,  and  paid  in  stock  for  it  an 
amount  which  they  knew  was  in  excess  of  its  actual  value.  In  that 
case  the  whole  capital  stock  of  the  company,  three  thousand  shares, 
was  issued  for  property  to  one  Horton,  and  he,  in  pursuance  of  an 
agreement  with  the  company,  on  or  about  the  same  date,  trans- 
ferred back  to  the  company  six  hundred  shares,  to  be  sold  to  pay 
the  contract  price  which  Horton  had  agreed  to  pay  for  some  of  the 
very  property  transferred  to  the  company  for  its  stock,  and  also 
one  thousand  shares  for  the  purpose  of  enabling  the  company  to 


254  LAKE    SUPERIOR    IRON    CO.  V.  DREXEL.  [cHAP.   III. 

raise  a  working  capital  by  the  sale  of  the  same.  The  question  of  the 
value  of  the  property  received  for  the  stock  was  submitted  to  a  jury 
and  they  found  it  to  be  $65,000,  and  the  other  questions  in  the  case 
were  decided  by  the  court  and  it  found  that  the  value  of  the  prop- 
erty was  so  disproportionate  to  the  nominal  value  of  the  stock  as 
to  take  the  case  out  of  a  sound  discretion  exercised  by  the  trustees; 
that  the  transaction  was  a  fraud  upon  the  law  and  could  not  be  up- 
held as  a  mistake  or  innocent  misunderstanding  of  the  value  of  the 
property;  that  the  capital  had  not  been  paid  in  as  required  by  the 
statute,  and  that  the  defendant  was  therefore  liable.  The  decision  of 
the  trial  term  in  that  case  was  upheld,  not  upon  the  theory  that  as 
matter  of  law  upon  the  facts  proved  the  capital  stock  had  not  been 
paid  in,  but  upon  the  findings  of  fact  that  it  had  not  been  paid  in; 
and  whether  it  was  paid  in  or  not  was  treated  as  a  question  of  fact 
which  was  found  against  the  defendant.  Afterward  another  action 
was  commenced  against  the  same  defendant  by  another  plaintiff, 
and  upon  substantially  the  same  evidence  the  jury  rendered  a  ver- 
dict in  favor  of  the  defendant,  and  the  judgment  entered  thereon 
was  affirmed  at  the  General  Term,  upon  the  ground  that  the  trial 
judge  had  substantially  followed  the  case  of  Douglass  v.  Ireland  in 
submitting  the  case  to  the  jur3^  Brockway  v.  Ireland,  61  How.  Pr. 
372. 

In  this  case  the  evidence  was  very  persuasive,  that  the  trustees, 
in  exchanging  the  stock  of  the  company  for  the  property  taken, 
were  endeavoring  to  evade  and  circumvent  the  law,  but  it  was  not 
conclusive.  Another  view  of  the  evidence  was  possible,  and  that  is, 
that  the  parties  believed  l^e  property  to  be  worth  82,500,000,  for 
the  uses  and  purposes  of  the  corporation,  and  that  the  trustees  ac- 
tually gave  the  entire  stock  for  it.  The  title  to  the  stock  passed  out 
of  the  company,  and  Blair,  Foster  &  Struthers  could  then  do  with 
the  stock  what  they  pleased,  sell  it,  give  it  away,  or  retransfer  a  por- 
tion of  it  to  the  company,  in  order  that  the  business  of  the  company 
might  be  successfully  prosecuted,  and  thus  the  sixteen  thousand 
shares  of  stock  still  held  by  them  rendered  more  valuable. 

When  they  transferred  the  nine  thousand  shares  they  made  a 
transfer  of  actual  stock  which  had  been  paid  for,  which  belonged 
to  them,  and  which,  but  for  their  agreement  with  the  company, 
they  could  hold  against  it.  The  fact  that  the}^  were  under  obliga- 
tion to  devote  a  portion  of  the  stock  received  by  them  to  the  pur- 
poses of  creating,  through  a  trustee,  a  working  capital  for  the  com- 
pany, by  which  they  were  to  be  benefited  more  than  all  others,  no 
more  altered  the  real  nature  of  the  transaction  than  if  thej^  had 
agreed  to  contribute  a  large  sum  of  money  toward  the  worldng  capi- 
tal instead  of  stock.  It  could  not  be  said,  as  matter  of  law,  that  the 
property  transferred  for  the  stock  was  not  worth  the  nominal  value 
of  the  stock,  or  that  the  trustees  did  not  believe,  and  have  reasons 


CHAP.  III.]  ELYTON    LAND    CO.  V.  BIRMINGHAM    CO.  255 

to  believe,  that  it  was,  and  it  could  not  be  said  that  they  did  not 
issue  the  whole  amount  of  the  stock  in  payment  for  the  property, 
because  they  did,  in  form,  so  issue  it.  Whether  the  form  the  trans- 
action took  was  a  mere  sham,  intended  as  an  evasion  of  the  statute, 
was  a  question  of  fact  for  the  determination  of  the  jury. 

It  may  be  said  that  the  statute  may  thus  easily  be  circumvented 
and  evaded;  but  the  policy  of  the  law  will  be  preserved  and  enforced 
if  all  the  questions  of  fact  in  such  cases  be  left  to  the  jury  under 
principles  laid  down  in  the  cases  cited. 

If  right  in  the  views  thus  far  expressed,  no  error  was  committed 
by  the  trial  judge  in  his  charge  to  the  jury  and  in  his  refusals  to 
charge  as  requested  b}^  plaintiff's  counsel. 

The  exceptions  taken  during  the  progress  of  the  trial  to  rulings 
upon  questions  of  evidence  have  been  carefully  examined  and  con- 
sidered, and  it  is  not  believed  that  any  of  them  point  out  any  error 
which  calls  for  a  reversal  of  the  judgment. 

The  judgment  should  be  affirmed,  with  costs. 

All  concur,  except  Tracy,  J.,  who  does  not  vote. 

Judgment  affirmed. 


ELYTON  LAND   CO.   v.  BIRMINGHAM   CO. 

92  Ala.  407.     1890. 

Walker,  J.  The  bill  was  filed  by  the  Elyton  Land  Company  as 
a  judgment  creditor  of  the  Birmingham  Warehouse  and  Elevator 
Company,  a  corporation,  and  its  purpose  is  to  secure  the  payment 
of  the  judgment  by  the  enforcement  of  the  alleged  unsatisfied  lia- 
bility of  the  individual  defendants  as  original  subscribers  to  the 
stock  of  the  defendant  corporation.  It  is  averred  that  said  indi- 
vidual defendants  pretend  that  they  have  discharged  and  satisfied 
their  liability  as  such  subscribers,  but  it  is  alleged  that  the  trans- 
action whereby  it  was  attempted  to  discharge  that  liability  is  merely 
colorable  and  is  void,  as  against  the  creditors  of  said  corporation, 
and  that  said  subscribers  are  liable  to  pay  in  money  the  amount  of 
their  said  subscriptions  or  so  much  thereof  as  is  necessary  to  satisfy 
said  judgment.  The  following  is  the  substance  of  the  case  stated 
by  the  bill:  On  the  9th  day  of  March,  1887,  the  Elyton  Land  Com- 
pany executed  and  delivered  to  the  defendant  J.  A.  VanHoose  as 
trustee  for  the  Birmingham  Warehouse  and  Elevator  Company,  a 
corporation  then  in  process  of  organization,  its  bond  of  title  for 
two  blocks  of  land  near  the  city  of  Birmingham,  to  be  paid  for  at  the 
price  of  fifty-three  thousand  dollars.  Said  VanHoose  paid  to  the 
Elyton  I^and  Company  five  thousand  dollars  on  the  execution  and 
delivery  of  the  bond  for  title,  by  the  terms  of  which  it  was  provided 
that  he  was  to  execute  a  transfer  and  conveyance  of  his  rights  and 


256  ELYTON    LAND    CO.  V.  BIRMINGHAM    CO.  [cH.VP.   III. 

interests  thereunder  to  the  Birmingham  Warehouse  and  Elevator 
Company  upon  its  organization,  and  that  that  company  should 
make  its  nine  notes  for  the  balance  of  the  purchase-mono}'  to  the 
Elyton  Land  Company,  said  notes  to  be  each  for  $5,333.33,  bearing 
interest  from  August  20th,  1886,  payable  respectively  at  1,  2,  3,  4, 
5,  6,  7,  8,  and  9  years  from  that  date.  On  the  19th  day  of  February, 
1887,  said  VanHoose  and  the  other  individual  defendants,  John- 
ston, Sage  and  McLester,  filed  their  petition  in  the  office  of  the  pro- 
bate judge  of  Jefferson  county  for  the  organization  as  a  corporation 
of  the  Birmingham  Warehouse  and  Elevator  Company,  the  capi- 
tal stock  of  which  was  to  be  fixed  at  two  hundred  and  fifty  thou- 
sand dollars,  to  be  divided  into  twenty-five  hundred  shares  of  one 
hundred  dollars  each.  On  the  same  day  a  commission  was  issued  to 
said  VanHoose,  Johnston,  Sage  and  JVIcLester,  constituting  them  a 
board  of  corporators  and  authorizing  them  to  open  books  of  sub- 
scription to  the  capital  stock  of  the  proposed  corporation.  On  the 
11th  day  of  March,  1887,  said  board  of  corporators  over  their  sig- 
natures reported  and  certified  to  said  probate  judge  that  on  the  9th 
day  of  March,  1887,  they  had  opened  books  of  subscription  to  the 
stock  of  said  proposed  corporation  and  that  the}'  had  each  subscribed 
for  five  hundred  shares,  "subscribed  through  James  A.  VanHoose, 
trustee  for  the  subscribers,  and  payable  in  real  property  near  the 
city  of  Birmingham,  ...  of  the  money  value  stated  in  said  sub- 
scription of  two  hundred  and  fifty  thousand,  one  hundred  and 
thirty-thi-ee  dollars  and  thirty-three  cents,  subject  to  the  unpaid 
purchase-money  due  to  the  Elyton  Land  Company  amounting  to 
fifty  thousand  one  hundred  and  thirty-three  dollars  and  thirty- 
three  cents,  the  payment  of  which  is  to  be  assumed  by  said  com- 
pany'', said  lands  being  fully  descril)ed  in  the  bond  for  titles  of  the 
Elyton  Land  Company  to  said  James  A.  \"anHoose,  trustee,  dated 
March  9th,  1887,  which  said  trustee  is  to  convey  to  said  company 
in  payment  of  said  two  thousand  shares  of  stock,"  and  VanHoose, 
Johnston,  Sage  and  McLester  each  subscribed  for  one  share  pay- 
able in  money.  Said  corporators  further  reported,  that  on  the  or- 
ganization of  said  company,  said  VanHoose,  Johnston,  Sage  and 
McLester  were  present  and  each  represented  in  person  five  hundred 
and  one  shares  in  stock;  that  each  of  said  persons  was  elected  a  direc- 
tor of  said  corporation,  and  that  the  board  of  directors  elected  Van- 
Hoose as  president  and  JMcLester  as  treasurer  and  secretary  of  the 
corporation.  It  was  further  reported  and  certified  by  the  corporators 
that  on  the  10th  day  of  March,  1887,  after  the  organization  of  said 
company,  all  the  capital  stock  thereof  payable  in  money  was 
paid  to  the  treasurer  and  all  the  property  subscribed  was  deliv- 
ered to  him.  The  subscriptions  were  made  as  reported  and  certified 
by  the  corporators.  It  w^as  not  true  at  the  time  of  the  filing  of  the 
bill,  or  when  the  subscriptions  were  made  and  reported,  that  said 


CHAP.  III.]  ELYTON    LAND    CO.  V.  BIRMINGHAM    CO.  257 

land  was  of  the  money  value  of  two  hundred  thousand  dollars.  The 
price  named  m  said  bond  for  title,  fifty-three  thousand  dollars,  was 
at  the  time  of  said  subscriptions  the  full  money  value  of  said  land 
when  sold  on  long  credit.  Said  VanHoose,  Johnston,  Sage  and  Mc- 
Lester  well  knew  that  said  land  was  not  worth,  nor  was  it  of  the 
money  value  of,  two  hundred  thousand  dollars  or  anything  near 
that  sum.  After  said  subscriptions  were  made,  and  after  said  Birm- 
ingham Warehouse  and  Elevator  Company  was  organized,  said 
VanHoose  endorsed  to  it  said  bond  for  title,  and  said  company 
executed  its  nine  promissory  notes  as,  by  the  terms  of  the  bond  for 
title,  it  was  provided  it  should  do;  arid  said  VanHoose,  Johnston, 
Sage  and  McLester  now  claim  that  the  assigmnent  of  said  bond  was 
a  discharge  and  satisfaction  of  said  subscription  of  two  hundred 
thousand  dollars,  which  has  not  been  otherwise  paid.  It  is  this 
transaction  which  the  bill  alleges  is  merely  colorable  and  is  void  as 
against  the  creditors  of  said  corporation.  Only  five  thousand  dol- 
lars has  been  paid  on  account  of  said  purchase-money.  The  Elji-on 
Land  Company  has  recovered  judgment  against  said  Birmingham 
Warehouse  &  Elevator  Company  on  two  of  said  notes.  That  judg- 
ment remains  unsatisfied,  and  said  corporation  has  no  property  out 
of  which  it  could  be  satisfied  by  execution. 

Each  of  the  individual  defendants  demurred  to  the  bill  upon  the 
following,  among  other,  grounds:  1.  That  the  bill  on  its  face  shows 
that  the  complainant  has  no  right  to  the  relief  therein  prayed  be- 
cause it  shows  that  this  defendant  owes  nothing  to  the  Birmingham 
Warehouse  &  Elevator  Companj^,  either  in  unpaid  subscriptions 
for  stock  or  otherwise;  2.  Because  said  bill  alleges  no  facts  which 
render  this  defendant  liable  personally  in  any  way  for  the  alleged 
debt  mentioned  therein  as  due  from  said  Birmingham  Warehouse 
&  Elevator  Company  to  the  complainant;  and,  3.  Because  said  bill 
shows  that  this  defendant  subscribed  for  stock  in  said  Birmingham 
Warehouse  &  Elevator  Company  payable  in  property  at  a  valua- 
tion mentioned  in  said  subscription,  which  property  has  been  de- 
livered and  received  in  full  payment  for  said  stock,  and  said  bill 
fails  to  show  that  said  property  was  overvalued  unreasonably,  in- 
tentionally and  fraudulently,  or  that  the  defendant  has  made  a  profit 
from  the  stock  so  subscribed  and  taken  by  him.  A  decree  was  ren- 
dered sustaining  the  demurrers  as  to  the  grounds  here  mentioned. 
The  appeal  is  from  that  decree. 

On  the  averments  of  the  ])ill  it  is  to  be  taken  as  true  that  the 
property  which  was  received  by  the  corporation  as  full  payment  of 
the  stock  subscription  was  worth  only  five  thousand  dollars,  the 
amount  which  had  been  paid  on  the  bond  for  title.  It  follows  that  the 
decree  of  the  Chancery  Court  involves  the  assertion  of  the  validity, 
as  against  the  creditors  of  the  corporation,  of  the  payment  of  a  stock 
subscription  of  two  hundred  thousand  dollars  by  the  transfer  to  the 


258  ELYTON    LAND    CO.  V.  BIRMINGHAM    CO.  [cHAP.  III. 

corporation  of  property  worth  only  five  thousand  dollars.  In  review- 
ing this  determination  regard  is  to  be  had  to  certain  constitutional 
and  statutory  provisions  which  are  to  be  construed  and  applied  in 
the  light  of  settled  prmciples  governing  the  relations  of  stockholders 
to  the  corporation  of  which  they  are  members,  and  to  the  creditors 
thereof.  By  the  Constitution  of  1875  it  was  provided,  that  "no  cor- 
poration shall  issue  stock  or  bonds  except  for  money,  labor  done,  or 
money  or  property  actually  received;  and  all  fictitious  increase  of 
stock  or  indebtedness  shall  be  void;"  and  that  "dues  from  private 
corporations  shall  be  secured  by  such  means  as  may  be  presciibed 
by  law,  but  in  no  case  shall  anj^  stockholder  be  individually  liable 
otherwise  than  for  the  unpaid  stock  owned  by  him  or  her."  §§6  and 
8  of  Article  xiv  of  the  Constitution,  Prior  to  the  adoption  of  the 
present  Constitution  each  stockholder  in  any  corporation  was  liable 
to  the  amount  of  stock  held  or  owned  by  him,  the  law  imposing  a 
liability  not  only  to  the  extent  that  the  stock  was  unpaid,  but  for  an 
additional  sum  equal  to  t)ie  amount  of  such  stock.  §  3,  Art.  xiii  of 
the  Constitution  of  1868;  §  17G0,  Revised  Code  of  1867;  MacDonnell 
V.  Gold  Life  Ins.  Co.,  85  Ala.  401.  Before  the  creation  of  this  addi- 
tional liability,  the  stock  and  other  property  of  a  private  corporation 
was  regarded  and  treated  in  a  court  of  equity  as  a  trust  fund  for  the 
payment  of  the  debts  of  the  corporation,  and  in  the  event  of  the  in- 
solvency of  the  corporation,  unpaid  stock  subscriptions  could  be 
condemned  for  the  satisfaction  of  the  creditors;  and  said  additional 
liability  was  a  mere  increase  of  the  security  for  the  payment  of  the 
corporate  debts.  Smith  v.  Huckahee,  53  Ala.  191.  While  corporate 
creditors  were  secured  by  this  special  liability  existing  in  their  favor 
there  was  no  direct  constitutional  or  general  statutory  prohibition 
against  the  abuse  of  corporate  powers  by  the  issue  of  stock  not  in 
good  faith  representing  the  value  of  money,  services  or  property 
actually  contributed  to  the  corporate  enterprise;  and  the  general  in- 
corporation law  then  in  force  contained  no  requirements  as  to  the 
mode  of  subscribing  for  stock,  or  as  to  how  the  subscription  liability 
should  be  satisfied.  Chapters  3  and  4,  Title  2,  Part  2,  of  Code  of 
1867.  The  dangers  to  which  corporate  creditors  were  exposed  by  the 
absence  of  such  regulations  were  obviated  by  the  provisions  for  said 
additional  hability.  "When  those  provisions  were  repealed  by  the 
Constitution  of  1875,  there  was  an  ob\'ious  necessity  of  pro%dding 
that  the  trust  fund,  the  remaining  security  for  corporate  creditors, 
should  exist  as  a  thing  of  substance,  and  that  the  liabiUty  for  unpaid 
stock  should  not  be  merely  illusory.  This  necessity  was  not  over- 
looked. The  former  legislative  policy  of  securing  corporate  creditors 
by  making  the  stockholders  liable  to  them  in  amounts  over  and 
above  what  they  could  be  called  upon  to  pay  on  their  stock  sub- 
scriptions gave  place  to  a  new  policy  the  aim  of  which  was  to  afford 
proper  security  to  persons  dealing  with  corporations  by  prohibiting 


CHAP.   III.]  ELYTON    LAND    CO.  V.  BIRMIXGIIAM    CO.  259 

the  issue  of  stock  except  for  value  received  by  the  corporation,  and 
by  providing  definite  regulations  for  the  paj'ment  of  stock  subscrip- 
tions in  money,  or  in  labor  or  property  at  its  money  value.  This  new 
policy  is  evidenced  generally  by  §  6  of  Article  xiv  of  the  Constitu- 
tion, quoted  above,  and  particularly  as  to  manufacturing,  mining, 
immigration  and  industrial  business  corporations,  by  §  1805  of  the 
Code  of  1876,  which  provides  that  "all  subscriptions  to  the  capital 
stock  of  any  company  organized  or  proposed  to  be  organized  under 
the  provisions  of  this  article  shall  be  made  payable  in  money,  or  in 
labor  or  property  at  its  money  value,  to  be  named  in  the  list  of  sub- 
scription, and  in  case  of  a  failure  to  perform  the  labor,  or  deliver  the 
property,  according  to  the  terms  of  the  subscription,  the  money  value 
thereof  as  named  in  the  lists  of  subscription,  shall  be  paid  b}'  the 
subscribers."  These  enactments  are  not  for  the  benefit  of  corporate 
creditors  alone.  The  policy  evidenced  thereby  bears  upon  the  rela- 
tions of  corporations  to  the  public  and  upon  the  relations  of  stock- 
holders to  each  other,  to  the  corporation  and  to  its  creditors.  This 
court  has  not  heretofore  had  occasion  to  pass  upon  the  question  as 
to  the  effect  of  these  provisions  upon  the  rights  of  corporate  creditors. 
The  effective  operation  of  the  constitutional  provision  in  other  con- 
nections has  been  recognized  in  several  cases.  In  Fitzpatrick  v.  Dis- 
patch Puhlishing  Co.,  83  Ala.  604,  it  was  held,  at  the  instance  of  an 
objecting  stockholder,  that  under  the  constitutional  and  statutory 
provisions  a  corporation  with  a  paid-up  capital  of  ten  thousand  dol- 
lai-s  has  no  authority  to  double  its  capital  stock  and  distribute  the 
new  stock  among  its  stockholders  as  a  stock  dividend,  on  the  mere 
statement  that  its  capital  stock  "  has  been  invested  in  property  which 
has  more  than  doubled  in  value  and  is  now  worth  twenty  thousand 
dollars  over  and  above  all  liabilities;"  and  an  injunction  was  issued 
to  restrain  and  enjoin  the  corporation  from  carrying  into  effect  a 
resolution  which  had  been  adopted  by  the  stockholders  for  the  issue 
and  distribution  of  such  new  stock.  In  the  course  of  the  opinion  it 
was  said :  "  Let  us  not,  by  timid  interpretation,  impair  the  strength  of 
this  bulwark,  erected  by  our  constitution-makers  against  the  frauds 
which  have  become  the  reproach  of  the  age  we  live  in."  In  Williams 
V.  Evans,  87  Ala.  725,  it  was  held,  that  relief  could  not  be  granted  on 
an  executor}^  contract  to  pay  for  the  transfer  of  a  subscriber's  right 
under  a  stock  subscription  whereby  it  was  provided  that  the  corpora- 
tion to  be  formed  should  issue  "five  dollars  of  stock  for  one  dollar  of 
subscription."  The  stock  had  not  been  issued  when  the  contract  in 
suit  was  made.  The  court  said:  "A  contract  which  contemplates  the 
violation  of  a  statute,  or  a  constitution,  as  a  mode  of  executing  such 
contract,  is  illegal  and  void.  .  .  .  One  of  the  purposes  of  this  clause 
of  the  Constitution  was  to  protect  the  public,  as  well  as  stock- 
holders, against  spurious  and  worthless  stock  by  the  process  of  water- 
ing —  in  other  words,  from  fraudulently  issuing  and  putting  on  the 


260  ELYTOX    LAND    CO.  V.  BIRMIXGIIAM    CO.  [cHAP.   III. 

market  fictitious  corporate  stock,  which  is  based  on  nothing  valuable 
as  a  consideration  for  its  issue.  It  is  gi-eatly  to  the  interest  of  the  pub- 
lic that  the  policy  of  this  provision  should  be  enforced."  In  Parso7is 
V.  Joseph,  decided  during  the  present  term,  and  reported  in  8  So. 
Rep.  788,  the  bill,  to  which  a  demurrer  was  overruled,  was  filed  by 
a  stockholder  to  secure  the  cancellation  of  certain  certificates  of  stock 
issued  to  another  stockholder,  on  the  ground  that  the  stock  so  issued 
was  fictitious  and  that  its  issue  was  in  violation  of  the  Constitution 
and  the  statute  law  of  the  State.  It  was  alleged  that  certain  stock 
was  paid  for  in  full  by  conveying  to  the  company  thirty-nine  acres 
of  land  at  an  agreed  price  and  valuation  of  $137  per  acre,  when  the 
land  was  not  worth  more  than  $25  per  acre;  that  afterwards  the  capi- 
tal stock  of  the  company  was  doubled,  and  without  further  considera- 
tion than-  the  thirty-nine  acres  of  land,  the  amount  of  stock  issued 
therefor  was  doubled.  The  contention  was  in  regard  to  this  latter 
issue  of  stock.  It  was  alleged  that  the  excessive  valuation  of  the  land 
was  made  knowingly,  willfully,  and  with  the  fraudulent  intent  of 
having  the  fictitious  stock  in  question  issued  in  violation  of  law.  On 
these  averments  it  was  held,  that  the  stock  in  question  was  issued  in 
violation  of  §  1662  of  the  Code  of  1886,  and  of  §  6,  Art.  xiv  of  the 
Constitution.  It  is  to  ])e  observed  that  the  respective  requirements  of 
§  1805  of  the  Code  of  1876  and  §  1662  of  the  Code  of  1886  as  to  how 
stock  subscriptions  shall  be  payable,  differ  in  this,  that  the  former 
requires  the  subscriptions  to  be  made  payable  in  money,  or  in  labor 
or  property,  at  its  money  value,  to  be  named  in  the  list  of  subscrip- 
tion; while  the  latter  provides  that  all  subscriptions  must  be  payaV)le 
in  money,  but  the  commissioners  may  receive  subscriptions  paj'able 
in  money,  the  subscriber  having  the  privilege  of  discharging  the  same 
by  the  rendition  of  stipulated  necessary  services,  or  the  performance 
of  stipulated  necessary  labor  for  the  corporation,  at  the  reasonable 
value  of  such  services  or  labor,  or  in  property,  at  the  reasonable 
value  thereof.  It  does  not  seem,  however,  that  the  variations  in  the 
terms  of  these  two  statutes  are  such,  that  the  fact  that  the  stock  sub- 
scription was  made  under  the  one  or  the  other  of  them  would  make 
any  substantial  difference  in  the  right  of  a  stockholder  to  object 
to  the  issue  of  other  stock  representing  property  received  by  the  cor- 
poration at  an  excessive  and  fraudulent  overvaluation.  In  the  case 
last  cited  it  was  suggested  that  stockholders  who  knowingly  and  in- 
tentionally have  subscribed  and  paid  for  stock  with  property  upon 
a  fictitious  valuation  are  liable  to  creditors  as  stockholders  who  have 
not  paid  up  in  full  for  their  stock ;  but  the  question  of  such  liability 
was  not  presented  in  that  case.  In  Tutwiler  v.  Tuscaloosa  Coal,  Iron 
&  Land  Co.,  89  Ala.  391,  several  questions  that  might  arise  from  the 
issue  of  stock  for  property  taken  at  a  palpably  excessive  valuation 
were  stated,  but  not  decided.  It  is  plain  from  this  review  of  the  de- 
cisions that  the  constitutional  and  statutory  provisions  in  question 


CHAP.  III.]  ELYTON    LAND    CO.  V.   BIRMINGHAM    CO.  261 

are  treated  as  effectual  to  prevent  the  courts  from  lending  their  aid 
for  the  enforcement  of  any  contract  or  obligation  the  execution  of 
which  involves  a  disregard  of  those  regulations,  and  that  so  far  as  they 
are  appropriate  for  the  protection  of  stockholders  from  improper 
discriminations  in  accepting  payments  for  stock,  those  regulations 
are  accorded  such  effect  and  operation  as  to  fully  accomplish  this 
purpose  of  their  enactment.  It  can  not  be  doubted  that  the  protection 
of  the  interests  of  corporate  creditors  is  as  much  within  the  aim  and 
policy  of  those  regulations  as  were  the  objects  in  behalf  of  which 
they  have  been  successfully  invoked  in  this  court.  In  considering 
the  claim  of  corporate  creditors  to  hold  the  stockholders  of  the  cor- 
poration individually  liable  on  the  ground  that  an  attempt  by  them 
to  satisfy  their  stock  subscriptions  by  the  transfer  to  the  corporation 
of  property  at  a  gross  overvaluation  was  not  such  payment  as  the 
law  requires,  the  fact  is  not  to  be  lost  sight  of  that  the  solution  of  the 
ciuestion  is  dependent  in  some  measure  at  least  upon  constitutional 
and  statutory  provisions  which  the  court  has  already  construed  as 
amply  effectual  to  secure  the  accomplishment  of  other  objects  also 
within  the  purview  of  the  enactments.  And  it  may  be  added  that  a 
like  beneficial  operation  should  be  accorded  to  those  provisions  when 
invoked  in  furtherance  of  either  of  their  manifest  purposes. 

[The  court  reviewed  numerous  authorities.] 

The  review  of  the  authorities  will  not  be  further  extended.  Dis- 
cussions of  them  may  be  found  in  Cook  on  Stocks  and  Stockholders, 
§§  38  to  47;  1  Morawetz  on  Corporations,  §§  425  to  429;  2  76.  §§  825, 
et  seq.;  2  Waterman  on  Corporations,  §  188;  Taylor  on  Private  Cor- 
porations, §§  545  and  701,  et  seq.  Our  examination  satisfies  us  that 
the  weight  of  American  authority  does  not  support  the  statement 
made  by  Mr.  Cook,  in  §  47  of  his  work  on  Stocks  and  Stockholders, 
to  the  effect  that  the  attempts  which  have  been  made,  in  cases  where 
stock  was  issued  for  property  taken  at  an  overvaluation,  to  hold  the 
party  receiving  such  stock  Uable  for  its  full  par  value,  less  the  actual 
value  of  the  property  received  from  him,  have  been  unsuccessful;  and 
that  if  there  has  been  an  overvaluation  which  is  shown  to  have  been 
fraudulent,  then  the  contract  is  to  be  treated  like  other  fraudulent 
contracts,  and  is  to  be  adopted  in  toto,  or  rescinded  in  toto  and  set. 
aside.  We  have  found  no  authority  at  all  asserting  the  exemption  of 
the  stockholder  from  such  liability  where  it  appeared  that  the  stock 
subscription  was  governed  by  a  statutory  regulation  at  all  similar  to 
§  1805  of  the  Code  of  1876  or  §  1062  of  the  Code  of  1886.  On  the 
other  hand,  the  New  York,  New  Jersey,  Maryland  and  Pennsyl- 
vania decisions  which  have  been  cited  show  that  the  courts  in  those 
States,  in  giving  effect  to  statutory  requirements,  certainly  no  more 
stringent  than  ours,  as  to  the  mode  in  which  stock  subscriptions 
shall  be  made  payable,  do  not  allow  attempted  payments  in  prop- 
erty worth  greatly  less  than  the  amount  of  the  stock  issued  therefor 


262  ELYTON    LAND    CO.  V.  BIRMINGHAM    CO.  [cHAP.  III. 

to  foreclose  the  just  demands  of  corporate  creditors  to  require  that 
the  stock  subscriptions  be  made  good  in  money  or  in  money's  worth 
as  contemplated  by  the  statutes.  Those  courts  recognize  in  such 
provisions  safeguards  intended  for  the  protection  of  persons  dealing 
with  corporations  as  well  as  for  the  corporations  themselves  and  th^ 
persons  associated  together  therein. 

Our  general  laws  afford  the  amplest  and  freest  facilities  for  per- 
sons desiring  to  engage  in  almost  any  kind  of  lawful  venture  to  secure 
by  corporate  association  the  advantages  of  defined  and  limited  re- 
sponsibility and  at  the  same  time  the  efficient  execution  of  their  pur- 
poses by  means  of  an  artificial  being,  changes  in  the  membership  of 
which  cause  no  break  in  the  continuity  of  its  action,  nor  affect  its 
capacity  to  act,  within  the  scope  of  its  powers,  as  a  natural  person. 
It  is  plain  that  such  associations,  endowed  with  such  powers  and 
privileges,  would  be  a  source  of  danger  to  persons  dealing  with  them, 
unless  the  law  required  that  in  their  formation  suitable  provisions 
be  made  for  a  substantial  responsibility  for  such  engagements  as 
they  may  enter  into.  When  legal  provisions  are  found  which  are 
appropriately  framed  to  secure  the  existence  of  such  responsibility 
it  is  not  permissible  so  to  construe  them  as  to  allow  a  mere  formal 
and  illusory  compliance  therewith  to  defeat  the  objects  intended  to 
be  accomplished.  No  argument  is  needed  to  show  that  a  require- 
ment that  the  stock  of  a  corporation  shall  be  paid  in  money,  or  in 
labor  or  property  at  its  money  value,  inures  to  the  l>enefit  of  persons 
who  may  become  creditors  of  the  corporation,  in  that  it  requires  the 
capital  stock  to  be  the  representative  of  substantial  values  and  in- 
sures the  existence  of  a  fund  which  must  be  within  reach  for  the 
satisfaction  of  debts  if  the  affairs  of  the  corporation  are  managed  as 
contemplated  by  the  law.  It  is  equally  clear  that  if  a  stock  subscrip- 
tion which  is  required  to  be  made  payable  in  money,  or  in  labor  or 
property  at  its  money  value,  and  is  in  fact  made  paj-able  in  property 
at  a  designated  money  valuation,  may  be  satisfied  by  the  transfer  of 
property  the  value  of  which  is  insignificant  or  merely  nominal  as 
compared  with  the  valuation  stated,  then,  so  far  as  this  provision 
of  the  law  looks  to  the  protection  of  creditors,  it  might  as  well  have 
allowed  the  subscription  to  be  made  payable  in  "chips  and  whet- 
stones," Except  §  6  of  Ai't.  xiv  of  the  Constitution  and  §  1805  of  the 
Code  of  1876,  there  were  not,  at  the  time  of  the  formation  of  the 
appellee,  in  reference  to  the  mode  of  satisfying  stock  subscriptions, 
adequate  provisions  for  the  protection  of  creditors  of  such  corpora- 
tions. Those  enactments  are  appropriate  for  this  purpose.  The  re- 
quirement of  §  1805  of  the  Code  of  1876  that  "in  case  of  a  failure  to 
perform  the  labor,  or  deliver  the  property  according  to  the  terms  of 
subscription,  the  money  value  thereof  as  named  in  the  lists  of  sub- 
scription, shall  be  paid  by  the  subscribers,"  can  not  be  regarded  as 
providing  for  a  penalty  to  compel  the  performance  of  the  labor  or 


CHAP.  III.]  ELYTON    LAND    CO.  V.  BIRMINGHAM    CO.  263 

the  delivery  of  the  property.  The  evident  meaning  is,  that  in  the 
event  of  such  failure,  the  corporation  shall  receive  the  equivalent, 
and  no  more  nor  less  than  the  equivalent,  in  money  of  the  labor  or 
the  property  as  the  case  may  be.  This  clause  of  the  statute  is  con- 
vincing that  the  statement  of  the  money  value  of  the  property  in 
which  the  subscription  is  made  payable  is  a  material  feature  of  the 
contract,  and  that  the  property  dehvered  must  be  of  a  value  to  cor- 
respond with  that  named  in  the  subscription.  As  affecting  the  rights 
of  creditors,  the  statute  is  simply  a  definite  requirement  as  to  what 
shall  constitute  that  trust  fund  to  which  persons  dealing  with  the 
corporation  have  a  right  to  look.  The  defendants  in  this  case  in 
maldng  and  accepting  paj^ments  on  the  stock  subscriptions  Were 
acting  in  a  fiduciary  capacity  in  reference  to  that  fund.  The  per- 
formance of  the  contract  of  subscription  to  be  binding  on  creditors 
should  have  been  such  as  is  required  in  the  case  of  a  contract  be- 
tween a  trustee  and  one  having  knowledge  of  his  trust  obligation. 
In  form  the  stock  subscription  was  such  as  the  statute  called  for. 
Under  §  2023  of  the  Code  of  1876  and  §  8  of  Art.  xiv  of  the  Constitu- 
tion, the  stockholders  are  Hable  only  for  the  unpaid  stock  owned  by 
them.  But  the  creditors  are  entitled  to  demand  that  the  pajmaent  on 
the  stock  shall  be  an  actual  and  hona-fide  discharge  of  the  liability 
imposed  by  the  contract  of  subscription.  The  defendants,  in  making 
and  accepting  payment  in  property,  were  bound  to  exercise  their 
judgment  and  discretion  fairly  and  honestly  directed  to  secure  a  sub- 
stantial compliance  with  the  terms  of  the  contract.  In  the  exercise 
of  that  judgment  and  discretion  they  are  entitled  to  the  benefit  of 
whatever  margin  there  may  be  for  honest 'differences  of  opinion  in 
the  valuation  of  the  property.  But  a  deliberate  and  intentional  over- 
valuation of  the  property  is  not  permissible.  The  transfer  of  prop- 
erty known  to  be  worth  only  $5  000  to  pay  a  stock  subscription  of 
$200,000  does  not  bear  the  semblance  of  a  compliance  with  the  con- 
tract of  subscription  as  to  one  of  the  essential  terms  thereof.  The 
taking  of  property  at  a  valuation  forty  times  gi-eater  than  its  actual 
worth,  which  was  known  to  the  parties,  shows  upon  its  face  the 
absence  of  a  hona-fide  exercise  of  judgment  and  discretion  in  making 
the  valuation  and  an  intentional  non-compliance  with  the  require- 
ment that  the  property  shall  be  taken  at  its  money  value.  The  ab- 
sence of  fraudulent  motive  on  the  part  of  a  trustee  does  not  give 
validity  to  a  mere  simulated  execution  of  the  trust ;  and  an  averment 
of  fraud  in  reference  thereto  is  unnecessary.  The  parties  beneficially 
interested  in  the  trust  are  entitled  to  a  substantial  compliance  with 
its  terms.  They  are  not  bound  by  an  act  of  mere  formal  compliance 
which  really  involves  their  practical  exclusion  from  the  benefits  in- 
tended to  be  secured  to  them.  The  capital  stock  of  a  corporation 
constitutes  the  basis  of  its  credit  and  persons  dealing  with  the  cor- 
poration have  a  right  to  assume  that  the  stock  has  been  actually  paid 


264  ELYTON    LAND    CO.  V.  BIRMINGHAM    CO.  [CHAP.  III. 

in  or  that  it  may  be  reached.  The  transaction  whereby  payment 
was  attempted  to  be  made,  as  shown  by  the  averments  of  the  bill  in 
this  case,  is  not  binding  on  creditors  because  it  did  not  constitute 
such  a  payment  as  was  contemplated  by  the  terms  of  the  contract  of 
subscription,  and  was  in" effect  a  palpable  evasion  of  the  requirements 
of  the  statute.  It  is,  however,  contended  in  the  argument  for  ap- 
pellees that  the  appellant  through  its  officers  knew  of  the  history 
of  the  organization  of  the  appellee  corporation  and  of  the  mode  in 
which  the  subscriptions  to  the  stock  were  to  be  paid ;  that  in  fact  it 
was  an  active  promoter  of  the  whole  transaction  in  advance.  It  may 
be  that  such  an  unauthorized  extinguishment  of  the  subscription 
liability  may  not  be  impeached  by  one  who  was  actively  instrumental 
in  securing  the  organization  of  a  corporation  with  a  view  of  making  a 
sale  of  property  to  it  and  did  in  fact  accept  benefits  in  dealing  with 
the  corporation  with  full  knowledge  of  the  arrangement  by  which  the 
stock  was  proposed  to  be  paid  for.  Disability  to  question  a  wrongful 
transaction  usually  attaches  to  a  party  who  consented  thereto  or 
participated  therein.  First  National  Bank  v.  Gustin  M.  C.  Milling 
Co.,  6  L.R.  An.  676;  Bank  of  Fort  Madison  v.  Alden,  129  U.S.  372; 
Parsons  v,  Joseph,  supra;  2  Morawetz  on  Private  Corporations,  § 
829.  But  the  averments  of  the  bill  in  this  case  do  not  show  that 
the  appellant  participated  in  or  knew  of  the  mode  in  which  the  stock 
subscription  was  undertaken  to  be  paid.  In  the  absence  of  averments 
upon  this  subject,  it  is  not  to  be  taken  for  granted  that  the  appellant, 
in  making  the  agreement  to  convey  the  land  to  the  corporation  when 
formed,  contemplated  that  the  stock  in  the  corporation  should  not 
be  paid  for  as  the  law  directed ;  or,  that  in  accepting  the  notes  of  the 
corporation  it  had  such  knowledge  and  such  part  in  the  furtherance 
of  the  acts  connected  with  the  transfer  of  the  bond  of  title  for  the 
stock,  that  it  is  to  be  presumed  to  have  dealt  with  the  corporation  on 
the  basis  of  treating  its  capital  stock  as  fully  paid  up.  We  find  noth- 
ing in  the  averments  of  the  bill  to  preclude  appellant  from  asserting 
the  right  of  a  creditor  of  a  corporation  to  hold  stockholders  liable  for 
subscriptions  to  stock  not  really  paid  for.  The  statements  of  fact  in 
the  bill  support  the  conclusion  therein  averred,  that  the  transaction 
by  which  payment  for  the  stock  was  attempted  to  be  made  was 
merely  colorable;  in  other  words,  that  it  was  not  really  a  payment, 
but  had  only  the  outward  appearance  without  the  substance  of 
payment.  Such  being  the  case,  the  individual  defendants  are  still 
liable  on  their  stock  subscriptions,  to  the  extent  that  the  attempted 
payment  falls  short  of  a  bona-fide  compliance  with  the  terms  of  the 
contact;  and  the  allegations  as  to  excessive  overvaluation  of  the 
property  in  question  were  sufficient  under  the  rules  above  stated. 
The  Chancery  Court  erred  in  sustaining  the  demurrers. 

Reversed  and  remanded. 


CHAP.  III.]  DOUGLASS   V.  IRELAND.  265 

Note.  —  Sec,  accord,  Lester  v.  Bemis  Lumber  Co.,  71  Ark.  379 
(property  not  worth  more  than  fifty  per  cent  of  par  value  of  stock) ; 
Allen  V.  Grant,  122  Ga.  552  (not  worth  more  than  ten  per  cent); 
Hobgood  v.  Ehlen,  141  N.C.  344;  Gates  v.  Tippecatioe  Stone  Co.,  57 
Ohio  60;  Macbeth  v.  Banfield,  45  Or.  553  (worth  about  thirty  per 
cent) ;  Gogebic  Investment  Co.  v.  Iro7i  Chief  Mining  Co.,  78  Wis.  427. 
(Cf.  National  Bank  of  Merrill  v.  Illinois  Lumber  Co.,  101  Wis.  247.) 


DOUGLASS   V.   IRELAND. 

73  N.Y.  100.     1878. 

Appeal  from  judgment  of  the  General  Term  of  the  Supreme 
Court  in  the  fourth  judicial  department,  affirming  a  judgment  in 
favor  of  plaintiff,  entered  upon  a  verdict. 

This  action  was  brought  against  defendant  as  a  stockholder  of 
"The  B'ack  River  Iron  and  Mining  Company  of  New  York,"  a  cor- 
poration organized  under  the  general  manufacturing  act  (chap.  40, 
Laws  of  1848),  under  §  10  of  said  act,  to  recover  certain  debts  of 
the  corporation,  on  the  ground  that  his  stock  was  not  paid  up. 

The  complaint  alleged,  in  substance,  the  incorporation  of  said 
company  with  a  capital  stock  of  1300,000,  with  five  trustees,  one  of 
whom  was  defendant,  and  John  Horton,  another.  That  at  the  time 
of  the  incorporation  Horton  had  a  contract  for  the  purchase  of  a 
furnace  and  mining  premises,  and  one  for  the  purchase  of  standing 
timber  in  the  vicinity  of  the  furnace,  upon  which  contracts  nothing 
had  been  paid,  and  their  fair  value  did  not  exceed  $20,000;  which  con- 
tracts Horton  assigned  to  said  company,  receiving  therefor  the  whole 
of  the  capital  stock;  that  Horton  thereafter  divided  S200,000  of  said 
stock  between  himself  and  the  other  trustees,  and  defendant  well 
knowing  the  facts  received  over  S5,000  thereof;  that  said  stock  has 
never  been  paid  in  in  any  other  way,  and  that  no  certificate  as  re- 
quired by  section  11  of  said  act  has  been  made  and  recorded. 

Upon  the  trial  evidence  as  to  the  value  of  the  property  was  re- 
ceived under  objection  and  exception.  The  question  as  to  value  was, 
by  consent,  submitted  to  the  jury;  the  other  questions  were  decided 
by  the  court.  The  jury  found  the  value  of  the  property  to  be  $65,000. 
The  court  found  the  incorporation  of  the  company  with  a  capital  of 
$300,000,  in  3,000  shares,  the  issuing  and  transfer  of  its  capital  stock 
in  payment  for  the  assignment  of  the  two  contracts  substantially  as 
alleged  in  the  complaint;  also,  that  Horton,  in  pursuance  of  the 
agreement  with  the  company,  on  or  about  the  same  date,  transferred 
back  to  the  company  600  shares  of  the  capital  stock  to  be  sold  to  pay 
the  contract-price  for  the  furnace  property,  which  was  $30,000,  and 
also  transferred  back  1,000  shares  of  the  capital  stock  in  pursuance 


266  DOUGL.\SS    V.  IRELAND.  [cHAP.  III. 

of  the  same  agreement  "for  the  purpose  of  enabling  said  company 
to  raise  a  working  capital  by  the  sale  of  the  same;"  that  defendant, 
loiowing  of  and  participating  in  the  transactions,  purchased  of  the 
company  250  shares  for  the  sum  of  810,000;  that  the  value  of  the 
property  was  so  disproportioned  to  the  nominal  value  of  the  stock  as 
"to  take  the  case  out  of  a  sound  discretion  exercised  by  the  trustees," 
and  as  conclusions  of  law,  he  found  that  the  transaction  was  a  fraud 
upon  the  law  and  cannot  be  upheld  as  a  mistake  or  innocent  misun- 
derstanding of  the  value  of  the  said  property,  "that  the  capital  had 
not  been  paid  in  as  required  by  the  statute  and  that  defendant  was 
liable." 

Further  facts  appear  in  the  opinion. 

Allen,  J.  The  question  upon  which  this  court  divided  in  Boynton 
V.  Hatch,  47  N.Y.  225,  has  been  definitely  settled  by  the  later  deci- 
sions of  this  court  as  well  as  the  Commission  of  Appeals.  The  views 
I  there  expressed,  and  which  were  agreed  to  by  two  of  my  brethren, 
have  been  approved,  and  it  is  now  settled  that  to  charge  a  holder 
of  stock,  issued  upon  and  for  the  purchase  of  propertj',  individually 
for  the  debts  of  the  company,  it  is  not  enough  to  prove  that  the  prop- 
erty has  been  purchased  and  paid  for  at  an  overvaluation  through  a 
mere  mistake  or  error  of  judgment  on  the  part  of  the  trustees,  but 
that  it  must  be  shown  that  the  purchase  at  the  price  agreed  upon 
was  in  bad  faith  and  to  evade  the  statute.  The  transaction  may  be 
impeached  for  fraud,  but  not  for  error  of  judgment  or  mistaken  views 
of  the  value  of  the  property,  inasmuch  as  good  faith  and  the  exercise 
of  an  honest  judgment  is  all  that  is  required.  Schenck  v.  Andrews, 
57  N.Y.  133;  Boynton  v.  Andrews,  63  id.  93. 

The  entire  capital  stock  of  the  "Black  River  Iron  and  Mining 
Company"  was  issued  to  Horton,  one  of  the  trustees,  in  considera- 
tion of  the  assignment  to  the  company  of  two  executory  contracts; 
the  one  for  the  purchase  of  a  furnace  property  and  premises,  and  the 
other  of  certain  woodlands.  No  part  of  the  capital  stock  was  paid  in 
money,  or  otherwise  than  by  the  assignment  of  the  contracts  referred 
to,  and  no  certificate  has  been  filed  as  required  by  section  11  of 
chapter  40  of  the  Laws  of  1848  that  the  capital  stock  has  been 
paid  in. 

As  was  said  in  Boynton  v.  Hatch,  supra,  §§10  and  14  of  the  general 
law  of  1848,  supra,  and  §  2  of  chapter  33  of  the  Laws  of  1853,  supra, 
are  in  pari  materia,  and  must  be  read  together  as  parts  of  the  same 
general  law,  and  the  law  is  that  the  entire  capital  stock  of  monied 
and  manufacturing  corporations  organized  under  the  general  laws  for 
that  purpose  must  be  paid  in  money,  and  a  certificate  thereof  filed 
by  the  trustees,  as  required  by  the  law  of  1848,  and  stockholders 
remain  individually  liable  for  the  debts  of  the  company  until  these 
conditions  of  the  statute  are  complied  with,  subject  only  to  the  excep- 
tion engrafted  upon  the  prior  general  law  by  the  act  of  1853,  to  the 


CHAP.  III.]  DOUGLASS    V.  IRELAND.  267 

effect  that  the  trustees  of  such  companies  may  in  good  faith  pur- 
chase property  necessary  to  their  business,  and  issue  stock  to  the 
amount  of  the  value  thereof  in  pa\Tnent  therefor,  and  the  holdere  of 
stock  thus  issued  are  exempt  from  UabiUty  for  the  debts  of  the  cor- 
poration under  section  10  of  the  prior  law.  The  stock  issued  in  pa}^- 
mcnt  for  property  may  be  a  part  or  the  whole  of  the  capital  stock 
contemplated  by  the  articles  of  association,  or  of  new  stock  created 
for  that  purpose.   Schenck  v.  Andrews,  46  N.Y.  589. 

The  statute,  however,  only  exempts  stockholders  from  liability 
under  §  10  of  the  original  statute  in  respect  of  stock  issued  in  good 
faith,  pursuant  to  the  privilege  conferred  by  the  supplementary  act 
of  1853;  that  is,  to  the  amount  of  the  value  of  property  in  payment 
for  which  it  is  issued.  A  deliberate  and  advised  overvaluation  of 
property  thus  purchased  and  paid  for  is  a  fraud  upon  the  law,  and  a 
violation  of  the  condition  upon  which  the  exemption  of  stockholders 
from  hability  under  the  provisions  of  the  original  statute  is  made  to 
depend.  It  is  in  direct  violation  of  the  policy  as  well  as  of  the  terms 
of  the  law  which  demands  payment,  either  in  money  or  property  at 
its  value,  of  all  the  capital  stock  of  the  company,  as  a  condition  of 
immunity  to  the  stockholders  from  liability  for  debts  of  the  coi-pora- 
tion.  The  pa>mient  of  an  amount  for  property  in  excess  of  its  value 
deprives  creditors  and  the  public  of  the  security  contemplated  by 
the  statute,  and  thus  a  fraud  is  perpetrated  as  well  upon  the  law  as 
upon  creditors.  The  fraud  is  consummated  by  the  issue  of  stock  as 
full  paid  stock,  under  the  act  of  1853,  which  has  not  been  fully  paid 
for  in  value  by  the  property  for  which  it  is  issued,  and  it  does  not 
depend  upon  any  fraudulent  intent  other  than  that  which  is  evi- 
denced by  the  act  of  knowingly  issuing  stock  for  property-  to  an 
amount  in  excess  of  its  value.  All  that  is  necessary  to  establish  the 
legal  fraud  and  take  the  stock  issued  out  of  the  immunity  assured  to 
stock  honestly  issued  in  pursuance  of  the  act  of  1853  is  to  prove  two 
facts:  1st.  That  the  stock  issued  exceeded  in  amount  the  value  of 
the  property  in  exchange  for  which  it  was  issued;  and,  2d.  That  the 
trustees  deliberately,  and  with  knowledge  of  the  real  value  of  the 
property  overvalued  it,  and  paid  in  stock  for  it  an  amount  which 
they  knew  was  in  excess  of  its  actual  value.  The  value  must  be  deter- 
mined in  any  action  in  which  the  question  arises  upon  such  evidence 
as  may  be  given,  having  respect  to  the  circumstances  and  the  nature 
of  the  property,  and  the  scienter  and  guilty  action  of  the  trustees 
may  be  proved  either  directly  or  inferred  from  circumstances. 

The  complaint  does  not  specifically  in  totidem  verbis  charge  guilty 
knowledge  of  the  value  of  the  property,  and  a  fraudulent  intent 
upon  the  trustees  in  the  purchase  from  Horton;  but  it  does  aver  facts, 
which,  if  proved,  would  authorize  the  inference  of  every  fact  neces- 
sary to  sustain  the  action.  The  purchase  of  property,  the  value  of 
which  did  not  exceed  $20,000,  from  Horton,  one  of  the  trustees,  and 


268  DOUGLASS    V.  IRELAND.  [cHAP.   IH. 

the  issue  of  the  entire  capital  stock  of  the  company  to  the  amount  of 
$:i{K),()(K)  thorofor,  is  jiUoKctl,  with  an  avorinent  that  $2(M),(H)()  of  the 
stock,  llms  issued  was  (hvidcd  between  Horton  and  the  other  trustees, 
of  whom  the  defendant  was  one,  and  that  the  defendant,  well  know- 
ing the  facts,  received  upon  such  division  more  than  So,0()0  of  the 
stock  at  its  par  value,  and  still  holds  and  owns  the  same.  The  s<'ller 
of  the  property  may  well  \)V  presumed  to  know  its  value,  and  knowl- 
edge by  the  defendant  of  all  the  facts  .stated,  indudinj;  the  alleged 
value  of  the  property,  is  averred.  It  is  a  very  significant  fact,  as 
alleged,  giving  character  to  the  transaction,  that  the  seller  of  the 
property  was  wilHiig  to  an<l  did  divide  with  his  co-trustees,  the  bar- 
gainers, two-thirds  of  the  nominal  consideration  he  received  for  it. 
This  is  entirely  inconsistent  with  the  idea  that  the  sale  was  a  bona- 
fide  sale  for  the  supposed  actual  value  of  the  property,  and  without 
explanation  would  l)e  conclusive  evidence  that  the  purchase  by  the 
trustees  was  not,  in  the  e.xercise  of  an  honest  judgmetit  and  the  <li.s- 
cretion  vested  in  them,  at  the  real  or  supposed  value  of  the  thing 
purchased;  l)ut  that  under  color  of  a  compliance  with  the  provisions 
of  the  act  of  lSr>;i  the  purchase  of  the  property  and  the  issue  of  the 
stock  was  a  |)alpable  evasion  of,  and  fraud  upon,  the  law.  Th(>  corn- 
plaint  does,  in  its  substantive  facts,  make  a  case  entitling  the  |)lain- 
tiff  to  recover,  by  showing  that  the  stock  held  and  owned  by  the  de- 
fendant was  not  issued  for  profXMty  purcha-scd  in  good  faith  for  the 
business  of  the  company,  and  for  the  amount  of  its  value,  but  was 
issued  in  fraud  of  the  law,  and  of  those  who  should  afterwards  deal 
with  and  become  creditors  of  the  corporation.  The  evidence  of  the 
value  of  the  property  was,  therefore,  competent,  and  the  objection 
to  its  admission  was  properly  overruled. 

The  facts  found  by  the  judge  were  warranted  by  the  evidence,  and 
sustain  the  judgment  founded  thereon.  The  jury,  to  whom  the  ques- 
tion of  value  was  submitted,  found  the  value  of  the  property  to  be 
SOo.OOO,  and  this  was  a  liberal  estimate  upon  all  the  evidence.  The 
other  questions  of  fact,  and  the  whole  case  upon  the  law,  were  sub- 
mitted to  the  judge  as  upon  a  trial  by  the  court,  and  it  is  found  as  a 
fact  that  the  value  of  the  property  was  so'  disproportionate  to  the 
nominal  value  of  the  stock  issued  as  to  take  the  case  out  of  a  sound 
discretion  exercised  by  the  trustees,  and  as  a  conclusion  of  law  that 
the  transaction  was  a  fraud  upon  the  law,  and  not  to  be  upheld  as  a 
mistake  or  innocent  misunderstanding  of  the  value  of  the  property, 
and  that  the  capital  stock  of  the  company  had  not  been  paid  in  as 
contemplated  by  law. 

The  property  was  held  by  Horton,  under  executory  contracts  of 
purchase,  upon  which  nothing  had  been  paid;  the  purchase-money 
being  wholly  unpaid.  The  contract-price  for  the  furnace  property 
was  $30,000,  and  the  contract  was  made  out  about  a  year  before  the 
sale  to  the  company.    The  contract  for  the  woodland  had  been  en- 


CHAP.  III.]  DOUGLASS    V.  IRELAND  269 

tered  into  but  about  five  months  before  the  sale  to  the  company,  and 
was  for  $10,000,  to  be  paid  for  as  the  wood  should  be  cut.  One-third 
of  the  stock  issued  was  immediately  retransferred  to  the  company, 
to  be  sold  by  it  to  raise  a  "working  capital,"  and  enable  the  com- 
pany to  prosecute  its  business,  and  this  stock  was  sold  at  prices 
ranging  from  forty  to  sixty  cents  on  the  dollar  of  its  par  value,  the 
defendant  buying  his  at  the  lowest  price  named.  In  this  sale  of  stock 
by  the  corporation  to  the  defendant  we  have  the  estimate  of  both 
buyer  and  seller  —  that  is,  of  all  the  trustees  of  the  company  of  the 
value  of  the  property  acquired  and  owned  by  the  company,  and  rep- 
resented by  the  nominal  capital  of  $300,000.  By  that  sale  and  pur- 
chase they  fix  the  value  of  the  property  at  only  $120,000,  which  is 
nearly  double  the  value  proved  upon  the  trial  and  found  by  the 
jury.  The  defendant  cannot  complain  if  the  property  is  valued  at 
his  own  price. 

The  surrender  and  re-transfer  of  $100,000  of  the  stock  to  the  com- 
pany, without  consideration,  is  some  evidence  that  the  $300,000  was 
not  regarded  as  the  value  of  the  property,  but  that  it  was  so  treated 
with  a  view  to  absorb  the  entire  capital  stock,  and  the  sale  of  the 
stock  received  by  the  company  at  the  prices  stated  was  very  persua- 
sive evidence  of  the  opinion  entertained  by  the  trustees  of  the  value 
of  the  property  as  represented  by  the  stock.  The  learned  judge,  be- 
fore whom  the  case  was  tried,  was  clearly  right  in  his  views  of  the 
transaction. 

All  concur,  except  Church,  Ch.J.,  not  voting. 

Judgment  affirmed. 

Note.  —  See  Flour  City  National  Bank  v.  Shire,  88  N.Y.  App. 
Div.  401;  aff'd,  179  N.Y.  587. 

In  Coleman  v.  Howe,  154  111.  458,  Magruder,  J.,  said  (p.  468): 
"It  is  held,  that  stock  may  be  paid  for  in  property  as  well  as  in 
money.  2  Morawetz  on  Priv.  Corp.  §  825;  23  Am.  &  Eng.  Enc.  of 
Law,  page  794.  In  the  present  case,  the  capital  stock  was  paid  for  in 
property  alone.  Property  worth  not  more  than  $75,000.00  was  con- 
veyed in  exchange  for  capital  stock  amounting  to  $300,000.00.  There 
was  here  an  overvaluation  of  the  property  which  formed  the  con- 
sideration for  the  issue  of  the  stock.  Cases  may  arise,  where  stock 
is  issued  for  property  taken  at  an  overvaluation,  which  will  justify 
the  courts  in  compelling  the  stockholders  to  respond  to  the  creditors 
for  the  par  value  of  the  stock  less  the  actual  value  of  the  property 
taken  in  exchange  for  it.  Such  will  not  be  the  case  where  there  is 
entire  good  faith  in  making  the  valuation.  But  if  the  property  con- 
tributed is  not  valued  in  good  faith,  the  shares  of  stock  will  not  be 
fully  paid  up,  either  in  law  or  fact,  by  the  contribution  of  such  prop- 
erty. A  declaration  by  the  corporation  that  the  shares  are  paid  up 
will  not  avail  against  the  creditors  in  case  of  insolvency.   2  Mora- 


270  IIERRON    CO.  V.  SHAW.  [CH.\P.   III. 

wetz  on  Priv.  Corp.  §  825.  'The  courts  huvo  inflexibly  enforced  the 
rule,  that  payment  of  stock  suh.scriptions  is  good  a.s  afjuinst  credi- 
tors only  where  payment  has  been  made  in  money,  or  what  maybe 
fairly  considered  as  money's  worth.'  Weatherbee  v.  Bakery  35  N.J. 
Eq.  501. 

"Some  of  the  cases  hold,  that  overvaluation  will  not  render  the 
stockholder  liable  for  the  difference  l)etween  the  actual  and  accepted 
values  unlc's.s  there  is  affirmative  proof  of  fraud  aliunde.  But  other 
cases  hold  what  we  regard  :is  the  better  view,  namely,  that,  where 
property,  whose  value  is  well  known  or  can  be  easily  leamefl,  is  taken 
at  an  exaggerated  estimate,  a  strong  presumption  is  rai.sed  that  the 
valuation  is  not  in  good  faith  and  is  made  for  a  fraudulent  purpo.se. 
This  presumption  will  be  conclusive  unless  rebutted  l)y  satisfactory 
evidence  explanatory  of  the  apparent  fraud.  Where  the  overvaluation 
is  so  great  that  the  fraudulent  intent  appears  on  its  face,  and  is  not 
explained,  the  court  will  hoKl  it  to  be  fraudulent  as  matter  of  law." 


IIKHRON    CO.    r.    8H.\W. 

IGoCal.  GGS.      lOi:}. 

Shaw,  J.  This  is  an  action  against  the  several  defendants,  as 
stockholders  of  a  corporation  named  Kern  River  Mining  and  Power 
Company  to  recover  a  separate  judgment  against  each  of  them  in  a 
sum  e(iual  to  the  amount  unjxiid  upon  his  subscrijjtion  for  the  stock 
of  said  company  held  by  him,  not  exceeding,  however,  the  debt  which 
it  is  alleged  is  ilue  from  said  company  to  the  plaintiff.  The  court  be- 
low made  its  findings  and  thereupon  rendered  judgment  for  the 
(.lefendants,  from  which  plaintiff  ap]«\ds. 

The  ca.se  turns  upon  the  question  whether  or  not  the  .stock  issued 
to  and  held  by  the  several  defendants  was  fully  paid  up.  The  au- 
thorized capital  stock  of  the  Kern  River  Mining  and  Power  Company 
was  one  million  dollars,  diviiled  into  one  million  shares  of  one  dollar 
each.  Of  this,  the  defendants  held  in  the  aggregate  537,635  shares. 
The  complaint  alleges  that  they  had  paid  thereon  only  ten  cents  per 
share.  On  this  point  the  court  found,  in  effect,  that  certain  persons, 
not  named,  owned  certain  water-rights,  mining  claims,  and  mining 
machinery,  that  solely  in  consideration  of  the  transfer  thereof  by 
said  owners  to  said  company  it  issued  to  said  owners  six  hundred  and 
ninety-five  thousand  of  its  shares  as  fully  paid  nonassessable  stock, 
that  nothing  further  has  ever  been  paid  for  or  on  account  of  said 
shares,  that  the  market  value  of  said  property  did  not  then  exceed 
sixty-nine  thousand  five  hundred  dollars,  that  the  board  of  directors 
of  said  corporation  did  not  then  believe  that  the  market  value  of  said 
property  was  six  hundred  and  ninety-five  thousand  dollars,  but  did 


CHAP.  III.]  HEREON    CO.  V.  SHAW.  271 

believe  that  it  exceeded  sixty-nine  thousand  five  hundred  dollars  and 
believed  that  the  property  purchased  could  be  developed  to  a  value 
in  excess  of  six  hundred  and  ninety-five  thousand  dollars,  and  that 
said  directors  "in  issuing  said  stock  for  said  property  acted  in  good 
faith  and  in  the  honest  belief  that  said  property  could  and  would 
be  developed  so  that  the  said  property  would  have  a  market  value 
in  excess  of  $695,000."  The  stock  owned  by  the  defendants  is  a 
part  of  the  six  hundred  and  ninety-five  thousand  shares  above 
referred  to. 

AVhere  the  stock  of  a  corporation  is  issued  without  being  fully  paid 
up,  the  amount  remaining  unpaid  is,  so  far  as  its  creditors  are  con- 
cerned, deemed  to  be  money  due  to  the  corporation  from  the  stock- 
holders. Such  creditor,  if  the  corporation  becomes  insolvent,  may 
apply,  in  equity,  as  plaintiff  sought  to  do  here,  to  have  the  fund  so 
deemed  to  be  due  to  the  corporation  collected  and  applied  upon  his 
debt.  The  fact  that  the  stock  is  issued  as  fully  paid  up  does  not  estop 
or^bind  the  creditor,  and  in  such  a  case,  if  it  is  not  fully  paid  up,  the 
creditor  may  prove  the  fact  and  recover  enough  of  the  portion  that 
is  unpaid  to  satisfy  his  debt.  No  subterfuge  or  device  by  which  it  is 
made  to  appear  as  fully  paid  up  when  it  is  not,  will  enable  the  stock- 
holder to  avoid  this  liability.  Thus,  in  Vermont  M.  Co.  v.  Declez 
Granite  Co.,  135  Cal.  579  [87  Am.  St.  Rep.  143,  56  L.R.A.  728,  67 
Pac.  1057],  the  par  value  of  the  stock  was  one  hundred  thousand  dol- 
lars, and  it  had  all  been  issued  to  the  stockholders  as  fully  paid  stock 
on  payment  of  only  twenty  thousand  dollars.  This  was  done  without 
any  intent  to  defraud  creditors.  The  case  holds  that  the  balance  of 
eighty  thousand  dollars  not  paid  was  a  fund  for  the  benefit  of  credi- 
tors, which  they  might  collect  from  the  stockholders  if  the  corpora- 
tion became  insolvent.  The  court  said:  "The  question  concerns 
creditors  only.  As  to  them  the  corporation  is  presumed  to  have 
sought  credit  based  upon  its  supposed  capital  of  one  hundred  thou- 
sand dollars,  actually  paid  in  or  due  from  its  stockholders.  Public 
policy  requires  that  the  fact  whether  a  particular  creditor  did  trust 
the  corporation  on  that  basis  should  not  be  inquired  into.  The  con- 
stitution and  laws  require  commercial  corporations  to  have  a  capital 
stock,  the  amount  of  which  shall  be  stated  in  the  articles,  and  that 
this  can  be  had  of  the  corporation  only  for  value."  The  language  of 
the  constitution  referred  to  is  that  stock  can  be  issued  only  for 
"money  paid,  labor  done,  or  property  actually  received."  Art.  xii, 

§11.. 

It  is  proper  to  add  that  in  the  case  just  cited  it  was  not  claimed 
that  the  creditors,  at  the  time  of  giving  credit,  knew  that  the  stock 
had  been  issued  at  a  cash  price  less  than  the  par  value.  The  part  of 
the  quotation  declaring  that  "public  policy  requires  that  the  fact 
whether  a  particular  creditor  did  trust  the  corporation  on  that  basis 
(that  the  par  value  had  been  paid)  should  not  be  inquired  into,"  was 


272  IIERRON    CO.  V.  SHAW.  [cHAP.   III. 

not  necessary  to  the  decision  of  the  case.  The  fact  that  par  value  had 
not  been  paid  was  admitted.  The  basis  of  the  doctrine  is  that  credit 
is  p;iven  in  reliance  on  the  j)resuniption  that  full  par  value  ha.s  l)een 
received  by  the  corporation  for  the  stock  it  has  issued  as  fully  p:iid. 
We  would  not  here  say  that  this  presumption  is  in  all  cases  conclusive. 
Cases  may  arise  in  which  the  corporation,  at  the  time  of  obtaining  the 
credit,  made  full  disclosure  to  the  creditor  and  the  credit  has  been 
given  with  full  knowledge  l)y  the  creditor  of  the  ilifference  between 
the  par  value  of  the  stock  and  the  value  of  the  property  received  for 
it.  If  such  facts  are  properly  pleaded  and  proved  by  the  stockholtler, 
we  do  not  mean  to  declare  that  it  might  not  be  a  complete  defense 
to  a  suit  by  the  creditor  to  recover  such  difference.  Nothing  of  the 
sort  appears  here,  either  in  the  pleadings  or  fnulings,  and  it  is  un- 
necessary to  consider  the  question. 

The  Vermont  Marble  Company  case  establishes  the  rule  in  this 
state  as  to  creditor's  rights,  where  the  stock  is  an  original  issue  and 
is  i.ssued  as  i)aid  up  at  a  ]mvr  substantially  less  than  the  par  value, 
where  the  price  is  paid  in  money.  Where  it  is  issued  irt  exchang(>  for 
labor,  services,  or  specific  property,  the  rule,  so  far  as  other  stock- 
holders are  concerned,  seems  to  be  that  the  transaction  is  conclusive 
unless  it  is  fraudulent  as  to  them  in  purpose  or  in  effect.  With  regani 
to  creditors  we  know  of  no  d(>cision  in  this  state.  In  some  jurisdic- 
tions, where  the  value  of  the  property  taken  in  exchange  is  less  than 
the  par  value  of  the  stock,  it  appears  to  be  the  rule  that  creditors  can 
enforce  their  claims  against  stockholders  to  the  extent  of  the  difTer- 
ence  between  the  par  value  of  the  stock  and  the  actual  market  value 
of  the  pro{)erty,  the  value  being  taken  as  of  the  time  of  the  exchange, 
and  the  absence  of  fraud  being  regarded  as  immaterial.  Van  Cleave 
v.  Bcrkey,  143  Mo.  109  [42  L.H.A.  503,  44  S.W.  743);  Cole  v.  Adorns, 
19  Tex.  Civ.  App.  .')12  [49  S.W.  1().')2|;  Lihhij  v.  Tobnj,  82  Me.  404 
[19  Atl.  904);  W'etherbcc  v.  Baker,  35  N.J.  Eq.  501.  In  other  states  if 
the  exchange  is  made  in  good  faith,  both  parties  believing  that  the 
property  is  really  worth  a.s  much  as  the  par  value  of  the  stock  taken 
in  exchange  for  it,  the  transaction  is  valid  as  against  the  creditors; 
but  if  there  is  fraud,  or  bad  faith,  or  if  the  property  is  taken  at  a 
valuation  known  or  believed  by  the  parties  to  be  in  excess  of  its  real 
market  value,  the  creditors  may  impeach  the  transaction  and  obtain 
the  benefit  of  the  difference  between  the  par  value  of  the  stock  and 
the  reasonable  value  of  the  property  at  the  time  of  the  exchange. 
Where  there  is  no  fraud  or  bad  faith  but  the  property  is  laiowingly 
overvalued,  it  is  intimated  in  some  of  the  cases  that  the  stockholders 
would  be  liable  only  for  the  difference  between  the  actual  value  of 
the  property  as  known  to  them  and  the  par  value  of  the  stock. 
Douglass  v.  Ireland,  73  N.Y.  100;  National  Tube  W.  Co.  v.  Gilfillan, 
124  N.Y.  302  [26  N.E.  5SS];  Clayton  v.  Ore  Knohe,  etc.,  Co.,  109  N.C. 
389  [14  S.E.  36]:  Elyto7i  Land  Co.  v.  Birmingham  W.  &  E.  Co.,  92 


CHAP.  III.]  HEREON    CO.  V.  SHAW.  273 

Ala.  407  [25  Am.  St.  Rep.  465,  12  L.R.A.  307,  9  South.  12^]-,  Sprague 
V.  National  Bank,  172  111.  166  [64  Am.  St.  Rep.  17,  42  L.R.A. 
606,  50  N.E.  19];  Young  v.  Erie  I.  Co.,  65  Mich.  122  [31  N.W.  814]; 
Medler  v.  Albuquerque  Hotel  Co.,  6  N.  Mex.  345  [28  Pac.  551];  Allen 
V.  Grant,  122  Ga.  557  [50  S.E.  494];  Kellij  v.  Clark,  21  Mont.  291  [69 
Am.  St.  Rep.  668,  42  L.R.A.  621,  53  Pac.  959];  Gilkie  &  Anson  Co. 
V.  Dawson  Town  &  Gas  Co.,  46  Neb.  333  [64  N.W.  978,  1097];  Os- 
good V.  King,  42  Iowa,  478. 

There  are  also  cases  where  the  fact  of  a  known  overvaluation  was 
jiot  established  or  conceded  and  the  court  in  discussing  the  effect  of 
evidence  of  mere  overvaluation  as  proof  of  fraud,  declares  that  if 
the  real  value  is  substantial  the  overvaluation  is  not  conclusive 
proof  of  fraud  and  does  not  overthrow  a  finding  that  there  was  no 
fraud  or  fraudulent  intent.  These  cases  do  not  affect  the  rule  to  be 
applied  where  the  parties  were  at  the  time  aware  of  the  overvalua- 
tion. Parties  may  honestly  mistake  the  value  of  property  and  if  they 
do  so,  proof  at  the  trial  that  they  were  mistaken,  without  proof, 
direct  or  circumstantial,  that  it  was  not  an  innocent  mistake,  will 
not  render  the  stockholders  liable  under  the  rule  we  are  now  con- 
sidering. 

There  are  other  decisions  in  some  of  the  states  holding  that  a 
creditor  cannot  rely  on  the  issued  capital  stock  of  a  corporation  as 
evidence  of  its  solvency,  but  must  inquire  as  to  its  assets  the  same  as 
when  he  is  giving  credit  to  a  natural  person  and,  therefore,  that  an 
excliange  of  paid-up  stock  at  less  than  par  value  for  property  does 
not  make  the  stockholder  liable  for  the  difference,  unless  it  is  done 
to  defraud  creditors.  We  think  the  case  of  Vermont  Marble  Co.  v. 
Declez  Granite  Co.,  135  Cal.  579  [87  Am.  St.  Rep.  143,  56  L.R.A.  728, 
67  Pac.  1057],  establishes  the  opposite  rule  in  this  state  and  hence  we 
do  not  discuss  those  decisions. 

On  principle,  we  perceive  no  essential  difference  between  an  ex- 
change of  full  paid  stock  for  property  at  a  known  overvaluation  and 
a  sale  of  such  stock  for  money  at  less  than  par  value,  such  as  was 
considered  in  Vermont  M.  Co.  v.  Declez.  If,  for  example,  the  parties 
know  or  believe  that  certain  property  is  actually  worth  only  twenty 
thousand  dollars,  but  nevertheless  agree  to  exchange  it  for  corporate 
stock  of  the  par  value  of  one  hundred  thousand  dollars,  to  be  issued 
and  considered  as  fully  paid  up,  in  what  respect  is  the  transaction 
less  injurious  to  creditors  than  in  a  case  of  sale  of  full  paid  stock  of 
the  par  value  of  one  hundred  thousand  dollars  for  twenty  thousand 
dollars  in  lawful  money?  Manifestly  they  are  equally  injurious  and 
on  principle  each  should  be  equally  susceptible  to  impeachment  in 
a  court  of  equity  for  the  benefit  of  the  creditors.  This  being  so,  it  is 
decisive  of  the  case  at  bar.  The  parties  here  believed  that  the  prop- 
erty was  worth  less  than  six  hundred  and  ninety-five  thousand  dol- 
lars, by  which  we  understand  a  substantial  amount  less,  yet  they 


274  HERRON    CO.  V.  SHAW,  [('HAP.   III. 


I 


exchanged  it  for  six  h  unci  ret!  and  ninety-five  thousand  shares  of 
paid-up  capital  stock  at  one  dollar  a  share.  The  numerous  ca.scs  last 
cited  hold  that  this  is,  as  to  the  creditors,  constructively  fraudulent, 
that  is,  it  is  an  evasion  of  the  law  which  the  law  visits  with  the  same 
consequences  as  if  it  were  intentionally  fraudulent. 

The  further  fact  found  by  the  court  that  the  directors  acted  in 
good  faith  and  honestly  believed  that  the  property  could  and  would 
bo  developed  so  that  its  market  value  would  eventually  exceed  six 
hundred  and  ninety-five  thou.sand  dollars,  does  not  relieve  or  excuse 
the  stockholdei-s  from  such  liability.  .\s  appellant's  counsel  well 
says,  to  hold  that  it  would  have  that  effect  would  l)e  to  sanction  an 
arrangement  to  "throw  the  risk  of  the  venture  from  the  shouldei-s  of 
the  stockholders  to  those  of  the  creditors."  It  is  the  value  of  the 
property  in  the  condition  it  is  in  at  the  time  of  the  exchange,  the 
value  as  known  to  the  parties  and  as  they  honestly  Ix'lieve  it  to  l>e, 
that  determines  the  liai)ility,  at  least  where  there  is  no  sub.sequent 
increa.se  in  value  nor  any  intentional  fraud.  The  parties  may  believe 
that  the  i)ro|X'rty  will  eventually  rise  to  a  value  faa  above  that  at 
which  it  is  exchanged,  and  they  may  willingly  accept  the  hazard  in 
view  of  the  expected  gain,  but  they  have  no  right  to  demand  that 
the  creditor  shall  share  the  risk  with  them,  in  effect  become  then- 
partner  with  no  share  in  the})rofits,  and  lose  his  recourse  on  them  if 
their  speculation  proves  a  bad  one.  The  cii.se  cannot  be  distinguished 
in  principle  from  Vermont  M.  Co.  v,  Dcclez  Granite  Co.,  where  stock 
of  the  par  value  of  one  hundred  thousand  dollars  was  sold  for  less 
than  i)ar  in  money.  The  parties  may  believe,  and  doubtless  fre- 
quently do  believe,  that  the  money  can  be  invested  in  property  which 
can  be  developed  so  as  to  make  it  worth  the  par  value  of  the  stock. 
Whether  the  stock  is  invested  in  the  property  by  direct  exchange,  or 
by  first  .selling  it  for  money  and  then  buying  the  property  from  third 
pei"sons  therewith,  the  effect  is  the  same  and  the  same  principle 
should  control.  The  creditor  is  presumed  to  rely  on  the  fact  that  the 
company  has  received,  or  will  receive,  full  par  value  for  the  stock 
issued.  He  is  not  a  partner  with  the  stockhokler,  he  cannot  partici- 
pate in  the  profits  of  their  venture  and  he  should  not  be  required  to 
assume  their  burden  or  hazard. 

We  have  alluded  to  the  rule  that  as  to  other  stockholders  the 
transaction  cannot  be  impeached  except  for  fraud  or  mistake.  Gar- 
retson  v.  Pacific  C.  Co.,  146  Cal.  184  [79  Pac.  838],  is  an  example  of 
this  class  of  cases.  It  is  obvious  that  passages  from  the  opinions  in 
cases  involving  this  rule  are  not  applicable  to  suits  by  a  creditor  and 
are  of  no  value  in  the  decision  of  this  case. 

Respondent  cites  the  decision  of  the  United  States  Circuit  Court 
in  the  South  Mountain  C.  M.  Co.  case  (7  Sawy.  30  [5  Fed.  403];  8 
Sawy.  336  [14  Fed.  347]),  to  the  effect  that  the  rule  as  stated  in 
Vermont  M.  Co.  v.  Declez  Granite  Co.  does  not  apply  to  corporations 


CHAP.  III.]  HEREON    CO.  V.  SHAW.  275 

engaged  in  mining.  The  South  Mountain  case  is  based  on  the  as- 
sumed practice  of  mining  companies  to  issue  full  paid  stock  in  ex- 
change for  mining  claims,  wholly  undeveloped  and  of  a  value  un- 
known and  prospective  only,  at  an  estimated  value  far  above  their 
actual  or  known  value  and  fixed  by  mere  guess  as  to  their  probable 
value  when  developed.  This  practice,  it  is  said  is  so  universal  and  so 
well  known  that  no  creditor  can  be  supposed  to  have  been  ignorant 
of  it  or  to  have  given  credit  on  the  belief  that  the  issued  stock  rep- 
resented the  actual  or  real  value  of  the  assets,  and  that  creditors  of 
such  companies  must  be  presumed  to  have  looked  to  and  relied  upon 
the  property  of  the  company  only,  in  giving  it  credit.  In  the  Vermont 
Company  case  the  court  said:  "We  are  not  inclined  to  extend  the 
doctrine  of  In  re  South  Mountain  Min.  Co.,  7  Sawy.  30  [5  Fed.  403], 
to  this  case,  even  if  we  were  prepared  to  indorse  the  principle  there 
announced.  This  is  not  such  a  mining  corporation  as  is  there  de- 
scribed." This  remark  is  applicable  here.  The  name  of  the  company 
is  Kern  River  Mining  and  Power  Company.  The  property  trans- 
ferred by  the  stock  is  described  as  "certain  water-rights,  mining 
claims  and  mining  machinery."  There  is  nothing  in  the  record  to 
show  whether  the  company  is  or  was  engaged  in  or  intended  to  en- 
gage in  mining  for  precious  metals,  or  whether  it  was  intending  to 
engage  in  using  water  to  develop  power.  If  the  rule  of  the  South 
Mountain  case  is  to  be  followed  by  this  court  in  cases  to  which  it  is 
properly  applicable,  we  think  it  should  be  done  only  where  it  ap- 
pears from  the  record  that  the  company  concerned  was  a  mining 
corporation  of  the  class  described  in  that  case  and  that  the  property 
exchanged  was  of  the  kind  there  referred  to. 

We  deem  it  proper  to  add  that  it  is  not  expressly  stated  anywhere 
in  the  record  that  the  defendants  were  parties  to  the  exchange  of  the 
property  for  the  stock  mentioned,  or  that  they  were  aware  of  the 
overvaluation  when  they  bought  the  stock.  The  argument  of  both 
parties  is  made  upon  the  theory  that  they  either  knew  of  the  over- 
valuation or  that  they  were  chargeable  to  the  same  extent  as  if  they 
did  know.  We  have  therefore  not  considered  the  rule  applicable  to  an 
innocent  purchaser  of  stock,  or  to  a  case  where  the  directors  of  the 
corporation  knew  or  believed  that  the  property  was  worth  less  than 
the  par  value  of  the  stock  exchanged  for  it  but  the  purchaser  of  the 
stock  honestly  believed  that  the  values  of  the  stock  and  of  the  prop- 
erty were  equal. 

The  judgment  is  reversed. 

Note.  —  See,  accord,  Lea  v.  Iron  Belt  Mfg.  Co.,  147  Ala.  421. 


276  GILLETT   V.  CHICAGO   TITLE    &    TRUST    CO.         (ciIAP.   III. 

GILLETT  I'.   CHICAGO  TITLE  &   TRUST  CO. 

230  III.  373.     1907. 

Mr.  Ju.stice  Scott.  It  is  contended  by  appellants  that  in  accept- 
ing certain  property  in  payment  of  MacKaye's  subscription  to  the 
capital  stock  of  the  Columbian  Celebration  Company  to  the  amount 
of  S1,900.0(K),  the  directors  fixed  that  value  upon  the  projM^rty  offered 
in  the  fair  and  honest  e.xerci.se  of  their  judgment  ;us  to  its  worth,  and 
that  the  stock  must  therefore  Iw  regarded  as  fully  paid  and  non-as- 
sessable, even  if  the  directors  erred  in  their  judpnent  as  to  its  value. 

When  the  board  of  directors  met  on  May  1(),  1892,  the  principal 
asset  of  the  corporation  was  MacKaye's  sub.scription  for  stock  to  the 
amount  above  mentioned.  The  law  required  the  directors,  in  col- 
lecting that  sub.scription,  to  obtain  from  MacKaye  "money  or 
money's  worth"  to  the  full  amount  of  the  subscription.  Coleman  v. 
Howe,  154  111.  4r)S;  Garden  City  Sand  Co.  v.  Crematory  Co.,  205  id.  42. 
"Money  or  money's  worth"  means  cash  or  its  e(iuivalent.  If  the 
directors  saw  fit  to  accept  proi)erty  in  lieu  of  cash  they  could  only 
take  it  at  its  fair  cash  market  value,  if  it  was  pro{x^rty  which  had  an 
luscertainable  market  value.  If  it  had  no  ascertainable  market  value, 
then  the  only  price  at  which  the  directors  could  purchase  it  was 
such  price  as  could  be  realized  by  sellinn  '^  *"  others  for  cash. 

On  the  date  last  mentioned  the  tlirectors  of  the  corporation  entered 
into  a  contract  with  MacKaye,  by  which,  in  satisfaction  of  his  lia- 
bility on  his  .sul)scription,  MacKaye  transferred  to  the  corporation 
the  sole  and  exclusive  right  to  u.se  eleven  alleged  new,  useful  and 
valuable  improvements  in  scenic  art;  also  the  right  to  use  and  pro- 
duce a  "spectatorio"  or  play  entitled  "The  Great  Discovery,"  of 
which  it  is  said  MacKaye  was  the  author,  in  the  States  of  Illinois, 
Indiana,  Michigan,  Miime.sota,  Iowa  and  Mi.ssouri  for  a  period  of 
fifteen  years,  burdened  with  a  ten  per  cent  royalty  reserved  to  Mac- 
Kaye. At  the  time  the  contract  was  made  no  application  had  been 
made  for  a  patent  on  any  of  the  inventions.  The  de.scription  of  the 
inventions  contained  in  the  contract  is  ver\'  general  in  character. 
With  one  or  two  exceptions  the  descriptions  are  not  such  as  would 
enable  the  reader  to  identify  the  invention.  They  con.sist  usually  of 
the  name  given  by  MacKaye  to  the  invention,  followed  by  a  state- 
ment of  the  object  of  the  invention.  The  play,  "The  Great  Dis- 
covery," had  not  been  written.  At  the  time  MacKaye's  subscrip- 
tion was  so  satisfied  the  directors  were  MacKaye,  Buttcrworth, 
Crosley,  White  and  Edmonds.  Crosley  did  not  attend  the  meeting 
of  May  16,  1892,  and  MacKaye  did  not  vote  upon  the  proposition 
in  reference  to  the  payment  of  his  subscription  by  the  tran.sfer  of 
the  rights  above  enumerated.  Those  who  voted  in  favor  of  accept- 
ing the  proposition  were  Butterworth,  White  and  Edmonds.   But- 


CHAP.  III.)         GILLETT    V.   CHICAGO   TITLE    &    TRUST   CO.  277 

terworth  was  a  co-promoter  with  MacKaye,  and  a  tew  daj's  later  in 
accordance  witli  an  arrangement  effected  prior  to  May  16,  1892  le- 
:rd  from  MacKaye  a  considerable  portion  of  the  ^^^^^^^ 
for  bv  the  latter.   Edmonds  was  an  assistant  to  Butteiwortn,  as 
secretary  of  the  World's  Columbian  Exposition.  White  was  a  clerk 
in  [he  Siploy  of  MacKaye  and  Butterworth,  doing  clencal  work  m 
coi  nectZ  with  the  promotion  of  MacKaye's  scheme.  So  far  as  the 
transaction  of  business  affecting  the  corporation  was  conc^ned, 
Wh"te  and  Edmonds  were  wholly  dominated  by  MacKaye  and  But- 
terworth   Edmonds  testified  that  he  "never  formed  any  intelligent 
conc°u  ion  as  to  the  value  of  the  patents,"  referring  to    he  inven- 
tons  the  right  to  use  which  was  transferred  by  the  contract;  and 
further:  "I  did  not  consider  it  [the  MacKaye  proposition  which  was 
accepted!  in  the  sense  that  I  was  going  to  put  a  lot  of  money  m  it 
mS  but  I  honestly  believed  on  May  16,  1892,  that  the  resolution 
wStor  the  best  interests  of  the  company  and  was  a  good  proposi- 
tion for  it."  White  says:  "I  don't  remember  making  any  inquiry, 
as  a  member  of  the  board  of  directors  or  an  officer,  mto  the  merits  of 

*ir  "Zbt  be  agreed  that  the  rights  transferred  to  the  cor- 
poration by  the  contract  were  without  market  value    It  was  then 
the  duty  0  the  directors,  before  accepting  the  rights  transferred  by 
hs  contract  in  payment  of  this  large  -b-ription   to  ascert™ 
whether  those  rights  had  value,  and  if  so,  what  the  value  «as^  -The 
natural  and  reasonable  method  to  be  pursued  m  determimng  that 
nuestion  would  have  been  to  have  applied  to  men  not  interested  m 
?he  promotion  of  MacKaye's  scheme,  who  were  of  wide  experience  m 
he  production  of  great  spectacular  plays,  for  their  views  in  refe  - 
ence  to  the  worth  of  the  rights  which  MacKaye  proposed  to  transfei. 
No  such  investigation  was  made.  No  other  steps  were  taken  *»  ascer- 
tain the  value  of  the  rights  MacKaye  proposed  to  transfer,  such  as 
™ull  have  been  taken  by  directors  seeking  *«  df  ^^ff J^ ;"  ' 
drly  with  the  assets  of  the  corporation.  It  was  the  duty  of  these  li- 
reetors  to  ascertain  the  value  of  these  rights  precisely  as  they  would 
have  done  had  they  intended  to  invest  money  m  such  rights  them- 
selves and  that  they  did  not  do.   It  is  no  doubt  true  that  if  the  d  - 
ectors, Tn  the  fair,  honest  and  intelligent  exercise  of  theinudgmen 
make  a  mistake  and  accept  property  at  a  price  gi-eater  than  its  rea 
value,  such  can  not  be  regarded  as  a  fraudulent  overvaluation  of 
the  property;  but  that  rule  only  applies  where  the  transaction  con- 
stitutes a  valid  contract  of  bargain  and  sale,  made  m  good  faith  on 
the  part  of  the  directors  and  in  the  intelligent  exercise  of  fair  an<l 
honest  judgment  on  their  part.  There  was  no  such  transaction  here 
The  transfer  to  the  corporation  was  a  mere  sham.  It  was,  in  tact,  a 
sale  by  MacKaye  to  MacKaye,  and  was,  in  law,  a  fraud    it  was  a 
transfer  of  the  right  to  use  for  a  period  of  years,  in  a  limited  territory , 


278  BEE   V.  HEPPENHEIMER.  (cHAP.  Ill, 

an  unwritten  play  and  inventions  not  perfectetl  and  not  accurately 
(lescril)ed.  The  writiii'!;  of  the  play  and  the  perfecting  of  the  inven- 
tions depeniled  upon  MacKaye  moving  in  the  matter  in  the  future, 
and  he  is  conceded  to  have  Ix'cn  practically  without  proixrty  other 
than  these  inventions  and  this  play.  The  play,  in  fact,  never  was 
wrkten.  Successful  applications  were  made,  after  the  execution  of 
the  contract,  for  patents  upon  all  the  inventions  except  one.  As  to 
that  one  the  aj)i)lication  was  denied.  The  evidence  leads  irresistibly 
to  the  conclusion  that  hail  the  directors  on  May  IG,  1802,  after  the 
si^niiif?  of  this  contract,  sought  to  have  disposed  of  the  rights  therehy 
transferred,  they  coulil  not,  in  the  world  of  the  tlrama  or  elsewhere, 
have  obtaintnl  for  the  rights  transferred  to  the  company  by  that 
contract  anything  of  value  whatever.  It  follows  that  MacKaye's 
stock  subscription  remaineil  wholly  unpaid. 

Note.  —  Sec,  accord,  State  Trud  Co.  v.  Turner,  1 1 1  Iowa,  GG4, 
G71;  Hastings  Malting  Co.  v.  Iron  Range  Co.,  C5  Minn.  28,  34.  In 
the  latter  ca.se,  the  court  said:  "If  he  knew  or  ought  to  have  known 
that  he  was  paying  for  his  stock  in  pro|)erty  at  a  material  overvalua- 
tion, it  will  not  be  sufficient  for  him  to  .show,  as  a  mental  operation, 
that  he  did  not  intend  to  defraud  anv  one." 


SEE  V.   HEPPENHEIMER. 

09  N.J.  Eq.  30.     llMJo. 

Pitney,  V.C.  The  questions  involved  in  this  cause  arc  important, 
both  on  account  of  their  intrinsic  character  and  of  the  amount  — 
over  S200,()00  —  involved.  They  have  been  argued  on  each  side  by 
distinguished  counsc^l.  in  the  most  able,  thorough,  exhau.stive  and 
lucid  manner,  so  that  it  is  but  .simple  truth  to  say  that  if  the  court,  in 
dealing  with  the  case,  shall  fall  into  any  error,  it  will  not  be  due  in  the 
least  degree  to  a  lack  of  illuminating  instruction  from  counsel. 

The  suit  is  brought  by  the  creditors,  represented  by  the  receiver  in 
insolvency,  of  the  roluml)ia  Straw  Paper  Company,  a  coqwration 
organized  in  this  state  in  the  month  of  December,  181)2,  and  thrown 
into  insolvency  in  May,  1895. 

The  object  of  the  suit  is  to  hold  responsible  certain  of  the  stock- 
holders of  the  company  for  the  debts  of  the  creditors. 

The  ground  on  which  the  defendants  arc  sought  to  be  held  is  that 
the  stock  held  bj'  them  was  issued  without  any  value  paid  for  it, 
and  hence  that  they  occupy  the  position  of  subscribers  to  the  capital 
stock  who  have  not  paid  their  subscriptions,  and  therefore  are  liable 
to  the  creditors  both  at  common  law  and  under  our  statute. 

First.    At  common  law,  on  the  familiar  ground  that  unpaid  sub- 


CHAP.  III.]  SEE    V.  HEPPENHEIMER.  279 

scriptions  to  capital  stock  form  a  trust  fund  for  the  benefit  of  cred- 
itors. 

Second.  And  under  the  fifth  section  of  the  act  concerning  corpora- 
tions of  1875  (1  Gen.  Stat.  p.  910),  which  declares  that  "where  the 
whole  capital  of  a  corporation  shall  not  have  been  paid  in,  and  the 
capital  paid  shall  be  insufficient  to  satisfy  the  claims  of  its  creditors, 
each  stockholder  shall  be  bound  to  pay  on  each  share  held  by  him 
the  sum  necessary  to  complete  the  amount  of  such  share  as  fixed  by 
the  charter  of  the  company,  or  such  proportion  of  that  sum  as  shall 
be  required  to  satisfy  the  debts  of  the  company." 

The  charge  of  the  complainant  is  that  the  stock  so  issued  was  not 
issued  for  cash,  but  for  property  purchased  at  an  overvaluation, 
which  overvaluation  was  arrived  at  by  including  in  that  valuation 
matters  not  in  any  sense  property,  and  that  this  was  done  consciously 
and  fraudulently. 

The  defences  of  the  defendants  are  not  all  precisely  similar.  Those 
represented  by  Mr.  Corbin  claim  to  stand  on  a  different  footing  from 
the  others  —  that  is,  to  have  a  defence  somewhat  peculiar  to  them- 
selves —  and  they  will  be  so  considered. 

The  stress  of  the  case  is  found  in  the  defence  set  up  by  the  de- 
fendants represented  by  Messrs.  Lindabury  and  Marshall. 

Counsel  for  those  defendants,  whom  I  shall  hereafter  call  "the  de- 
fendants," do  not  contend  that  the  stock  held  by  their  clients  was 
issued  for  cash  paid,  as  required  by  the  fifty-fourth  section  of  the 
Corporation  Act  (1  Gen.  Stat.  p.  917),  but  they  claim  that  it  was 
issued  for  property  purchased  at  the  value  thereof,  under  the  fifty- 
fifth  section  of  that  act,  as  amended  by  the  act  of  May  9th,  1889. 
1  Gen.  Stat.  p.  952,  §  213.  For  convenience,  I  insert  here  the  language 
of  the  two  sections  covering  this  subject:  — 

"54.  That  nothing  but  money  shall  be  considered  as  payment  of 
any  part  of  the  capital  stock  of  any  company  organized  under  this 
act,  except  as  hereinafter  pro\dded  for  the  purchase  of  property,  and 
no  loan  of  money  shall  be  made  to  a  stockholder  or  officer  therein;  and 
if  any  such  loan  shall  be  made  to  a  stockholder  or  officer  of  the  com- 
pany, the  officers  who  shall  make  it,  or  who  shall  assent  thereto, 
shall  be  jointly  and  severally  liable,  to  the  extent  of  such  loan  and 
interest,  for  all  the  debts  of  the  company  contracted  before  the  re- 
payment of  the  sum  so  loaned." 

"213.  That  the  directors  of  any  company  incorporated  under  this 
act  may  purchase  mines,  manufactories  or  other  property  necessary 
for  their  business,  or  the  stock  of  any  company  or  companies  owning, 
mining,  manufacturing  or  producing  materials  or  other  property 
necessary  for  their  business,  and  issue  stock  to  the  amount  of  the 
value  thereof  in  payment  therefor,  and  the  stock  so  issued  shall  be 
declared  and  be  taken  to  be  full  paid  stock  and  not  liable  to  any 
further  call,  neither  shall  the  holder  thereof  be  hable  for  any  further 


280  SEE    V.  HEPPEXHEIMER.  {(HAP.  III. 

payments  under  any  of  the  provisions  of  this  act;  and  said  8tock 
sli:ill  have  Ic^ilily  staini^'d  upon  the  faee  thereof  'issueil  for  profwrty 
purchased,'  and  in  all  statements  and  reports  (jf  the  eonipany  to  Ix* 
puhHshed  this  stock  shall  not  Ik;  stattnl  or  repoited  as  hein^  issued 
for  ciush  paid  into  the  company,  but  shall  \)e  reported  in  this  resfx*ct 
accord  inn  to  the  fact." 

These  defendants  assert  that  the  corporation,  after  Iwinp  duly 
organized,  purdiased  from  one  Kmanuel  Stein,  of  Chicago,  thirty- 
nine  flifTerent  mills  or  plants,  for  the  manufacture  of  straw  paper, 
located  in  several  of  the  western  states,  at  the  round  sum  and  price 
of  S.'),(KM),(KH),  for  which  it  issued  to  Stein  $1,(KK),(KK)  of  its  bonds, 
secured  hy  a  fii-st  mortgage  on  the  properties  in  (juestion,  and  S1,(KK),- 
LHK)  of  its  preferred  stock,  aiul  $;i.(X)(),(XX)  of  its  common  stock,  anil 
that  their  several  holdings  of  stock  are  parcels  of  the  stock  so  issued. 

To  this  the  creditors  reply  that  there  w;us  no  such  actual  i>urchase 
and  sale  from  Stein  to  tlu'  corporation;  that  Stein  was  a  mere  fig- 
ure-heatl  for  himself  and  one  Beard  and  the  defendant  Samuel 
Untermeyer,  and  that  Stein  held  for  himself  and  the  two  just  nameil 
options  from  the  owners  of  the  thirty-nine  mills  to  [jurchase  their 
mills  at  an  aggregate  price  state<l  at  S2.2.')(),(HK).  hut  actually  footing 
up  at  less  than  S"-,200,(XX),  and  that  the  mills  wen*  paitl  for  on  that 
basis,  the  owners  receiving  therefor  in  round  figures,  and  with  cer- 
tain variations  not  now  necessary  to  l>e  given  in  detail.  $7.'>0,rKX)  in 
cash,  SToO.tXK)  in  preferred  stock  of  the  company  and  S1,.')(M ).()()()  of 
the  common  stock  at  fifty  cents  on  the  dollar,  which  would  make 
S^i,(XK).()00.  In  actually  working  out  the  scheme,  however,  it  is 
asserted  and  proved  that  the  amount  actually  paid,  counting  the 
coimnon  stock  at  par.  was  less  than  S2.S00,000.  and  that  the  balance 
of  the  stock  of  over  $1,(KH),0(X)  was  divided  equally  between  Stein, 
Beard  and  the  defendant  Samuel  Untermeyer,  without  payment 
therefor. 

Further,  that  the  cash  so  paid  was  raised  by  selling  the  mortgage 
bout  Is  at  par,  with  two  shares  of  preferred  stock  and  four  shares  of 
common  stock  added  as  a  bonus  to  each  S1,0()0  bond. 

The  clients  of  Messrs.  Lindabur>'  and  Marshall,  as  I  interpret 
their  argument,  do  not  seriously  dispute  the  accuracy  of  the  state- 
ment just  matle.  but  they  contend  that  the  valuation  of  $.5.0(X),000 
was  arrived  at  after  a  careful  calculation  of  the  quantity  of  paper, 
viz.,  ninety  thousand  tons,  which  the  thirty-nine  mills  were  able  to 
produce  per  year,  and  the  greatly  increased  price  which  would  be 
realized  from  its  sale  by  the  suppression  of  the  competition  thereto- 
fore practiced  between  the  several  mill-owners.  They  say  that  the 
cost  of  producing  the  paper  was  less  than  S20  per  ton  and  that  its 
selling  price  had  been  reduced  by  competition  to  a  trifle  over  S20  per 
ton,  but  that  bj'  a  concentration  of  the  ownership  of  the  mills  they 
found  and  believed  that  the  price  could  be  easily  maintained  and  the 


CHAP.  III.]  SEE    V.  HEPPENHEIMER.  281 

whole  product  of  ninety  thousand  tons  a  year  could  be  marketed  at 
about  $28  per  ton,  which  would  pay  interest  on  the  bonded  debt, 
with  one  per  centum  per  year  for  a  sinking  fund,  and  a  dividend  at 
eight  per  cent,  per  year  on  the  preferred  stock  of  $1,000,000,  and 
leave  a  very  large  dividend,  at  least  fifteen  per  cent,  each  year,  for 
the  common  stock  of  the  amount  mentioned,  $3,000,000. 

In  short,  they  estimated  the  value  of  the  property  upon  a  capi- 
talization of  the  profits  expected  to  be  made  out  of  its  use  by  control 
of  the  price  of  its  product.  So  that,  taking  the  aspect  of  the  case  most 
favorable  to  the  defendants,  the  question  which  arises  out  of  its 
ultimate  analysis  is,  whether,  under  our  statute  above  cited,  it  is 
competent  and  lawful  to  make  up  the  valuation  of  the  visible  prop- 
erty to  be  purchased  for  stock  issued,  by  adding  to  the  actual  market 
value,  or  cost  of  its  reproduction,  a  sum  of  money  ascertained  by  the 
capitalization  of  the  annual  profits  expected  to  be  realized  from  a 
favorable  marketing  of  the  product  of  the  company  by  a  suppression 
of  competition.  Or,  as  I  believe  I  asked  counsel  in  argument,  can 
prospective  profits,  however  promising,  be  considered  as  property, 
as  that  word  is  used  in  the  statute  above  quoted?    ■ 

I  repeat  its  language,  "the  directors  of  any  company  incorporated 
under  this  act  may  purchase  mines,  manufactories  or  other  property 
necessary  for  their  business  .  .  .  and  issue  stock  to  the  amount  of  the 
value  thereof  in  payment  therefor." 

There  the  word  "property"  must  evidently  be  construed  by  its 
context  which  refers  to  something  visible  and  tangible,  and  neces- 
sary for  the  business,  and  the  amount  of  stock  to  be  issued  therefor 
is  limited  to  the  value  thereof,  that  is,  to  the  value  of  that  property. 

If  the  question  above  put  be  the  true  one  it  seems  to  me  that  it 
answers  itself,  and  adversely  to  the  contention  of  counsel  of  de- 
fendants. 

But  the  defendants  attempt  to  sustain  their  valuation  in  question 
on  two  grounds : 

First.  That  the  valuation  was  made  in  perfectly  good  faith  and 
without  any  fraudulent  intent;  and  that  fraud  is,  by  the  rule  to  be 
applied  here,  a  necessary  ingredient  of  overvaluation;  and 

Second.  That  the  increased  valuation  in  this  case  may  be  justified 
by,  and  attributed  to,  the  item  of  "good  will." 

The  reply  of  counsel  for  complainant  to  the  point  of  good  faith 
and  absence  of  fraud  is  twofold. 

First.  That  these  elements  have  no  place  in  a  transaction  of  this 
kind  where  the  thing  valued  is  not,  properly  speaking,  property;  and 

Second.  That  the  good  faith  and  absence  of  fraud  set  up  by  the 
defendants  will  not  stand  the  test  of  close  scrutiny,  and,  further,  that 
the  circumstances  of  the  case,  given  with  great  detail  in  the  evidence, 
show  that  there  was  no  actual  appraisement  of  the  property  by  a 
competent  board  of  directors  such  as  is  contemplated  by  the  statute. 


282  SEE    V.  IIEPPENHEIMER.  [CIIAP.   III. 

With  regard  to  the  defence  based  on  the  item  of  good  will,  ad- 
vanced by  the  ch^fcndunts,  comphiinant  replies,  that  it  is  an  entire 
misapplication  of  the  term,  and  all  the  law  growing  out  of  it,  to  use 
it  in  that  connection,  and  they  iK)int  out  that  the  conveyances,  and 
the  contract  preceding  them,  matle  by  the  original  owners  of  the 
thirty-nine  mills,  included  l)y  express  terms  the  good  will  of  the  mills 
which  was  included. in  the  original  valuation  of  the  mills  at  S2,2'>0,- 
000,  and  besides,  that  the  original  contracts  were  in  each  case  ac- 
companied by  an  undertaking  on  the  part  of  the  vendor  not  to  en- 
gage in  the  bu.siness  for  five  years,  and  that  the  preliminary  contract 
with  Stein  also  included  the  good  will. 

I  shall  tleal  with  this  element  of  good  will  at  once. 

Lord  I':ldo\,  in  CnUtwdl  v.  Lye  {IS  10),  17  Vea.  335  (at  p.  346), 
said:  "The  good  mil  which  has  l^con  the  subject  of  sale  is  nothing 
more  than  the  probability  that  the  old  customers  will  resort  to  the  old 
place.'' 

This  definition,  though  often  criticised,  seems  to  me  to  contain 
the  germ  of  all  the  more  modem  and  complete  definitions. 

I  am  willing  to  adopt,  for  present  purposes,  that  written  by  Judge 
Lacombk,  of  the  I'nitc'd  States  circuit  court,  and  rej^orted  in  Wa.sh- 
burn  V.  National  Wall  Paper  Co.,  81  Fed.  Hep.  17  (at  p.  20),  and 
cited  in  extenso  in  defendants'  printed  argument:  "Good  will  has 
been  defined  as  'all  that  good  disposition  which  customers  enter- 
tain towards  the  house  of  business  identified  by  the  particular  name 
or  firm,  and  which  may  induce  them  to  continue  giving  their  custom 
to  it.'  There  is  nothing  marvelous  or  mysterious  about  it.  When  an 
intlividual,  or  a  firm,  or  a  corporation,  has  gone  on  for  an  unbroken 
series  of  years  conducting  a  particular  business,  and  has  been  so 
scrupulous  in  fulfilling  every  obligation,  so  careful  in  maintaining  the 
standard  of  the  goods  dealt  in,  so  absolutely  honest  and  fair  in  all 
business  dealings  that  customers  of  the  concern  have  become  con- 
vinced that  their  exjx^rience  in  the  future  will  be  as  satisfactorj'  as  it 
has  been  in  the  past,  while  such  customers'  good  report  of  their  own 
experience  tends  continually  to  bring  new  customers  to  the  same 
concern,  there  has  been  produced  an  element  of  value  quite  as  im- 
portant —  in  some  cases,  perhaps,  far  more  important  —  than  the 
plant  or  machinery  with  which  the  business  is  carried  on.  That  it 
is  property  is  abundantly  settled  by  authority,  and,  indeed,  is  not 
disputed.  That  in  some  cases  it  may  be  very  valuable  property  is 
manifest.  The  individual  who  has  created  it  by  years  of  hard  work 
and  fair  business  dealing  usually  experiences  no  difficulty  in  finding 
men  willing  to  paj^  him  for  it,  if  he  be  willing  to  sell  it  to  them." 

This  language  was  used  in  a  case  where  the  capital  stock  was 
issued,  as  here,  for  the  value  of  several  manufacturing  establish- 
ments, in  which  the  individual  good  will  of  each  separate  factory 
was  added  to  the  value  of  its  visible  property  (precisely  as  would 


CHAP.  III.]  SEE    V.  HEPPENHEIMER.  283 

have  been  the  case  here  if  the  stock  had  been  issued  for  the  amount 
of  the  sum  of  the  valuations  of  the  several  mills  with  their  good  will 
added,  to  wit,  $2,200,000),  and  the  bill  was  filed  by  stockliolders 
who  received  their  stock  in  payment  for  a  mill  which  they  owned  and 
conveyed  to  the  corporation,  and  they  sought  by  their  bill  to  enjoin 
the  payment  of  dividends  on  the  stock  so  issued.  It  was  held  that 
they  were  estopped  from  setting  up  that  the  property  had  been  over- 
valued, and,  further,  that  the  evidence  was  insufficient  to  show  such 
a  depreciation  in  value  as  would  warrant  the  relief  prayed  for. 

Turning  to  the  present  case,  we  find,  as  before  remarked,  that 
the  individual  good  will  of  the  different  properties  was  included  in 
the  individual  valuations  thereof,  and  conveyed  for  the  considera- 
tion above  mentioned  to  the  corporation. 

Further,  the  inference  is  irresistible  that  the  corporation  itself 
could  not  possibly,  at  the  time  of  its  organization,  have  acquired  any 
good  will  in  the  proper  sense  of 'that  word,  or,  indeed,  in  any  sense 
of  that  word.  It  had  made  no  business  friends  nor  any  business 
reputation.  Moreover,  an  examination  in  detail  of  the  plan  of  busi- 
ness laid  out  and  adopted  bj^  the  promoters  of  the  enterprise,  from 
which  they  expected  to  reap  such  great  profits,  contemplated  a  com- 
plete destruction  of  the  old  good  will  of  the  individual  establishments. 

Mr.  Stein  had,  in  fact,  no  good  will  to  convey  with  the  mills  except 
what  he  acquired  from  the  individual  owners,  hence  the  increase  in 
price  cannot  be  justified  on  that  basis. 

It  follows  that  we  are  driven  back  to  the  question  first  stated  — 
whether  prospective  and  contingent  profits  of  any  business,  de- 
pending, as  they  always  must  and  do,  upon  good  management  and 
the  general  course  of  business  of  the  country,  including,  always,  the 
element  of  competition,  can  be  treated  as  property  in  the  sense  in 
which  that  word  is  used  in  the  statute  above  cited. 

It  seems  to  me  that  there  can  be  but  one  opinion  as  to  the  sound- 
ness of  the  notion  that  profits  derived,  or  to  be  derived,  from  the 
prosecution  of  any  business  can  be  properly  taken  into  account,  ex- 
cept to  a  limited  extent,  in  estimating  the  value  of  the  mere  inani- 
mate instrument  which  is  used  in  conducting  that  business.  Of 
course,  an  instrument  which  is  incapable  of  producing  a  product  to 
advantage  is  of  no  value.  On  the  other  hand,  an  instrument  which 
produces  sometliing  of  great  value  at  little  cost  is  of  itself  of  value, 
which,  however,  is  limited  by  the  cost  of  reproducing  the  instrument 
itself. 

Of  course,  an  inanimate  instrument  which  has  an  extraordinary 
capacity  for  producing  an  article  of  value  is  usually  covered  by  a 
patent,  and  to  the  actual  cost  of  its  physical  reproduction  must  be 
added  the  patentee's  fee  or  license,  but  in  the  absence  of  any  right 
arising  out  of  a  patent  the  actual  cost  of  the  physical  reproduction 
is  the  test. 


284  SEE    I'.  IIEPPENHEIMER.  [CHAP.   III. 

Hence  the  p;ross  profits  to  be  derived  from  the  carryinjjj  on  of  any 
ordinary  manufacturing  business  are  to  be  diviiled  — first,  into  a 
fair  rental  for  the  factory,  btised  on  the  cost  of  its  repnxhiction; 
second,  interest  on  the  working  capital;  third,  cost  of  operating  and  of 
administration.   The  balance,  if  any,  is  net  profit. 

P'(jr  example,  if  an  ordinary  manufacturing  business  should  Ix* 
unusually  successful  for  a  series  of  years  and  earn  large  dividends  on 
the  amount  of  cai)ital  invested,  no  one  would  think  of  increasing  the 
valuation  of  the  mill  by  reason  of  these  profits  beyond  the  cost  of  its 
reproduction.  The  profits  were  due,  in  the  main,  to  good  manage- 
ment, aided  by  the  general  pros{KMity  of  the  country.  Without  proper 
management  there  might,  and  probably  wouUl,  be  no  profits,  and 
then,  on  the  b:usis  of  measuring  the  valu(>  of  the  mill  by  the  profits  of 
its  operations,  the  mill  would  be  valueless. 

The  i)resent  case  is  a  painful  illustration  of  the  utter  impossibility 
of  giving  the  word  "property"  the  construction  claime<l  for  it. 

The  rose-colored  future  (presently  to  l)e  stated  at  length),  for  this 
enterprise,  created  with  so  much  confidence  by  its  promoters,  failed 
entirely  in  the  face  of  actual  experience.  .  .  . 

But  the  defendants  say  the  practice  of  so  valuing  property  under 
our  statute  has  been  indulg(Ml  in  freciuently  before,  and  numerous 
corporations  have  been  organized  and  have  existed  upon  such  a 
basif,  so  that,  they  argue,  the  practice  has  l)ecome  well  nigh  crys- 
talized  and  sanctioned  by  long  u.sage. 

I  am  sorry  to  feel  constrained  to  admit  that  this  practice  has  been 
fre(iuently  indulged  in,  and,  further,  that  it  has  brought  oblocjuy 
U|K)n  our  state  and  its  legislation.  Hut  I  am  happy  to  be  able  to  as- 
sert, with  confidence,  that  such  practice  is  entirely  unwarranted  by 
anything  either  in  our  statute  or  in  the  decisions  of  our  courts,  and 
whenever  it  has  been  indulged  in  it  has  involvetl  a  clear  infringement 
of,  if  not  a  fraud  uj)on,  the  plain  letter  and  spirit  of  our  legislation. 

So  far  from  approving  these  transactions,  our  court  of  eiToi-s  and 
appeals  has  recently,  in  a  case  not  yet  reported,  made  a  decision  and 
rendered  an  opinion,  in  which  it  di.sapproves  of  these  inflated  trans- 
actions in  the  most  emphatic  and  practical  manner.  I  allude  to  the 
case  of  Volncy  v.  Nixon  (since  reported,  68  N.J.  Eq.  605),  the  opin- 
ion in  which  I  have  had  opportunity  to  examine,  the  headnote  of 
which  is  as  follows:  "A  contract  between  two  persons  that,  in  ex- 
change for  their  joint  property,  one  of  them  shall  procure  from  a 
corporation  of  this  state  an  original  issue  of  stock  to  an  amount 
known  by  all  parties  to  be  in  excess  of  the  value  of  the  property,  and 
shall  divide  the  stock  thus  procured  with  the  other  person,  is  il- 
legal; and  the  courts  of  this  state  will  not  aid  in  its  enforcement,  even 
though  the  objectionable  feature  has  been  accomplished  by  the 
actual  issue  of  the  stock." 

In  the  course  of  the  opinion  the  learned  judge  (Dixon)  remarks: 


CHAP.  III.]  SEE    V.  HEPPENHEIMER.  285 

"It  must  be  remembered  that  under  the  laws  of  New  Jersey  the 
stock  of  the  corporation  can  be  origmally  issued  for  property  pur- 
chased only  to  the  amount  of  what  is  honestly  deemed  by  the  di- 
rectors the  value  of  the  property."  Referring  to  Donald  v.  American 
Smelting  Co.,  62  N.J.  Eq.  (17  Dick.)  729. 

"But,"  say  the  defendants,  "we  acted  in  perfectly  good  faith;  we 
really  believed  this  property  was  worth  the  amount  at  which  it  was 
appraised,  and  we  were  guilty  of  no  fraud  in  that  behalf;  and  to 
show  our  good  faith  we  invested  therein  several  hundred  thousand 
dollars  ($467,000)  in  cash,  besides  $50,000  in  services  and  expenses 
of  the  law  firm  of  Guggenheimer  &  Untermeyer,  and  their  correspond- 
ents in  Chicago,  and  have  lost  it  all."  And  a  powerful  appeal  was 
made  to  the  court  not  to  subject  the  defendants  to  further  loss  by 
saddling  these  enormous  debts  upon  them. 

Let  us  consider  the  affair  from  the  standpoint  of  the  defendants, 
and  inquire  just  how  and  for  what  they  invested  their  money. 

The  real  estate  and  good  will  of  the  thirty-nine  mills  footed  up  in 
value,  for  purposes  of  sale  to  the  corporation,  to  nearly  $2,200,000, 
and,  after  allowing  for  the  overvaluation,  which  we  all  know  that  the 
individual  owners  of  these  industiial  properties  about  to  be  united 
usually  manage  to  maintain  for  that  purpose,  and  of  which  there  is 
some  proof  in  this  case,  we  may  reasonably  suppose  them  to  be 
worth  $1,500,000,  and  thus  to  furnish  reasonably  good  security  for 
$1,000,000  of  bonds.  Hence  it  was  reasonably  safe  to  invest  at  par 
in  the  bonds  to  the  extent  of  $1,000,000,  secured  by  a  mortgage  upon 
the  property. 

There  was  little  reason  to  anticipate  the  completeness  of  the  final 
catastrophe. 

Now,  that  investment  at  par  in  six  per  cent,  bonds  secured  by  a 
mortgage  on  property  worth  at  least  one  and  one-half  times  the 
amount  of  the  sum  secured,  is  all  that  any  of  the  defendants  risked. 

Not  one  dollar  was  invested  by  any  of  them  beyond  the  par  value 
of  the  mortgage  bonds  of  the  compan3^  For  every  $1,000  paid  into 
the  company  they  received  a  mortgage  bond  for  that  amount,  and, 
besides,  a  bonus  of  two  shares  of  preferred  and  four  shares  of  com- 
mon stock. 

It  is  thus  made  clear  that  when  the  faith  of  these  investors  in  the 
value  of  the  property  purchased  was  put  to  the  actual  test  it  went  no 
further  than  to  invest  at  par  in  first  mortgage  six  per  cent,  bonds, 
secured  by  property  estimated  to  be  worth  about  twice  the  amount 
of  the  mortgage,  to  wliich  bonds  was  added  as  a  bonus,  sixty  per 
cent,  of  stock  representing  the  value  of  the  property  above  the  mort- 
gage. 

Tliis  transaction  is  known,  in  the  language  employed  in  these 
financial  transactions,  as  "getting  in  on  the  ground  floor,"  and  was 
so  understood  by  each  of  the  investors.  Mr.  Heppenheimer,  in  fact, 


28G  SEE    V.  IIEPPENUEIMER.  (cHAP.  HI. 

uses  this  very  language  in  his  evidence.  In  answer  to  a  question  put 
by  mo  whether  he  "<U«1  not  think  Mr.  UntenueyiT  wtis  nuikinn  you  a 
\n^  present?"  he  rt'{)h('(l,  "Xo,  he  was  not  making  me  any  present, 
but  letting  me  in  on  the  ground  floor;  that  is  the  way  all  these  cor- 
porations have  Ix'en  formed  in  the  State  of  New  Jersey." 

No  doubt  each  of  these  investors  really,  and  therefore  in  goo<l 
faith,  hoped  and  expected  that  the  enterprise  would  prove  what  they 
called  a  success;  that  is,  that  the  bonds  were  entirely  safe,  and  so, 
probably,  wjvs  the  preferred  stock,  and  in  like  manner  it  was  hop<Ml 
and  expected  that  the  common  stork  would  receive  periotlical  di- 
vidends for  a  period  of  time  long  iiiough  at  least  to  enal)le  some,  if 
nf)t  all,  of  it  to  Ih^  marketed,  or,  to  us*'  the  apt  phra.se  which  has  been 
applied  to  such  transactions,  ''to  be  distributed  to,"  and  later  to  be 
"digested by  the  piildic." 

I  am  unable  to  find  that  the  defendants'  Ijelief  and  faith  went  l)C- 
yond  this. 

But  I  am  unwilling  to  adopt  the  notion  that  this  sort  of  goo<l  faith 
is  that  which  is  refjuired  in  order  to  legalize  tran.sactions  like  this 
under  consideration. 

And  here  we  find  the  real  motive  and  reason  which  give  rise  to 
these  inflated  vahu's  ami  "watering"  of  capital  stock.  It  is  the  de- 
sire and  intention  to  sell  shares  in  a  property  owned  by  the  corpora- 
tion—  for  that  is  what  capital  stock  represtnits  —  for  more  than 
they  are  really  worth.  And  thenun  lies  the  intrinsically  fraudulent 
character  of  these  transactions. 

I  feel  justifietl  in  so  characterizing  them,  since  the  overvaluation 
of  the  property  does  not  at  all  or  in  any  manner  increase  its  intrinsic 
or  practical  value,  or  in  the  least  degree  jiromote  the  real  prosperity 
of  the  enterprise.  A  single  paper  mill  will  turn  out  just  as  much 
product  capitalized  at  S1(M).(MK)  as  $2(K),(K)().  and  its  rental  value  will 
be  practically  the  same.  The  earnings  and  [)rofit  due  to  ^o(xl  man- 
agement anil  skillful  handling  of  the  product  will  be  the  same,  and 
these  last  tlo  not  depiMid  at  all  upon  the  prcxluct-producing  capacity 
of  the  mill.  Finally,  the  division  of  the  profits,  if  any  there  be,  among 
the  stockholders  will  be  on  the  same  basis,  and  the  amount  received 
by  each  stockholder  will  be  the  same,  the  only  difference  being  in  the 
percentage  of  the  division,  anil  the  market  values  of  the  shares  will 
finally  settle  down  to  the  gauge  of  the  dividends  earned  and  de- 
clared. 

But  this  straightforward  mode  of  doing  business  does  not  satisfy 
the  prcsent-ilay  promoter,  whose  object  in  making  an  overvalua- 
tion is  twofold. 

First.  To  sell  shares  at  more  than  their  real  value,  and  thereby 
secure  a  profit  immediately  in  hand.  ("Profit"  is  the  word  used  by 
Mr.  Samuel  Untermeyer  in  his  e\'idence.) 

Second.  To  obtain  mercantile  credit  based  on  a  large  capital. 


CHAP.  III.]  SEE    V.  HEPPENHEIMER.  287 

A  large  number  of  authorities,  in  apparent  support  of  inflated 
values  for  purix)ses  of  capitalization,  from  different  States  in  the 
Union,  were  cited  by  counsel  for  defendants. 

I  shall  not  stop  at  this  moment  to  discuss  their  value  in  this  state 
and  in  this  connection,  because  I  find  the  law  laid  down  in  this  state, 
under  this  statute,  by  the  court  of  errors  and  appeals  in  the  very 
recent  case,  cited  by  the  defendants,  of  Donald  v.  American  Smelting 
Co.,  62  N.J.  Eq.  (17  Dick.)  729.  That  case  arose  under  the  act  of 
1896,  in  which  the  language  of  the  governing  section  (§  49)  is  more 
liberal  than  the  corresponding  section  of  the  act  governing  the  pres- 
ent case,  in  that  it  has  added  the  words,  "and  in  the  absence  of 
actual  fraud  in  the  transaction,  the  judgment  of  the  directors  as  to 
the  value  of  the  property  purchased  shall  be  conclusive." 

That,  indeed,  was  a  suit  by  a  stockholder  in  a  corporation,  al- 
ready organized  and  engaged  in  its  legitimate  business,  to  restrain 
an  issue  of  stock  in  payment  of  additional  property  to  be  purchased, 
but  the  rule  laid  down  by  the  learned  judge,  who  spoke  for  a  majority 
of  the  court,  applies  with  equal,  and  I  think  greater,  force  to  the  pres- 
ent case,  where  creditors  are  asking  for  payment  of  their  just  debts. 

After  quoting  (p.  731)  §  48,  and  a  portion  of  §  49  of  the  act  of  1896, 
he  proceeds:  " The  meaning  of  §  48  is  not  questionable.  The  money 
must  equal  the  face  value  of  the  stock.  The  language  of  §  49  is  even 
more  explicit.  The  corporation  may  issue  stock  to  the  amount  of  the 
value  of  the  propei'ty.  The  value  of  the  property  in  the  one  case  just 
as  the  value  of  the  money  in  the  other  must  at  least  equal  the  face 
value  of  the  stock.  Such  was  the  view  expressed  for  this  court  by  Mr. 
Justice  Depue  in  Wetherbee  v.  Baker,  35  N.J.  Eq.  (8  Stew.)  501,  and 
supported  by  abundance  of  authority.   ' 

"The  distinction  between  the  contemplated  issue  of  corporate 
stock  for  property  and  its  issue  for  money  lies  not  in  the  rule  for 
valuation,  but  in  the  fact  that  different  estimates  may  be  formed  of 
the  value  of  property.  When  such  differences  are  brought  before 
judicial  tribunals,  the  judgment  of  those  who  are  by  law  entrusted 
with  the  power  of  issuing  stock  '  to  the  amount  of  the  value  of  the 
property,'  and  on  whom,  therefore,  is  placed  the  first  duty  of  valu- 
ing the  property,  must  be  accorded  considerable  weight,  but  it  can- 
not be  deemed  conclusive  when  duly  subjected  to  judicial  scrutiny. 
Nor  is  it  necessary  that  conscious  overvaluation  or  any  other  form 
of  fraudulent  conduct  on  the  part  of  these  primary  valuers  should  be 
shown  to  justify  judicial  interposition.  Their  honest  judgment,  if 
reached  without  due  examination  into  the  elements  of  value,  or  if  based 
in  part  upon  an  estimate  of  matters  which  really  are  not  property,  or 
if  plainly  loarped  by  self-interest,  may  lead  to  a  violation  of  the  statutory 
rule  as  surely  as  would  corrupt  motive. 

"The  cases  in  this  state  to  which  we  are  referred  (citing  cases)  in 
support  of  the  proposition  that  the  honest  judgment  of  the  man- 


288  SEE    V.  HEPPENHEIMEIR.  (CHAP.   III. 

agers  of  a  corporation,  with  respect  to  matters  intra  vires,  cannot  be 
disturbed  at  the  instance  of  stockholders;  all  relate  to  transactions 
for  which  the  legislature  has  set  up  no  other  criterion  than  the  dis- 
cretion of  those  managers.  But  the  original  issue  of  corjiorate  stock 
is  a  special  function,  in  the  exercise  of  which  the  legislature  has  fixed 
the  standard  to  Ik'  obstM'ved,  and  it  is  the  duty  of  the  courts,  so  far 
as  their  jurisdiction  extends,  to  see  that  this  standard  is  not  violated, 
either  iiitcntioiudly  or  unintentionally." 

This  language,  as  I  understand  it,  contains  the  ver>'  ratio  decidendi 
of  the  case  then  under  consideration,  and  is,  therefore,  binding  on 
nie,  even  if  I  did  not  concur  in  it,  which  I  do  most  heartily. 

The  intention  of  the  legislature  expressed  in  these  sections  in 
(luestion,  in  my  judgment,  manifestly  was,  that  the  capital  .stock  of 
all  corporations  should  at  the  start  represent  the  same  value  whether 
l)aid  for  in  proix'rty  or  money.  That  result  can  only  be  obtain(>d  by 
supiKwing  that  the  property  is  to  be  appniised  at  its  actual  cash 
value,  precisely  as  if  a  lK)ard  of  tlirectors  with  the  whole  capital  stock 
actually  paiil  in  cash  is  dealing  at  actual  "arms'-length"  as  real 
purchivsei-s  with  the  owner  of  property  proposetl  to  l)e  purchased  as 
a  real  vendor,  without  any  interest  in  the  directors  to  overvalue  the 
property  or  other  interests  inconsistent  with  the  real  interest  of  the 
stockholders  as  such. 

I  say  "at  the  start,"  because  we  all  know  that  property  purchased 
in  good  faith  for  cash  is  liable  afterwards  to  depreciate  in  value 
owing  to  circumstances  not  foreseen  at  the  time  of  its  purcha.se. 

After  all,  it  seems  to  me  that  the  true  test,  under  this  statute,  as 
applied  to  the  case  here  in  hand,  is  this:  if  the  company  actually  had 
to  its  credit  in  the  bank  the  sum  of  S').0(X).000  would  it  have  been 
willing  to  have  [laid  that  price  in  cash  for  the  property  in  question 
for  the  uses  and  purposes  to  which  it  proposed  to  devote  it;  would 
the  property  be  worth  that  sum  in  cash  to  the  company? 

Any  less  severe  test  will,  it  seems  to  me,  fail  to  satisfy  the  letter 
and  spirit  of  the  two  sections  of  the  act  before  recited,  which  seem 
to  me  clearly  to  require  that  the  shares  of  capital  stock  of  any  com- 
pany organized  under  the  act  in  force  when  this  company  was  or- 
ganized should  be  of  equal  value  whether  paid  for  in  cash  or  prop- 
erty purchased. 

The  learned  judge,  however,  in  Donald  v.  American  Synching  Co., 
supra,  after  using  the  language  above  quoted,  proceeds  to  express 
some  thoughts,  which,  so  far  as  I  can  perceive,  are  not  necessary  to 
the  decision  of  the  cause,  and  so  necessarily  in  the  nature,  at  best, 
of  obiter  dicta,  and  therefore  not  ])inding  upon  me. 

I  venture  to  suggest  that  their  object  was  to  show  the  effect  of 
stock  once  issued  coming  into  the  hands  of  a  bona  fide  purchaser. 
They  certainly  have  no  application  to  the  present  case  in  which 
creditors  are  suing. 


CHAP.  III.]  SEE    V.  HEPPENHEIMER.  289 

They  are,  however,  relied  upon  by  the  defendants  and  are  as 
follows :  — 

"When  corporate  stock  has  once  been  issued  for  property  pur- 
chased, then  the  legislature  has  directed  the  application  of  a  dif- 
ferent rule.  In  the  words  of  the  same  §  49,  the  stock  so  issued 
shall  be  full  paid  stock,  and  not  liable  to  any  further  call,  neither 
shall  the  holder  thereof  be  liable  for  any  further  payment  under  the  pro- 
visions of  this  act;  and  in  the  absence  of  actual  fraud  in  the  transac- 
tion the  judgment  of  the  directors  as  to  the  value  of  the  property 
purchased  shall  be  conclusive."  (Tliis  last  clause  is  not  found  in  the 
act  governing  the  transaction  here  in  question.) 

"Under  these  provisions,  after  the  property  has  been  purchased 
and  the  stock  issued  therefor,  nothing  short  of  actual  fraud  in  the 
transaction  can  impair  the  right  of  the  holder  to  hold  his  stock  as 
full  paid  stock,  free  from  further  call." 

As  applied  to  the  case  then  before  the  court  of  errors  and  appeals, 
I  understand  that  language  as  holding  that  if  the  stock,  the  issue  of 
which  was  sought  to  be  restrained,  should  be  issued  with  the  words 
"issued  for  property  purchased"  printed  on  the  certificate,  it  would 
not  be  competent  for  the  company  to  deny  the  vahdity  of  the  stock 
and  the  rights  of  the  holders  of  the  certificates  on  the  ground  that 
the  property  had  been  overvalued,  unless  there  was  fraud  practiced 
by  the  vendor  on  the  vendee. 

He  did  not  have  in  mind  the  case  of  creditors.  (And  see  the  language 
of  Mr.  Justice  Brown  in  Handley  v.  Stutz,  139  U.S.  417,  at  p.  426.) 

Moreover,  the  construction  of  that  language  claimed  by  defend- 
ants would  result  in  a  practical  nullification  of  the  section  of  the  act 
first  above  quoted,  which  declares  the  liability  to  creditors  of  stock- 
holders who  have  not  paid  in  the  amount  of  their  stock,  or  have  paid 
for  it  in  property  at  an  overvaluation,  since  it  is  entirely  practicable 
to  purchase  the  property  and  issue  the  stock  in  a  single  transaction 
and  before  any  creditors  exist  or  any  judicial  interference  can  be 
made.  In  short,  the  construction  claimed  would  run  directly  counter 
to  the  carefully-prepared  opinion  of  Justice  Depue,  in  Weatherbee 
v.  Baker,  35  N.J.  Eq.  (8  Stew.)  501  (at  p.  511  et  seq.),  relied  on  by  the 
learned  judge  in  his  opinion  here  in  question. 

In  reading  the  opinion  in  Wetherbee  v.  Baker,  it  must  be  borne  in 
mind  that  the  case  there  dealt  with  arose  under  a  statute  which  ap- 
parently contemplated  an  actual  subscription  for  stock,  and  there 
appeared  to  have  been  such  subscription  in  that  case.  But  the  fifth 
section  of  the  Corporation  Act  above  quoted,  which  governs  this 
case,  does  not  contemplate  or  require  any  actual  subscription  to 
stock,  but  deals  with  the  stockholder  who  accepts  and  holds  stock 
without  paying  for  it  in  fuU. 

But,  taking  the  language  of  Justice  Dixon,  as  last  above  quoted, 
as  the  statement  of  the  law,  it  is  quite  clear  that  a  conscious  over- 


290  LANTZ    V.  MOELLER.  [tHAP.   HI. 

valuation  is  a  frp.ud  on  the  law,  in  that  it  is  an  evasion  of  its  man- 
date, and  is  the  very  sort  of  fr:iud  mentioned  in  the  statute.  It  was 
so  treated  throughout  the  opinion  of  \'ice-C'hancellor  Stevens  in  the 
same  case,  61  N.J.  Eq.  (16  Dick.)  458,  and  the  language  of  Justice 
Dixon,  just  quoted,  leaves  no  room  for  doubt  on  this  point,  where 
he  says:  "  Nor  is  it  necessary  that  conscious  oicrvalualion  or  any  other 
form  of  fraudulent  conduct  on  the  part  of  these  primary  valuers  should 
be  shown  to  justify  judicial  interposition.  Their  honest  judgment, 
if  reached  without  due  examination  into  the  elements  of  value,  or  if 
based  in  part  upon  an  estimate  of  matters  irhich  really  are  not  property, 
or  if  plainly  xvarjyed  by  self-interest,  may  lead  to  a  violation  of  the  stat- 
utory rule  as  surely  as  would  corrupt  motive." 

If,  then,  the  promoters  of  this  enterpri.se  and  the  directoi-s,  who 
assisted  them  in  adopting  the  valuation  in  question,  consciously 
included  in  their  valuation  thereof  "an  estimate  of  mattei-s  which 
really  are  not  property,"  which  I  have  shown  they  did,  then  there 
was  a  conscious  overvaluation  of  the  property  which  amounts  to  a 
fraud  on  the  act. 

A  strong  appeal  was  made  to  the  court  in  the  argument  of  de- 
fendants' couiisi'l,  based  on  the  fact  that  these  defendants  had  lost 
between  S^OO.tXX)  and  $4U(J.(XXJ  of  cash,  and  that  no  further  loss 
ought  to  be  thrown  upon  them.  With  regard  to  that  plea  I  have  this 
to  say:  Men  of  business,  who  transact  their  business  under  the  .shield 
of  a  corporate  existence,  have  the  great  and  iiecuHar  advantage  over 
those  trading  as  inchviduals  of  avoiding  personal  pecuniary  liability. 
If  the  enterpri.se  is  prosi^)crous,  they  make  and  enjoy  its  gain.  If,  on 
the  other  hand,  it  is  not  prosperous,  they  lose  only  their  originai 
investment,  which  may  be  a  part  only  of  their  individual  fortunes, 
and  any  loss  beyond  that  investment  falls  on  the  unfortunate 
creditors.  This  involves  apparent,  if  not  real,  unfairness  in  trade. 
Be  that  as  it  may.  under  these  conditions,  surel}'  the  investors  in  the 
stock  of  trading  corporations  ought  not  to  complain  or  ask  any  sjTn- 
pathy  if  the  courts  of  the  countr\'  hold  them  to  a  strict  compliance 
with  the  terms  of  the  law  under  which  they  claim  immunity  from 
pecuniary  responsibiUt}'. 

They  ought  not  to  complain  if  the  creditors  of  the  corporation  shall 
demand  that  the  original  statement  of  their  capital  stock  shall  be 
made  good  by  those  persons  who  accept  it  from  the  company. 


LANTZ   V.   MOELLER. 

76  Wash.  429.     1913. 


Main,  J.  The  respondents  contend  that,  when  the  stock  is  paid  for 
by  the  transfer  of  property,  the  liquidation  of  the  Uability  on  the 


CHAP.  III.]  LANTZ    V.  MOELLER.  291 

subscription  contract  is  complete,  even  though  there  may  be  a  mate- 
rial discrepancy  between  the  par  value  of  the  stock  and  the  value  of 
the  property  transferred  in  payment  thereof,  unless  there  is  fraud  in 
the  transaction  either  actual  or  constructive.  According  to  this  con- 
tention, it  would  be  immaterial  whether  or  not  the  value  of  the  prop- 
erty transferred  to  the  corporation  in  payment  of  the  subscription 
was  substantially  equivalent  to  the  par  value  of  the  stock.  It  must 
be  admitted  that  the  expressions  of  this  court,  from  time  to  time, 
have  not  been  harmonious  upon  this  question.  The  rule  contended 
for  by  the  respondents  appears  to  be  supported  in  the  cases  of  Turner 
V.  Bailey,  12  Wash.  634,  42  Pac.  115;  Kroenert  v.  Johnston,  19  Wash. 
96,  52  Pac.  605,  and  possibly  some  others.  The  opposite  doctrine, 
that  the  stock  of  a  corporation  is  a  trust  fund  for  the  benefit  of  its 
creditors  and  that,  when  the  rights  of  creditors  are  involved,  the 
stock  subscribed  for  must  be  paid  in  money  or  money's  worth,  is 
upheld  in  the  following  cases:  Adamant  Mfg.  Co.  v.  Wallace,  16  Wash. 
614,  48  Pac.  4:15;Dunlap  v.  Ranch,  24  Wash.  620,  64  Pac.  807;  Davies 
V.  Ball,  64  Wash.  292,  116  Pac.  833.  In  the  Adamant  case,  supra, 
this  court  in  an  opinion  written  by  the  late  Chief  Justice  Dunbar, 
said :  — 

"The  doctrine  that  the  stock  of  a  corporation  is  a  trust  fund  for 
the  benefit  of  creditors  is  one  which  is  founded  in  equity  and  fair 
dealing,  and  in  any  event  has  become  so  well  established  in  this  coun- 
try that  it  can  no  longer  be  gainsaid.  This  doctrine  was  announced 
by  Chancellor  Kent,  as  early  as  1824,  in  Wood  v.  Dummer,  3  Mason, 
309,  and  since  that  time  has  become  the  established  law  of  this  coun- 
try and  is  termed  the  'American  doctrine,'  although,  as  shown  in  the 
case  above  referred  to,  the  same  doctrine  had  long  been  established 
in  England;  and  so  universally  has  this  doctrine  been  accepted,  in 
America  especially,  that  the  citation  of  authorities  seems  a  work  of 
supererogation.  We  will,  however,  quote  from  2  Morawetz  on  Priv- 
ate Corporations,  §  820,  the  rule  which  is  announced  as  follows: 
'Debts  due  a  corporation  are  equitable  assets,  and  may  be  reached 
by  creditors  through  the  aid  of  a  court  of  chancery,  if  the  legal  assets 
which  can  be  reached  by  execution  prove  insufficient.  The  liability  of 
the  shareholders  to  contribute  the  amount  of  their  shares  as  capital 
is  treated  in  equity  as  assets,  like  other  legal  claims  belonging  to  the 
corporation.  This  liability,  together  with  the  capital  actually  con- 
tributed, constitutes  the  trust  fund  which  in  equity  is  deemed 
pledged  for  the  payment  of  the  corporate  debts.'  This  being  true, 
then  it  must  necessarily  follow,  for  the  protection  of  creditors  who 
dealt  with  these  corporations,  that  the  stock  subscribed  for  must  be 
paid  in  cash  or  in  property  of  an  equivalent  value.  In  other  words, 
the  corporation  must  be  in  the  actual  condition  which  it  represents 
itself  to  be  in  financially.  If  it  were  allowed  to  hold  itself  out  as 
having  a  capital  stock  of  $100,000,  when  in  reality  the  capital  stock, 


292  HOSPES    V.  NORTHWESTERN    MFG.  &.    CAR    CO.       [CHAP.   MI. 

which  is  and  must  be  under  the  theory  of  the  law,  assets  in  the  hands 
of  the  corporation,  is  worth  only  one-half  that  amount,  the  corpora- 
tion is  to  that  extent  iloing  business  under  false  coloi-s,  and  is  ob- 
taining credit  upon  the  faith  of  an  asserted  estate  which  is  purely 
fictitious." 

We  think  the  rule  as  laid  down  in  the  Adamant  case  is  not  only 
legally  but  ethically  sound,  and  all  the  decisions  of  this  court  wliich 
are  not  in  harmony  with  the  views  therein  expressed  are  overruled. 

Note.  —  See,  accord,  Kentucky  ^[utual  Co.  v.  Schaefcr,  120  Ky. 
227;  Dilzell  Engincerituj  Co.  v.  Lchmann,  120  La.  273;  Berry  v.  Rood, 
168  Mo.  316;  Cole  v.  Adams,  19  Tex.  Civ.  App.  507. 


HOSPES  V.  NORTHWESTERN   MFG.  &  CAR  CO. 

48  Minn.  174.      1892. 

Mitchell,  J.  The  principal  question  in  the  case  is  whether  the 
complaint  states  facts  showing  that  the  thresluM*  company,  as  credi- 
tor, is  entitled  to  the  relief  prayed  for;  or,  in  other  words,  states  a 
cause  of  action.  Briefly  stated,  the  allegations  of  the  complaint  are 
that  on  May  10,  1882,  Seymour,  Sabin  &  Co.  owned  property  of  the 
value  of  several  million  dollars,  and  a  business  then  supjjosed  to  be 
profitable.  That,  in  oriler  to  continue  and  enlarge  this  business,  the 
parties  interested  in  Seymour,  Sabin  &  Co.,  with  others,  organized 
the  car  company,  to  which  was  sold  the  greater  part  of  the  assets  of 
Seymour,  Sabin  &  Co.  at  a  valuation  of  S2, 207,000,  in  i)ayment  of 
which  there  were  i.ssued  to  Seymour,  Sabin  ct  Co.  shares  of  the  pre- 
ferred stock  of  the  car  company  of  the  par  value  of  S2, 207,000,  it 
being  then  and  there  agreed  by  both  parties  that  this  stock  was  in 
full  payment  of  the  jiroperty  thus  purchased.  It  is  further  alleged 
that  the  stockholders  of  Seymour,  Sabiii  tt  Co.,  and  the  other  persons 
who  had  agreed  to  become  stockhoklei-s  in  the  car  company,  were 
then  desirous  of  issuing  to  themselves,  and  obtaining  for  their  own 
benefit,  a  large  amount  of  common  stock  of  the  car  company,  "with- 
out paying  therefor,  and  without  incurring  any  liability  thereon  or 
to  pay  therefor;"  and  for  that  purpose,  and  "in  order  to  evade  and 
set  at  naught  the  laws  of  this  state,"  they  caused  Seymour,  Sabin 
&  Co.  to  subscribe  for  and  agree  to  take  common  stock  of  the  car 
company  of  the  par  value  of  SI  ,500,000.  That  Seymour,  Sabin  & 
Co.  thereupon  subscribed  for  that  amount  of  the  common  stock, 
but  never  paid  therefor  any  consideration  whatever,  cither  in  money 
or  property.  That  thereafter  these  persons  caused  this  stock  to  be 
issued  to  D.  M.  Sabin  as  trustee,  to  be  by  him  distributed  among 
them.  That  it  was  so  distributed  without  receipt  by  him  or  the  car 


CHAP.  III.]       HOSPES    V.  NORTHWESTERN    MFG.  &    CAR    CO.  293 

company,  from  any  one,  of  any  consideration  whatever,  but  was 
given  by  the  car  company  and  received  by  these  parties  entirely 
"gratuitously."  The  car  company  was,  at  this  time,  free  from  debt, 
but  afterwards  became  indebted  to  various  persons  for  about  S3,000,- 
000.  The  thresher  company,  incorporated  after  the  insolvency  and 
receivership  of  the  car  company,  for  the  purpose  of  securing  pos- 
session of  its  assets,  property,  and  business,  and  therewith  engaging 
in  and  continuing  the  sam6  kind  of  manufacturing,  prior  to  October 
27,  1887,  purchased  and  became  the  owner  of  unsecured  claims 
against  the  car  company,  "bona  fide,  and  for  a  valuable  considera- 
tion," to  the  aggregate  amount  of  $1,703,000.  As  creditor,  standing 
on  the  purchase  of  these  debts,  which  were  contracted  after  the  issue 
of  this  "bonus"  stock,  the  thresher  company  files  this  complamt 
to  recover  the  par  value  of  the  stock  as  never  having  been  paid  for. 
The  complaint  does  not  allege  what  the  consideration  of  these  debts 
was,  nor  to  whom  originally  owing,  nor  what  the  intervener  paid  for 
them,  nor  whether  any  of  the  original  creditors  trusted  the  car  com- 
pany on  the  faith  of  the  bonus  stock  having  been  paid  for.  Neither 
does  it  allege  that  either  the  thresher  company  or  its  assignors  were 
ignorant  of  the  bonus  issue  of  stock,  nor  that  they  or  any  of  them 
were  deceived  or  damaged  in  fact  by  such  issue,  nor  that  the  bonus 
stock  was  of  any  value.  Neither  is  there  any  traversable  allegation 
of  any  actual  fraud  or  intent  to  deceive  or  injure  creditors.  A  desire 
to  get  something  without  paying  for  it,  and  actually  getting  it,  is  not 
fraudulent  or  unlawful  if  the  donor  consents,  and  no  one  else  is  in- 
jured by  it;  and  the  general  allegation  that  it  was  done  "in  order  to 
evade  and  set  at  naught  the  laws  of  the  state"  of  itself  amounts  to 
nothing  but  a  mere  conclusion  of  law.  As  a  creditors'  bill,  in  the 
ordinary  sense,  the  complaint  is  manifestly  insufficient.  The  thresher 
company,  however,  plants  itself  upon  the  so-called  "trust-fund" 
doctrine,  that  the  capital  stock  of  a  corporation  is  a  trust  fund  for 
the  payment  of  its  debts;  its  contention  being  that  such  a  "bonus" 
issue  of  stock  creates,  in  case  of  the  subsequent  insolvency  of  the 
corporation,  a  liability  on  part  of  the  stockholder  in  favor  of  creditors 
to  pay  for  it,  notwithstanding  his  contract  with  the  corporation  to 
the  contrary. 

This  "trust-fund"  doctrine,  commonly  called  the  "American 
doctrine,"  has  given  rise  to  much  confusion  of  ideas  as  to  its  real 
meaning,  and  much  conflict  of  decision  in  its  application.  To  such 
an  extent  has  this  been  the  case  that  many  have  questioned  the  ac- 
curacy of  the  phrase,  as  well  as  doubted  the  necessity  or  expediency 
of  inventing  any  such  doctrine.  While  a  convenient  phrase  to  ex- 
press a  certain  general  idea,  it  is  not  sufficiently  precise  or  accurate 
to  constitute  a  safe  foundation  upon  which  to  build  a  system  of 
legal  rules.  The  doctrine  was  invented  by  Justice  Story  in  Wood  v. 
Dummer,  3  Mason,  308,  which  called  for  no  such  invention,  the  fact 


294  HOSPES    V.  NORTHWESTERN    MFG.  A    CAR    CO.       [cilAP.  III. 

in  that  case  being  that  a  bank  divided  up  two  tiiirds  of  its  capital 
amoHK  its  stockholders  without  ])rovi(linj;  funds  sufficient  to  pay  its 
outstiinchii^  1)111  hoKlcrs.  I  pon  old  and  f;iniili:ir  principles  this  was  a 
fraud  on  creditors.  Evidently  all  that  the  eminent  jurist  meant  by 
the  doctrine  was  that  corporate  pro|x,'rty  must  b(;  lii-st  appropriated 
to  the  payment  of  the  debts  of  the  company  before  there  can  Ix;  any 
ilistrihution  of  it  among  stockholders,  —  a  proiX)sition  that  is  sountl 
upon  the  pUiinest  princij)les  of  common  honesty.  In  Fogg  v.  likiir, 
133  U.S.  534,  541  (10  Sup.  Ct.  Ilep.  338),  it  is  said  that  this  is  all  the 
doctrine  means.  The  ex])ression  used  in  Wood  v.  Dummer  has,  how- 
ever, lx>en  taken  up  as  a  new  iliscovery,  which  furnished  a  solution  of 
every  question  on  the  subject.  The  phrase  that  "the  capital  of  a 
corporation  constitutes  a  trust  funil  for  the  iKMiefit  of  creditoi-s"  is 
misleatling.  Corporate  property  is  not  held  in  trust,  in  any  proper 
sense  of  the  term.  A  trust  implies  two  estates  or  interests,  —  one 
e(iuitable  and  one  legal;  one  pei"son,  as  trustee,  holding  the  legal  title, 
while  another,  as  the  cestui  que  trust,  has  the  beneficial  interest. 
Absolute  control  and  power  of  disixjsition  are  inconsistent  with  the 
idea  of  a  trust.  The  capital  of  a  corporation  is  its  pro[)erty.  It  has 
the  whole  beneficial  interest  in  it,  as  well  as  the  legal  title.  It  may 
use  the  income  and  profits  of  it,  and  sell  and  dispo.se  of  it,  the  same 
as  a  natural  pei-son.  It  is  a  tru.stee  for  its  crixlitors  in  the  same  sense 
and  to  the  siune  extent  as  a  natural  person,  but  no  further.  This  is 
well  illustrated  and  clearly  announced  in  the  case  of  (iraham  v.  La 
Crosse  ct-  M.  li.  Co.,  102  U.S.  MS.  That  was  a  creditors'  suit  to  reach 
a  piece  of  real  estate  on  the  ground  that  it  had  been  conveyed  l)y  the 
corporation  fraudulently  for  a  wholly  inadequate  consideration. 
The  trust -fund  doctrine  was  invoked  by  a  subsequent  creditor,  and 
it  was  claimed  that,  as  the  trust  had  iK'en  violated,  the  deed  shouhl 
be  set  aside.  If  the  premi.se  was  correct  that  the  corporation  held 
it  in  trust  for  creditoi-s,  the  conclusion  was  inevitable;  but  the  court 
denied  the  premise,  saying  that  a  corporation  is  in  law  as  distinct  a 
being  as  an  individual  is,  and  is  entitled  to  hold  property  (if  not 
contrary  to  its  charter)  as  absolutely  as  an  individual  can  hold  it. 
Its  estate  is  the  same,  its  interest  is  the  same,  its  possession  is  the 
same;  and  that  there  is  no  reason  why  the  disposal  by  a  corporation 
of  any  of  its  property'  should  be  questioned  by  subsequent  creditors 
any  more  than  a  like  disposal  by  an  individual;  that  the  same  prin- 
ciples of  law  apply  to  each.  That  the  phrase  that  "the  capital  of  a 
corporation  is  a  trust  fund  for  the  payment  of  its  creditors"  is  mis- 
leading, if  not  inaccurate,  is  illustrated  by  the  character  of  the  ac- 
tions that  are  frequently  mistakenly  instituted  on  the  strength  of 
it.  For  example,  in  the  case  of  Wabash,  etc.,  R.  Co.  v.  Ham,  114 
U.S.  587  (5  Sup.  Ct.  Rep.  1081),  two  roads  had  been  consohdated, 
the  new  company  acquiring  the  property  of  the  old  ones.  A  creditor 
of  one  of  the  old  companies,  on  the  strength  of  the  "trust-fund" 


CHAP.   III.]       HOSPES    V.  NORTHWESTERN    MFG.  &    CAR    CO.  295 

doctrine,  claimed  a  lien  on  its  property  in  the  hands  of  the  new  cor- 
poration. If  this  property  was  impressed  with  a  trust  in  favor  of 
creditors  in  the  hands  of  the  old  company,  it  would  logically  follow 
that  it  would  continue  so  in  the  hands  of  the  new  one.  But  the  court 
denied  the  relief,  and,  in  giving  its  construction  of  the  "trust-fund" 
doctrine,  said:  "The  property  of  a  corporation  is  doubtless  a  trust 
fund  for  the  payment  of  its  debts  in  the  sense  that  when  the  cor- 
poration is  lawfully  dissolved,  and  all  its  business  wound  up,  or 
when  it  is  insolvent,  all  its  creditors  are  entitled  in  equity  to  have 
their  debts  paid  out  of  the  corporate  property  before  any  distribu- 
tion thereof  among  the  stockholders.  It  is  also  true,  in  the  case  of  a 
corporation,  as  in  that  of  a  natural  person,  that  any  conveyance  of 
the  property  of  the  debtor  without  authority  of  law  and  in  fraud  of 
existing  creditors  is  void."  This  is  probably  what  is  meant  when  it  is 
said  in  some  cases,  as  in  Clark  v.  Bever,  139  U.S.  96,  110  (11  Sup.  Ct. 
Rep.  468),  that  the  capital  of  a  corporation  is  a  trust  fund  sub  modo. 
If  so,  no  one  will  dispute  it.  But  it  means  very  Httle,  for  the  same 
thing  could  be  truthfully  said  of  the  property  of  an  individual  or  a 
partnership.  And  obviously  it  would  make  no  difference  whether 
the  disposition  of  the  corporate  property  is  to  a  stranger  or  to  a 
stockholder,  except  that,  of  course,  the  latter  could  not  be  an  in- 
nocent purchaser. 

There  is  also  much  confusion  in  regard  to  what  the  "trust-fund" 
doctrine  applies.  Some  cases  seem  to  hold  that  unpaid  subscribed 
capital  is  a  trust  fund,  while  other  assets  are  not,  —  that  is,  so  long 
as  the  subscription  is  unpaid,  it  is  held  in  trust  by  the  corporation, 
but,  when  once  paid  in,  it  ceases  to  be  a  trust  fund ;  while  other  cases 
hold  that,  paid  or  unpaid,  it  is  all  a  trust  fund.  The  first  seems  to 
be  the  rule  laid  down  in  Sawyer  v.  Hoag,  17  Wall.  610,  in  which  the 
"trust-fund"  doctrine  was  first  squarely  announced  by  that  court 
with  all  the  vigor  and  force  characteristic  of  the  great  jurist  who  wrote 
the  opinion.  In  that  case  a  stockholder  in  an  insurance  company  had 
given  his  note,  as  the  court  found  the  fact  to  be,  for  85  per  cent,  of 
his  subscription  to  the  stock  of  the  company.  After  the  company 
had  become  bankrupt,  and  the  stockholder  knew  the  fact,  he  bought 
up  a  claim  against  the  company  for  one  third  its  face,  and  in  a  suit 
by  the  assignee  in  bankruptcy  on  his  note  set  up  this  claim  as  an 
offset.  That  this  would  have  been  a  fraud  on  the  banlcrupt  act,  and 
at  least  a  moral  fraud  on  policy  holders,  is  quite  apparent  without 
invoking  the  "trust-fund"  doctrine;  and,  if  the  note  for  unpaid  stock 
was  a  trust  fund,  there  could  have  been  no  offset,  whether  the  com- 
pany was  solvent  or  insolvent.  In  the  opinion  it  is  said  that,  if  the 
subscription  had  been  paid  by  the  note  or  otherwise,  the  note  ceased 
thereby  to  be  a  trust  fund  to  which  creditors  can  look,  and  becomes 
ordinary  assets,  with  which  directors  may  deal  as  they  choose.  But 
in  Upton  v.  Trihilcock,  91  U.S.  45,  it  is  stated:  "The  capital  paid  in 


296  II03PE3    V.  NORTirWESTERN    MFG.  &    CAR    CO.       [cilAP.   III. 

and  promised  to  be  paid  in  is  a  fund  which  the  trastees  cannot 
squander  or  give  away."  Wliile  in  Sanger  v.  Upton,  Id.  50,  it  is  said: 
"When  debts  are  incurred  a  c<jiitract  arises  with  the  creditors  that 
it  [the  capital]  shall  not  be  withdrawn  or  applied  otherwise  than  upon 
their  demands  until  such  demands  are  Siitisfied."  And  in  the  s;ime 
connection  it  is  distinctly  stated  that  there  is  no  difference  between 
assets  paid  in  and  subscriptions;  that  "unpaid  stock  is  as  much  a 
part  of  this  pledge  and  as  nmch  a  j)art  of  the  a.ssets  of  the  comi)any 
as  the  cash  which  hius  been  j)aid  in  ujwn  it.  Creditors  have  the  same 
right  to  look  to  it  as  to  anything  else,  and  the  siime  right  to  insist 
upon  its  payment  as  upon  the  payment  of  any  other  debt  due  to  the 
company.  As  regards  creditors,  there  is  no  dislinclion  between  such  a 
demand  and  any  other  asset  ivhieh  may  form  a  part  of  the  properly  and 
effects  of  the  corporation."  This  language  is  quotetl  and  approved  in 
County  of  Morgan  v.  Allen,  103  U.S.  498,  508.  It  would  seem  clear 
that  this  is  the  correct  statement  of  the  law.  The  capital  (not  the 
mere  share  certificates)  means  nil  the  a.«sets,  jiowever  invested.  If 
a  subscriber  gives  his  note  for  his  stock,  that  note  is  no  more  and  no 
less  a  trust  fund  than  the  money  would  have  been  if  he  had  paid  cash 
down.  Capital  cannot  change  from  a  trust  to  not  a  trust  by  a  mere 
change  of  form.  It  is  either  all  a  trust  or  all  not  a  trust,  and  the 
"trust -fund"  rule,  whatever  that  be,  nuist  apply  to  all  alike,  and  in 
the  siune  way.  If  the  assets  of  a  corj)oration  are  given  back  to  stock- 
holders, the  result  is  the  same  as  if  the  shares  had  been  issued  wholly 
or  partly  as  a  bfmus.  The  latter  is  merely  a  short  cut  to  the  same 
result.  So  with  dividends  paiil  out  of  the  capital,  vohmtary  convey- 
ances, stock  paid  in  overvalued  property;  all  are  forms  of  one 
and  the  same  thing,  all  reaching  the  same  result  (a  disposition  of 
corporate  assets),  which  may  or  may  not  be  a  fraud  on  creditors, 
depending  on  circumstances.  This  much  being  once  settled,  the  solu- 
tion of  the  question  when  a  subscfjuent  creditor  can  insist  on  pay- 
ment of  stock  issued  as  paid  up,  but  not  in  fact  paid  for,  or  not  paid 
for  at  par,  becomes,  as  we  shall  presently  see,  comparatively  simple. 
Another  proposition  which  we  think  nmst  be  sound  is  that  credi- 
tors cannot  recover  on  the  ground  of  contract  when  the  corporation 
could  not.  Their  right  to  recover  in  such  cases  must  rest  on  the  ground 
that  the  acts  of  the  stockholders  with  reference  to  the  corporate 
capital  constitutes  a  fraud  on  their  rights.  We  have  here  a  case 
where  the  contract  Ix'tween  the  corporation  and  the  takers  of  the 
shares  was  specific  that  the  shares  should  not  be  paid  for.  Therefore, 
unlike  many  of  the  cases  cited,  there  is  no  ground  for  implying  a 
promise  to  pay  for  them.  The  parties  have  explicitly  agreed  that 
there  shall  be  no  such  implication,  by  agreeing  that  the  stock  shall 
not  be  paid  for.  In  such  a  case  the  creditors  undoubtedly  may  have 
rights  superior  to  the  corporation,  but  these  rights  cannot  rest  on 
the  impUcation  that  the  shareholder  agreed  to  do  something  directly 


CHAP.  III.]       HOSPES    V.  NORTHWESTERN    MFG.  &    CAR    CO.  297 

contrary  to  his  real  agreement,  but  must  be  based  on  tort  or  fraud, 
actual  or  presumed.  In  England,  since  the  act  of  1867,  there  is  an 
implied  contract  created  by  statute  that  "every  share  in  any  com- 
pany shall  be  deemed  and  be  taken  to  have  been  issued  and  to  be 
held  subject  to  the  payment  of  the  whole  amount  thereof  in  cash." 
This  statutory  contract  makes  every  contrary  contract  void.  Such 
a  statute  would  be  entirely  just  to  all,  for  every  one  would  be  ad- 
vised of  its  provisions,  and  could  conduct  himself  accordingly.  And 
in  view  of  the  fact  that  "watered"  and  "bonus"  stock  is  one  of  the 
greatest  abuses  connected  with  the  management  of  modern  cor- 
porations, such  a  law  might,  on  grounds  of  public  policy,  be  very 
desirable.  But  this  is  a  matter  for  the  legislature,  and  not  for  the 
courts.  We  have  no  such  statute;  and,  even  if  the  law  of  1873,  under 
which  the  car  company  was  organized,  impliedly  forbids  the  issue  of 
stock  not  paid  for,  the  result  might  be  that  such  issue  would  be  void 
as  ultra  vires,  and  might  be  canceled,  but  such  a  prohibition  would 
not  of  itself  be  sufficient  to  create  an  implied  contract,  contrary  to  - 
the  actual  one,  that  the  holder  should  pay  for  his  stock. 

It  is  well  settled  that  an  equity  in  favor  of  a  creditor  does  not  arise 
absolutely  and  in  every  case  to  have  the  holder  of  "bonus"  stock 
pay  for  it  contrary  to  his  actual  contract  with  the  corporation.  Thus 
no  such  equity  exists  in  favor  of  one  whose  debt  was  contracted 
prior  to  the  issue,  since  he  could  not  have  trusted  the  company  upon 
the  faith  of  such  stock.  First  Nat.  Bank  v.  Gustin,  etc.,  Mining  Co., 
42  Minn.  327  (44  N.W.  Rep.  198);  Coit  v.  Gold  Amalgamating  Co., 
119  U.S.  343  (7  Sup.  Ct.  Rep.  231);  Handleij  v.  Stutz,  139  U.S.  417, 
435  (11  Sup.  Ct.  Rep.  530).  It  does  not  exist  in  favor  of  a  subsequent 
creditor  who  has  dealt  with  the  corporation  with  full  knowledge  of 
the  arrangement  by  which  the  "bonus"  stock  was  issued,  for  a  man 
cannot  be  defrauded  by  that  which  he  knows  when  he  acts.  First 
Nat.  Bank  v.  Gustin,  etc.,  Mining  Co.,  supra.  It  has  also  been  held 
not  to  exist  where  stock  has  been  issued  and  turned  out  at  its  full 
market  value  to  pay  corporate  debts.  Clark  v.  Bever,  supra.  The 
same  has  been  held  to  be  the  case  where  an  active  corporation, 
whose  original  capital  has  been  impaired,  for  the  purpose  of  recup- 
erating itself,  issues  new  stock,  and  sells  it  on  the  market  for  the  best 
price  obtainable,  but  for  less  than  par  {Handley  v.  Stutz,  supra);  al- 
though it  is  difficult  to  perceive,  in  the  absence  of  a  statute  author- 
izing such  a  thing  (of  which  every  one  dealing  with  the  corporations 
is  bound  to  take  notice) ,  any  difference  between  the  original  stock  of 
a  new  corporation  and  additional  stock  issued  by  a  "going  concern." 
It  is  difficult,  if  not  impossible,  to  explain  or  reconcile  these  cases 
upon  the  "trust-fund"  doctrine,  or,  in  the  hght  of  them,  to  predicate 
the  liability  of  the  stockholder  upon  that  doctrine.  But  by  putting  it 
upon  the  ground  of  fraud,  and  applying  the  old  and  familiar  rules  of 
law  on  that  subject  to  the  peculiar  nature  of  a  corporation  and  the  re- 


298  H0SPE3    V.  NORTHWESTERN    MFG.   Jc    CAR    CO.       (ciIAP.  III. 

lation  which  its  stockhoklers  bear  to  it  and  to  the  pubhc,  we  have  at 
once  rational  und  lofjical  pound  on  which  to  stancl.  I'lie  capital  of  a 
corporation  is  the  l)a.sis  of  its  credit.  It  i.s  a  substitute  for  the  in- 
diviilual  liability  of  those  who  own  its  stock.  People  deal  with  it  and 
give  it  credit  on  the  faitli  of  it.  They  luive  a  right  to  assume  that  it 
has  paid-in  capital  to  the  amount  which  it  represents  itself  as  having; 
and  if  they  give  it  cre<lit  on  the  faith  of  that  rei)re.sentation,  and  if 
the  representation  is  false,  it  is  a  fraud  u|)on  them;  and,  in  ca.se  the 
corporation  becomes  insolvent,  the  law,  upon  the  jjlainest  principles 
of  connnon  justice,  says  to  the  delin(iuent  stockhokler,  "Make  that 
representation  good  by  paying  for  your  stock."  It  certainly  cannot 
refiuire  the  invention  of  any  new  doctrine  in  order  to  enforce  so 
familiar  a  rule  of  equity.  It  is  the  misrepresentation  of  fact  in  stating 
the  amount  of  capital  to  be  greater  than  it  really  is  that  is  the  true 
basis  of  the  liability  of  the  stockholder  in  such  cases;  and  it  follows 
that  it  is  only  those  creditoi-s  who  have  relied,  or  who  can  fairly  be 
presumed  to  have  relied,  upon  the  profes.sed  amount  of  capital,  in 
whose  favor  the  law  will  recognize  anil  enforce  an  e(iuity  against  the 
holders  of  "bonus"  stock.  This  furnishes  a  rational  and  uniform 
rule,  to  which  familiar  principle's  are  ea-sily  ai)j)lied,  and  which  frees 
the  subject  from  many  of  the  difhculties  and  apparent  incon.sisteiicies 
into  which  the  "trust-fund"  doctrine  luus  involved  it;  and  we  think 
that,  even  when  the  trust -fund  doctrine  has  been  invoked,  the  de- 
cision in  almost  every  well-consitlered  case  is  readily  referable  to  such 
a  rule. 

It  is  urged,  however,  that,  if  fraud  be  the  ba.sis  of  the  stockholders' 
liability  in  such  cases,  the  creditor  .should  affirmatively  allege  that 
he  believed  that  the  lionus  stock  had  been  paid  for,  and  repre.sent<>d 
so  much  actual  capital,  and  that  he  gave  credit  to  the  corjioration 
on  the  faith  of  it;  and  it  is  also  argu(>d  that,  while  there  may  be  a 
presumi)tion  to  that  effect  in  the  ca.se  of  a  subseciuent  creditor,  this 
is  a  mere  presumption  of  fact,  and  that  in  pleadings  no  presumptions 
of  fact  are  indulged  in.  This  position  is  ver>'  plausible,  and  at  first 
sight  would  seem  to  have  much  force;  but  we  think  it  is  un.'^ound. 
Certainly  any  such  rule  of  pleading  or  proof  would  work  very  in- 
equitably in  practice.  Inasmuch  as  the  capital  of  a  corporation  is 
the  basis  of  its  credit,  its  financial  standing  and  reputation  in  the 
community  has  its  source  in,  and  is  founded  upon,  the  amount  of  its 
professed  and  supposed  capital,  and  every  one  who  deals  with  it 
does  so  upon  the  faith  of  that  standing  and  reputation,  although,  as 
a  matter  of  fact,  he  may  have  no  pei-sonal  knowledge  of  the  amount  of 
its  professed  capital,  and  in  a  majority  of  cases  knows  nothing  about 
the  shares  of  stock  held  by  any  particular  stockholder,  or,  if  so,  what 
was  paid  for  them.  Hence,  in  a  suit  by  such  creditor  against  the 
holders  of  "bonus"  stock,  he  could  not  truthfully  allege,  and  could 
not  affirmatively  prove,  that  he  beUeved  that  the  defendants'  stock 


CHAP.  III.]       HOSPES    V.  NORTHWESTERN    MFG.  &    CAR    CO.  299 

had  been  paid  for,  and  that  he  gave  the  corporation  credit  on  the 
faith  of  it,  although,  as  a  matter  of  fact,  he  actually  gave  the  credit 
on  the  faith  of  the  financial  standing  of  the  corporation,  which  was 
based  upon  its  apparent  and  professed  amount  of  capital.  The  mis- 
representation as  to  the  amount  of  capital  would  operate  as  a  fraud 
on  such  a  creditor  as  fully  and  effectually  as  if  he  had  personal 
knowledge  of  the  existence  of  the  defendants'  stock,  and  believed 
it  to  have  been  paid  for  when  he  gave  the  credit.  For  this  reason, 
among  others,  we  think  that  all  that  it  is  necessary  to  allege  or  prove 
in  that  regard  is  that  the  plaintiff  is  a  subsequent  creditor;  and  that, 
if  the  fact  was  that  he  dealt  with  the  corporation  with  knowledge  of 
the  arrangement  by  which  the  "bonus"  stock  was  issued,  this  is  a 
matter  of  defense,  Gogebic  Inv.  Co.  v.  Iron  Chief  Min.  Co.,  78  Wis. 
427  (47  N.W.  Rep.  726).  Counsel  cites  Fogg  v.  Blair,  supra,  to  the 
proposition  that  the  complaint  should  have  stated  that  this  stock 
had  some  value;  but  that  case  is  not  in  point,  for  the  plaintiff  there 
was  a  prior  creditor;  and,  as  his  debt  could  not  have  been  contracted 
on  the  faith  of  stock  not  then  issued,  he  could  only  maintain  his 
action,  if  at  all,  by  alleging  that  the  corporation  parted  with  some- 
thing of  value. 

In  one  respect,  however,  we  think  the  complaint  is  clearly  in- 
sufficient. The  thresher  company  is  here  asking  the  interposition 
of  the  the  court  to  aid  in  enforcing  an  equity  in  favor  of  creditors 
against  the  stockholders  by  declaring  them  liable  to  pay  for  this 
stock  contrary  to  their  actual  contract  with  the  corporation.  While 
the  proceeding  is  not,  strictly  speaking,  an  equitable  action,  yet  the 
relief  asked  is  equitable  in  its  nature.  Under  such  circumstances, 
it  was  incumbent  upon  the  thresher  company  to  show  its  own  equi- 
ties, and  that  it  was  in  a  position  to  demand  such  relief.  It  was  not 
the  original  creditor  of  the  car  company,  but  the  assignee  of  the 
original  creditors.  By  that  purchase  it,  of  course,  succeeded  to  what- 
ever strictly  legal  rights  its  assignors  had ;  but  it  is  not  rights  of  that 
kind  which  it  is  here  seeking  to  enforce.  Under  such  circumstances 
we  think  it  was  incumbent  upon  it  to  state  what  it  paid  for  the 
claims,  or  at  least  to  show  that  it  paid  a  substantial,  and  not  a  mere 
nominal,  consideration.  The  only  allegation  is  that  it  paid  "a  valu- 
able consideration."  This  might  have  been  only  one  dollar.  It  ap- 
pears that  it  bought  the  claims  after  the  car  company  had  become 
insolvent,  and  its  affairs  were  in  the  hands  of  a  receiver;  also  that 
the  indebtedness  of  that  company  amounted  to  about  $3,000,000, 
and  that  there  were  not  corporate  assets  enough  to  pay  any  con- 
siderable part  of  it.  The  mere  chance  of  collecting  something  out  of 
the  stockholders  does  not  ordinarily  much  enhance  the  selling  price 
of  claims  against  an  insolvent  corporation.  If  any  person  or  company 
had  gone  to  work  and  bought  up  for  a  mere  song  this  large  indebted- 
ness of  the  car  company  for  the  purpose  of  speculating  on  the  Ua- 


300      EASTON    NATIONAL    BANK    V.  AMERICAN    BRICK    CO.      [CHAP.   III. 

bility  of  the  stockholders,  no  court  woukl  grant  thorn  the  reUef  here 
prayed  for.  It  would  say  to  thorn,  "Wo  will  not  create  and  enforce 
an  equity  for  the  benetit  of  any  such  speculation."  Counsel  for  re- 
spondent suggest  that  the  thresher  company  is  but  an  organization 
of  the  original  creditors,  who  formed  it,  and  poolocl  their  claims,  so 
as  to  save  somoHiing  out  of  the  wreck  of  the  car  company;  but  noth- 
ing of  the  kind  is  alleged.  On  this  ground  the  demurrer  should  have 
been  sustained. 

Note.  —  See,  accord,  Lcn  v.  Iron  Belt  Co.,  147  Ala.  421;  Slnte 
Truest  Co.  V.  Turner,  1)1  Iowa,  iWA;  Hank  v.  Xortlnip,  82  Kan.  ()38; 
Miller  V.  II{<j(jenhotham's  Adm'r,  9'.i  S.W.  (Ky.)  655;  Colonial  Tru.<<l 
Co.  V.  McMillan,  188  Mo.  547;  McAlliKter  v.  American  Iloapilal 
Ass'n,  62  Or.  530;  Martin  v.  i>outh  Salem  Land  Co.,  94  Va.  28; 
Adamant  Mfg.  Co.  v.  Widlnce,  !(>  Wash.  (>14,  622;  Gogebic  Invest- 
ment Co.  V.  Iron  Chief  Mining  Co.,  78  \\\h.  427. 


EASTON   NATIONAL   BANK   r.   AMERICAN   BRICK   CO. 

70  N.J.  Vai  732.      1U(M'.. 

The  question  was  whether  croditoi-s  who  had  oxt(>ndod  credit  to  a 
corporation  knowing  that  its  stock  had  boon  issued  for  overvalued 
property  could  rofiuiro  fuHhor  payments  by  the  stockholders  to  pay 
the  debts  due  them.  The  Court  of  Errors  and  Appeals  hold,  by  a 
vote  of  11  to  2,  that  they  could. 

PiTNKV,  ,1.  This  brings  us  to  a  consideration  of  the  grounds  upon 
which  the  learno<l  vice-chancellor  denied  the  receiver's  prayer  for 
relief  so  far  as  the  Green  claims  are  concemecL  There  is  a  line  of  re- 
ported cases  holding  that  stockholders  who  participate  or  aid  in  the 
issue  of  paid-up  stock  upon  payment  of  less  than  its  par  vtdue,  or 
who  have  knowledge  of  the  act  and  acquiesce  t heroin,  cannot  after- 
wards complain  of  the  transaction,  either  as  stockholders  or  as  credi- 
tors. Some  of  these  are  cited  in  Cook  "Stock,  §  39,  referred  to  in  the 
opinion  of  the  vice-chancellor.  Others  will  be  cited  below.  So  far  as 
we  have  observed,  however,  all  well-considered  decisions  that  adopt 
this  doctrine  are  based  upon  general  principles  of  equity,  in  the  ab- 
sence of  any  controlling  statute  or  pubUc  policy,  resort  being  had 
alone  to  the  "trust  fund  theory"  as  a  basis  for  the  stockholder's 
liability  to  creditoi-s.  The  theory  of  these  cases  is  that,  as  between 
the  stockholder  and  the  company,  there  is  no  absolute  liability  to 
pay  for  his  stock  in  full,  and  no  legal  prohibition  standing  in  the  way 
of  an  agreement  that  the  stock  shall  be  issued  to  him  for  less  than 
full  payment.  An  agreement  to  this  effect  is  therefore  treated  as 
valid  between  the  parties,  and  subject  to  avoidance  only  at  the  in- 


CHAP.  III.]      EASTON    NATIONAL    BANK    V.  AMERICAN    BRICK    CO.       301 

stance  of  those  creditors  who  have  been  defrauded  by  their  reHance 
upon  the  stock  issues  as  representative  of  capital  actually  paid  into 
the  company. 

The  "trust  fund  theory"  has  been  repeatedly  adopted  by  the 
courts  of  this  state  to  the  extent  that  it  deals  with  the  capital  stock 
paid  in  or  subscribed  for  as  a  fund  for  the  payment  of  debts  of  which 
the  directors  are  trustees,  so  that  they  cannot  dispose  of  it  to  the 
prejudice  of  creditors  without  an  equivalent  consideration,  nor  de- 
feat the  trust  by  accepting  any  simulated  payment  of  a  stock  sub- 
scription, or  by  any  other  device  short  of  actual  payment  in  good 
faith.  National  Trust  Co.  v.  Miller,  33  N.J.  Eq.  (6  Stew.)  155,  163; 
Wetherbee  v.  Baker,  35  N.J.  Eq.  (8  Stew.)  501,  512;  Bickley  v. 
Schlag,  46  N.J.  Eq.  (1  Diqk.)  533,  537. 

But  so  far  as  this  so-called  "trust  fund  doctrine"  excludes  any 
creditors  from  relief  against  the  stockholders,  it  does  so  on  the 
theory  that  the  liability  of  the  latter  rests  alone  upon  their  having 
held  out  the  capital  of  the  company  to  persons  extending  credit 
to  it  as  the  source  from  which  repayment  might  be  expected.  If 
this  be  the  only  foundation  of  the  stockholder's  liability,  it  is  per- 
haps not  irrational  to  debar  creditors  whose  claims  accrued  prior  to 
the  stock  issue  in  question,  and  subsequent  creditors  who  had  no- 
tice when  they  extended  credit  that  the  stock  issue  did  not  represent 
in  whole  or  in  part  what  it  purported  to  represent  —  that  is,  an 
equivalent  amount  in  value  added  to  the  assets  of  the  company. 

But  in  this  state  the  stockholder's  liability  to  creditors  does  not 
depend  alone  or  chiefly  upon  the  theory  of  "holding  out."  It  de- 
pends upon  the  stockholder's  voluntary  acceptance,  for  considera- 
tion touching  his  own  interest,  of  a  statutory  scheme  to  which 
watered  stock,  under  whatever  device  issued,  is  absolutely  alien,  and 
which  requires  stock  subscriptions  to  be  made  good  for  the  benefit 
of  creditors  of  insolvent  companies,  without  distinction  between 
prior  and  subsequent  creditors,  or  between  creditors  who  had  notice 
and  those  who  had  none.  The  corporation  now  under  consideration 
was  organized  in  1886,  under  the  General  Corporation  act  of  New 
Jersey  as  it  then  stood  —  that  is,  the  act  of  1875  and  its  supplements. 
Rev.  1877,  p.  175;  1  Gen.  Stat.  p.  907.  Section  5  of  this  act  declares 
that  "where  the  whole  capital  of  a  corporation  shall  not  have  been 
paid  in,  and  the  capital  paid  shall  be  insufficient  to  satisfy  the  claims 
of  its  creditors,  each  stockholder  shall  be  bound  to  pay  on  each 
share  held  by  him  the  sum  necessary  to  complete  the  amount  of 
such  share,  as  fixed  by  the  charter  of  the  company,  or  such  propor- 
tion of  that  sum  as  shall  be  required  to  satisfy  the  debts  of  the  com- 
pany." 

Section  54  declares:  "that  nothing  but  money  shall  be  considered 
as  payment  of  any  part  of  the  capital  stock  of  any  company  or- 
ganized under  this  act,  except  as  hereinafter  provided  for  the  pur- 


302       EASTON    NATIONAL    BANK    V.  AMERICAN    BRICK    CO.      [cHAP.   III. 

chase  of  property,  and  no  loan  of  money  shall  be  made  to  a  stock- 
holder or  officer  therein,"  etc. 

Section  5.5  provides  for  the  issuance  of  stock  for  property  pur- 
cha.sed,  to  the  fair  value  of  such  property,  but  as  it  has  already  been 
determined  that  this  section  was  not  complio<l  with  in  the  present 
case,  it  need  not  be  quoted  here.  Other  sections  (7,  .33,  53,  etc.) 
contain  provisions  intended  to  prevent  the  withdrawal  by  stock- 
holders, directly  or  indirectly,  of  any  part  of  the  capital  stock  to  the 
detriment  of  creditors. 

The  express  prohil)ition  of  §  54  and  the  whole  spirit  and  policy  of 
the  act  are  so  clearly  oppo.sed  to  any  arrangement  by  which  cor- 
porate stock  shall  be  issued  without  receipt  by  the  company  of  an 
equivalent  in  value  to  its  par  that  any  agreement  to  this  effect  must 
1)6  deemed  void  as  contrary  to  tlu^  policy  of  the  law.  If  any  doubt 
has  existe<l  upon  this  question  it  must  l)e  taken  as  settled  by  the 
decision  of  this  court  in  Volney  v.  \ixon,  68  N..J.  Kq.  605. 

Nor  do  we  deem  that  the  weight  of  authority  in  other  jurisdictions 
is  to  the  contrary  of  this.  As  already  remarked,  those  ca.ses  which  are 
apparently  opposed  procee<l  upon  a  view  of  the  e(iuitable  rights  of 
the  parties  as  they  exist  in  the  absence  of  express  statutory  mandate 
or  prohibition.  .  .  . 

In  IIospcs  V.  Northwestern  Mfg.  Co.,  48  Minn.  174,  it  was  held  that 
if  stock  is  issued  by  siich  a  corporation  upon  a  contract  that  it  shall 
not  be  paid  for,  its  cretlitors  cannot  recover  payment  for  such  stock 
on  account  of  the  implied  promise  of  the  persons  receiving  it  that 
such  payment  will  b(«  made.  Manifestly  such  a  decision  could  not 
properly  be  reached  with  respect  to  any  corporation  organized  under 
the  New  Jersey  law.  The  opinion  contains  an  interesting  criticism 
of  the  "trust-fund  doctrine."  resulting  in  what  seems  to  be  its  virtual 
repudiation.  As  showing,  however,  that  the  doctrine,  where  rec- 
ognized, must  give  place  to  an  express  statutory  provision,  the  fol- 
lowing excerpt  from  the  opinion  is  instructive:  "In  England,  since 
the  act  of  1867,  there  is  an  implied  contract  created  by  statute  that 
'ever\'  share  in  any  company  shall  be  deemed  and  be  taken  to  have 
been  issued  and  to  be  held  subject  to  the  payment  of  the  whole 
amount  thereof  in  cash.'  This  statutory-  contract  makes  ever>'  con- 
trary contract  void.  Such  a  statute  would  be  entirely  just  to  all,  for 
every  one  would  be  advised  of  its  provisions  and  could  conduct  him- 
self accordingly.  And  in  view  of  the  fact  that  'watered'  and  'honm' 
stock  is  one  of  the  greatest  abuses  connected  with  the  management  of 
modem  corporations,  such  a  law  might,  on  grounds  of  public  policy, 
be  very  desirable.  But  this  is  a  matter  for  the  legislature,  and  not 
for  the  courts.  We  have  no  such  statute." 

We  do  not  wish  to  be  understood  as  as.senting  to  the  reasoning  of 
the  foregoing  cases  so  far  as  they  debar  from  recourse  to  the  stock- 
holder's hability  those  creditors  whose  claims  accrued  before  the 


CHAP.  III.]  MEYER    V.  MINING    &    MILLING    CO.  303 

stock  issue  in  question,  and  those  subsequent  creditors  who  extended 
credit  to  the  company  with  knowledge  that  the  stock  was  issued  as 
full  paid  when  it  was  not  full  paid  in  fact.  With  respect  to  prior 
creditors,  the  query  arises.  Why  may  they  not  resort  to  after-ac- 
quired property  of  the  company,  and  as  well  stock  subscriptions  as 
more  tangible  assets?  With  respect  to  subsequent  creditors,  the 
query  is,  Why,  if  they  knew  the  stock  issued  as  full  paid  was  not  full 
paid  in  fact,  may  they  not  be  justified  in  dealing  with  the  very  stock- 
holder's liability  thus  arising  as  a  part  of  the  assets  of  the  company 
for  the  purpose  of  satisfying  creditors'  claims?  But  without  spend- 
ing time  in  discussion  of  these  questions,  we  content  ourselves  with 
saying  that  our  Corporation  act  places  the  stockholder's  liability  to 
creditors  upon  a  firmer  foundation  than  the  "trust-fund  doctrine" 
as  expounded  in  the  above  cases,  the  statute  absolutely  prohibiting 
agreements  for  the  issue  of  stock  for  a  consideration  less  than  its  par 
value,  and  affording  relief  to  all  creditors  without  distinction. 

Note.  —  See,  accord,  Sprague  v.  National  Bank  of  America,  172 
111.  149;  Marion  Trust  Co.  v.  Biish,  170  Ind.  686;  Jones  v.  Whitworth, 
94  Tenn.  602. 

Cf.  Johnson  v.  Tennessee  Oil  Co.,  74  N.J.  Eq.  32. 


MEYER  V.   MINING  &   MILLING   CO. 

192  Mo.  162.     1905. 

Marshall,  J.  .  .  .  The  promoters  of  the  scheme  secured  an  option 
on  three  mines  near  Ouray,  Colorado,  only  one  of  Avhich  had  been 
worked,  for  $125,000,  to  be  paid  in  installments  of  $30,000  in  1888, 
which  was  paid,  $30,000  on  the  1st  of  July,  1889,  $30,000  on  the  1st 
of  December,  1889,  and  $35,000  on  the  1st  of  July,  1890.  Before  the 
second  installment,  due  July  1,  1889,  fell  due,  the  parties  became 
satisfied  that  the  mine  was  worthless  and  surrendered  their  option 
and  ceased  business.  The  original  option  was  taken  by  Buschman 
and  was  afterwards  transferred  to  Chandler,  and  was  turned  over  by 
Chandler  to  the  defendant  company  and  constitutes  the  sole  con- 
sideration for  the  799,840  shares,  amounting  to  $7,998,400,  which 
were  issued  to  Chandler.  The  only  cash  that  was  paid  for  stock  was 
by  the  seventeen  subscribers,  fifteen  of  whom  subscribed  for  ten 
shares  each  and  two  for  five  shares  each,  and  those  who  thus  paid 
cash  for  stock  are  not  held  liable  in  this  case,  but  their  stock  has  been 
treated  as  full-paid.  Some  of  them  thereafter  acquired  portions  of 
the  Chandler  stock,  and  those  who  did  so  with  knowledge  of  the 
transaction  are  the  only  ones  held  liable  in  this  case.  The  company 
was  capitalized  for  $8,000,000.   Thus  it  appears  that  with  only  an 


304  MFYER    V.  MINING    &    MILLING    CO  [CHAP.  III. 

option  on  an  undeveloped,  uncertain  mine,  for  which  the  promoters 
agreed  to  pay  S125,000,  but  paid  only  to  S30,0()0,  a  company  was 
organized  with  a  capital  stock  of  §8,000,000,  and  S7,09S,-100  of  stock 
was  attempted  to  be  paid  up  by  the  transfer  to  the  company  of  the 
option  aforesaid. 

The  mere  statement  of  these  facts  is  a  sufficient  demonstration  of 
the  utter  fallacy  of  the  contention.  Whatever  doubt  may  have  ex- 
isted, and  whatever  room  for  contention  there  may  have  been  on  the 
subject  as  to  the  right  of  incorporators  to  turn  over  property,  at  a 
valuation  put  upon  it  by  them,  to  the  company,  in  payment  of  stock 
issued  by  the  company,  prior  to  the  Constitution  of  1875,  and  im- 
mediately thereafter,  all  such  questions  have  been  fully  and  finally 
set  at  rest  by  the  clear,  exhaustive  and  unanswerable  oi)ini()n  of 
Brace,  J.,  in  Van  Cleve  v.  Berkey,  143  Mo.  109.  In  that  case  the 
decisions  in  other  States  were  elaborately  reviewed,  and  the  decisions 
of  this  State,  begimiing  with  Choutenu  v.  Dean,  7  Mo.  App.  210,  and 
running  down  to  Woolfolk  v.  Janiinri/,  131  Mo.  ()20,  were  fully  set 
out  and  considered,  and  the  conclusion  drawn  as  follows:  — 

"  Upon  a  review  of  all  the  cases  decided  by  the  appellate  courts  of 
this  State  since  the  adoption  of  the  Constitution  of  1875.  the  ruling 
in  all  of  which  will  be  found  to  be  in  harmony,  it  is  impos.sible  to 
escape  the  convietion  that  in  this  State,  whatever  may  be  the  case 
in  some  other  States,  the  American  Trust  Doctrine,  as  suggested  by 
Mr.  Justice  Harlan,  has  indeed  been '  reinforced '  b}'  its  Constitution 
and  statutes;  and  that  the  proposition  that  the  stock  of  a  corporation 
must  be  paid  for  'in  meal  or  in  malt,'  in  money  or  in  money's  value, 
is  not  a  mere  figure  of  speech,  but  has  the  significance  of  its  terms. 
It  may  be  paid  for  in  property,  but  in  such  case  the  property  must 
be  the  fair  ecjuivalent  in  value  to  the  par  value  of  the  stock  issued 
therefor;  that  it  is  the  duty  of  the  stockholders  to  see  that  it  pos- 
sesses such  value;  that  when  a  corporation  is  sent  forth  into  the 
commercial  world,  accredited  by  them  as  possessed  of  a  capital  in 
money,  or  its  equivalent  in  property,  equal  to  the  par  value  of  its 
capital  stock,  every  pei-son  dealing  with  it,  unless  otherwise  advised, 
has  a  right  to  extend  credit  to  it  on  the  faith  of  the  fact  that  its  capi- 
tal stock  has  been  so  paid,  and  that  the  money,  or  its  equivalent  in 
property,  will  be  forthcoming  to  respond  to  his  legitimate  demands. 
In  short,  that  it  is  the  duty  of  the  stockholder,  and  not  of  the  credi- 
tor, to  see  that  it  is  so  paitl;  hence,  the  inquiry  in  a  case  between  the 
creditor  and  a  stockholder  when  property  has  been  put  in  for  the 
capital  stock  of  a  corporation,  is  not  whether  the  stockholder  be- 
lieved, or  had  reason  to  beUeve,  that  the  property  was  equal  in  value 
to  the  par  value  of  the  capital  stock,  but  whether,  in  point  of  fact, 
it  was  such  equivalent." 

This  case  has  since  been  uniformly  followed  and  approved  bj'  this 
court.  Hequemhourg  v.  Edwards,  155  ^NIo.  I.e.  520;  Steatn  Stone  Cutter 


CHAP.  III.]  NOTE.  305 

Co.  V.  Scott,  157  Mo.  I.e.  525;  Bernj  v.  Rood,  168  Mo.  I.e.  330;  Chris- 
man-Sawyer  Co.  v.  Independence  Mfg.  Co.,  168  Mo.  I.e.  643;  Shields 
V.  Hobart,  172  Mo.  I.e.  510;  Rumsey  Mfg.  Co.  v.  Kai7ne,  173  Mo. 
I.e.  560. 

The  rule  in  this  State,  therefore,  is  that  unpaid  subscriptions  on 
capital  stock  of  a  corporation,  constitute  a  trust  fund  for  the  benefit 
of  creditors,  and  that  whilst  incorporators  may  turn  over  property 
instead  of  cash  in  payment  of  stock,  that  property  must  be  fully 
equal  to  the  value  placed  upon  it,  and  its  value  is  determined  by  the 
fact  and  not  by  the  opinions  of  the  persons  turning  it  over,  even 
though  they  may  have  honestly  beheved  it  to  be  worth  the  amount 
certified;  and  that  all  persons  who  take  stock  thus  paid  for  with 
knowledge  of  the  manner  in  which  it  was  paid,  take  it  subject  to  the 
right  of  a  creditor  thereof  to  have  the  question  of  whether  it  has  been 
fully  paid  or  not  adjudicated  by  the  court;  but  that  where  such 
stock  is  acquired  by  persons  who  have  no  knowledge  of  such  facts, 
but  who  take  it  as  fully  paid  and  non-assessable  stock,  they  cannot 
be  held  liable  for  any  unpaid  subscription  nor  for  the  difference 
between  the  amount  they  paid  for  the  stock  and  the  par  value 
thereof. 

Note.  —  A  transferee  of  stock  issued  at  a  discount  or  for  over- 
valued property,  who  had  notice  of  the  facts  at  the  time  of  the 
transfer,  is  liable  to  creditors  to  the  same  extent  that  his  transferor  is 
liable.  See  Allen  v.  Grant,  122  Ga.  552;  Coleman  v.  Howe,  154  111. 
458;  Boidton  Carbon  Co.  v.  Mills,  78  Iowa,  460;  Kelly  v.  Clark,  21 
Mont.  291.   Cf.  Morgan  v.  Rowland,  89  Me.  484. 

But  a  transferee  for  value  and  without  notice  is  not  liable.  See 
Sprague  v.  National  Bank  of  America,  172  111.  149;  Brant  v.  Ehlen, 
59  Md.  1 ;  Young  v.  Erie  Iron  Co.,  65  ]\Iich.  Ill ;  Finletter  v.  Appleton, 
195  Pa.  349;  West  Nashville  Co.  v.  Nashville  Savings  Bank,  86  Tenn. 
252;  Davies  v.  Ball,  64  Wash.  292.  Cf.  White,  Corbin  &  Co.  v.  Jones, 
167  N.Y.  158;  Myers  v.  Seeley,  Fed.  Gas.  9994. 


NOTE. 


Constitutional  and  statutory  provisions  in  the  several  States,  on 
issues  of  stock  at  a  discount  or  for  overvalued  property,  and  some 
of  the  leading  eases,  are  given  below. 

Alabama.  Section  234  of  the  Gonstitution  provides  that  "No 
corporation  shall  issue  stocks  or  bonds  except  for  money,  labor  done, 
or  money  or  property  actually  received;  and  all  fictitious  increase  of 
stock  or  indebtedness  shaU  be  void." 


306  NOTE.  [chap.   III. 

Section  3467  of  the  Code  of  1907  provides:  "All  Bubscriptioiis  to 
or  for  the  capital  stock  of  the  eorj)oration  inu.st  be  payal)le  in  iiujiioy, 
but  may,  except  as  otherwise  provided  in  this  article,  be  discharged 
by  the  renthtioii  of  .stipulated  necessary  services  or  the  pei-fonnance 
of  stipulated  necessary  labor,  or  the  transfer  of  projierty,  at  the 
reasonable  value  thereof,  but  in  such  eases  the  subscription  list  shall 
state  the  names  of  the  sub.scril)ers  who  are  privileged  to  discharge 
their  subscriptions  in  services  or  lal)or  or  property  and  the  nature 
and  character  of  the  services  of  [.sic]  labor  in  wliich  the  same  are 
rendered  or  performed,  and  the  character  ami  a  brief  description  of 
such  property,  and  when  it  is  to  be  transferre<l  to  the  company." 

Vaughn  v.  Alabama  National  Bank,  143  Ala.  072  (VMU).  If  stock 
is  sold  by  a  corjioration  at  a  discount,  the  stockholdei-s  may  \)C  re- 
quired to  pay  the  amount  remaining  unpaid  to  satisfy  creditors. 

Elyton  Land  Co.  v.  Birmingham  Co.,  92  Ala.  407  (1890).  Ex- 
tracts from  the  opinion  are  .set  forth,  supra. 

Lea  v.  Iron  Brit  Mfg.  Co.,  147  Ala.  421  (l'.)O(i).  Land  costing 
$100,(JOO  was  capitalized  at  S1,2:)0,(HJ<),  §250.000  of  stock  being  re- 
turned to  the  treasury  of  the  corporation.  This  was  done  during  the 
excitement  of  a  speculative  period,  when  the  price  of  lands  was 
rapidly  advancing.  The  court  held  (p.  42.'))  that,  while  there  had 
been  no  purpose  to  defraud,  nevertheless  the  land  conveyed  was  not 
at  that  time  of  the  money  value  at  which  it  was  estimated,  and  "the 
corporators  must  have  known  that  fact,  however  much  they  may 
have  believcMl  it  would  advance  in  the  future."  But  subsecjuent  cred- 
itors, with  knowletige  of  the  facts  at  the  time  they  l)ecame  creditors, 
cannot  complain. 

Smith  v.  Alabama  Ass'n,  123  Ala.  538  (1898).  A  contract  by  a 
corporation  to  pay  a  subscrilx^r  to  its  stock,  in  dividends,  an  amount 
equal  to  the  amount  the  subscriber  pays  for  the  stock  is  unen- 
forcible. 

Fitzpatrick  v.  Dispatch  Publishing  Co.,  83  Ala.  604  (1887).  An 
existing  stockholder  may  restrain  an  issue  of  stock  not  for  proper 
consideration. 

Parsons  v.  Joseph,  02  Ala.  403  (1S90).  If  stock  has  been  issued 
without  proper  consideration,  other  stockholders  who  are  injured 
may  have  it  canceled. 

State  V.  Webb,  97  Ala.  Ill  (1802).  Issue  of  stock  without  a  proper 
consideration  is  a  cause  for  the  forfeiture  of  the  corporate  existence. 

Arizona'.  Section  2102,  Civil  Code,  Revised  Statutes  of  1913, 
provides:  "All  fictitious  increase  or  decrease  of  stock  or  indebtedness 
shall  be  null  and  void." 

In  Johnson  v.  Tennessee  Oil  Co.,  74  N.J.  Eq.  32  (1908),  a  creditor 
of  an  Arizona  corporation  sought  to  hold  the  stockholders  on  the 
ground  that  the  stock  had  been  issued  for  overvalued  property.  The 


CHAP.  III.]  NOTE.  307 

court  said  (p.  37):  "The  capitalization  in  this  case  was  so  grossly 
excessive  as  to  be  fraudulent,  and  the  complainant  would  be  entitled 
to  relief  on  this  ground  of  fraud  but  for  the  fact  that  he  was  a  sub- 
sequent creditor  with  full  notice  of  the  fraudulent  overvaluation." 

Arkansas.  Section  8  of  Art.  12  of  the  Constitution  provides:  "No 
private  corporation  shall  issue  stocks  or  bonds,  except  for  money 
or  property  actually  received  or  labor  done,  and  all  fictitious  increase 
of  stock  or  indebtedness  shall  be  void." 

Wait  V.  McKee,  95  Ark.  124  (1910).  Directors  of  an  insurance 
corporation  issued  its  stock  as  full  paid  at  a  50%  discount.  Held, 
that  the  directors  could  not  be  held  to  have  damaged  the  corpora- 
tion, until  the  remedy  against  the  stockholders  for  the  remaining 
50%  had  been  proved  inadequate.  "The  stockholders  are  liable  for 
the  full  amount  of  their  several  stock  subscriptions,  notwithstanding 
the  wrongful  credits  on  the  notes." 

Lester  v.  Bemis  Lumber  Co.,  71  Ark.  379  (1903).  The  creditor  of  a 
Texas  corporation  was  held  entitled  to  collect  from  stockholders 
who  had  received  stock  for  overvalued  property.  The  provision  of 
the  Texas  Constitution  was  almost  identical  with  that  of  the  Arkan- 
sas Constitution.  The  stock  had  been  issued  for  the  stock  of  another 
corporation,  and  the  court  was  of  opinion  (1)  that  payment  of  stock 
in  stock  of  another  corporation  was  invalid:  and  (2)  that,  in  any 
event,  the  stock  given  in  payment  was  intentionally  overvalued  to 
the  extent  of  more  than  double  the  actual  value.  "However  honest 
the  intentions  of  these  parties  may  have  been,  in  law  it  was  a  fraud 
upon  the  right  of  the  creditors  of  the  corporation,  which  entitles 
them  to  relief." 

California.  Section  359  of  the  Civil  Code  provides:  "No  corpora- 
tion shall  issue  stocks  or  bonds  except  for  money  paid,  labor  done  or 
property  actually  received,  and  all  fictitious  increase  of  stock  or 
indebtedness  is  void." 

Vermont  Co.  v.  Declez  Co.,  135  Cal.  579  (1902).  Holders  of  stock 
issued  at  a  discount  are  liable  to  creditors. 

Herron  Co.  v.  Shaw,  165  Cal.  668  (1913).  Extracts  from  the  opinion 
in  this  case  are  set  forth,  supra. 

Colorado.  Mills  Statutes,  1912,  sections  994,  995,  and  1008,  are  as 
given  below.  Section  995  is  substantially  the  same  as  section  9  of 
Art.  XV  of  the  Constitution. 

994.  The  directors  or  trustees  of  any  corporation  may  purchase 
mines,  manufactories  and  other  property  necessary  for  their  business 
and  issue  stock  to  the  amount  of  the  value  thereof  in  payment  there- 
for; and  the  stock  so  issued  shall  be  declared  and  taken  to  be  full- 
paid  stock  and  not  Uable  to  any  further  calls  or  assessments,  except 


308  NOTE.  [chap.  III. 

as  hereinafter  provided;  neither  shall  the  stockholdei"s  thereof  be 
liable  to  any  further  payments  under  the  provisions  of  [§  1(J(JH],  but 
in  all  statements  and  reports  of  the  comi)any,  this  stock  shall  not 
be  stated  or  re})orted  as  bcinj;  issued  for  cash  paid  into  the  company, 
but  shall  be  reported  in  this  respect  according  to  the  facts. 

995.  No  corporation  shall  issue  stock  or  bonds  except  for  labor 
done,  services  performed,  or  money  or  property  actually  received, 
and  all  fictitious  increiuse  of  stock  or  indebtedness  shall  be  void. 

1008.  Each  stockholder  shall  be  lial)le  for  the  tlebts  of  the  cor{)ora- 
tion  to  the  extent  of  the  amount  that  may  be  unpaitl  upon  the  stock 
held  by  him. 

There  are  also  provisions  relating  to  mining  companies  in  sections 
1109  and  1110. 

Felker  v.  Sullivan,  34  Col.  212  (1905).  The  court  leaves  open  the 
question  whether  the  trustee  in  bankruptcy  of  a  corporation  may 
collect  from  persons  to  whom  stock  was  issued  at  a  discount. 

A.  Leschen  &  Sons  Hope  Co.  v.  Allen,  187  Fed.  977  (1911).  The 
court  construes  the  Colorado  statutes  relating  to  mining  companies, 
and  concluiles  that  Colorado  iliiTerentiates  between  the  incorporation 
of  mining  enterprises  and  general  enterprises,  and  that  it  permits 
mining  corporations  to  issue  full-|)ai(l  and  non-a.s.sessable  shares  at 
a  price  less  than  par. 

In  Buck  V.  Jones,  IS  Col.  App.  250  U903),  and  Speer  v.  Bordelcau, 
20  Col.  App.  413  (1905),  the  court  did  not  treat  raining  corporations 
as  being  dilTerentiated  from  other  cori)orations.  In  Buck  v.  Jones  a 
stockholder  of  a  mining  corj^oration  was  held  liable  to  creditors.  The 
stock  had  been  issued  for  the  transfer  of  a  location,  to  which  the 
transferor  had  not  entitled  himself,  and  therefore  there  was  no  con- 
sideration for  the  issue.  In  Speer  v.  Bordeleau  there  was  no  evidence 
that  the  mining  property  had  been  received  at  a  fraudulent  over- 
valuation. In  Buck  V.  Jones  there  is  a  dictum  that  mining  stock  may 
be  issued  for  property  taken  at  its  "prospective  value,  that  is,  value 
which  in  the  judgment  of  the  parties  the  property  actually  has,  but 
which  development  is  neces.sary  to  disclose." 

Connecticut.  Section  12  of  chap.  194  of  PubUc  Acts  of  1903: 
"  If  any  stock  shall  be  paid  for  otherwise  than  in  cash,  a  majority  of 
the  directors  shall  make  and  sign  upon  the  record  book  of  the  cor- 
poration a  statement  showing  particularly  of  what  the  propeily  re- 
ceived in  payment  for  stock  subscriptions  consists,  and  that  it  has 
an  actual  value  equal  to  the  amount  for  which  it  is  so  received.  The 
judgment  of  the  directors  as  to  the  value  of  propertj'^  accepted  in 
payment  of  stock  shall  be  final;  but  the  directors  concurring  in  the 
judgment  of  such  value,  in  case  of  fraud  in  the  overvaluation  of  such 
property,  shall  be  jointly  and  severally  liable  to  the  corporation  for 
the  amount  of  the  difference  between  the  actual  value  of  any  prop- 


CHAP.  III.]  NOTE.  309 

erty  so  accepted  in  payment  at  the  time  of  such  acceptance,  and  the 
amount  for  which  it  is  received  in  payment." 

New  Haven  Trust  Co.  v.  Gaffney,  73  Conn.  480  (1901).  The  holder 
of  stock  in  an  insurance  corporation  issued  at  a  discount  is  Hable  to 
creditors  to  the  extent  of  the  unpaid  balance. 

Delaware.  Section  14  of  the  General  Corporation  Law,  as  amended 
by  chap.  155  of  the  Laws  of  1905,  provides:  "Subscriptions  to,  or 
purchase  of,  the  capital  stock  of  any  corporation  organized  or  to  be  or- 
ganized under  any  law  of  this  State  may  be  paid  for,  wholly  or  partly, 
by  cash,  by  labor  done,  by  personal  property,  or  by  real  property  or 
leases  thereof;  and  the  stock  so  issued  shall  be  declared  and  taken  to 
be  full  paid  stock  and  not  Uable  to  any  further  call,  nor  shall  the 
holder  thereof  be  hable  for  any  further  payments  under  the  provi- 
sions of  this  Act.  And  in  the  absence  of  actual  fraud  in  the  trans- 
action, the  judgment  of  the  Directors,  as  to  the  value  of  such  labor, 
property,  real  estate  or  leases,  shall  be  conclusive." 

District  of  Columbia.  Section  613  of  the  Code  of  Law  provides: 
"No  company  incorporated  under  this  subchapter  shall  be  au- 
thorized to  transact  any  business  until  ten  per  centum  of  the  capital 
stock  shall  have  been  actually  paid  in,  either  in  money  or  in  property 
at  its  actual  value ;  and  it  shall  be  lawful  for  the  trustees  to  call  in  and 
demand  from  the  stockholders  the  residue  of  their  subscriptions  in 
money  or  property  at  such  times  and  in  such  installments  as  the 
trustees  shall  deem  proper." 

Florida.  Section  2653  of  the  Compiled  Laws  of  1914  provides: 
"  The  capital  stock  of  all  corporations  shall  be  divided  into  shares  .  . . , 
and  all  payments  of  stock  and  of  interest  money  shall  be  made  in 
lawful  money  of  the  United  States  unless  it  be  stated  in  the  charter 
that  the  capital  stock  or  some  therein  designated  portion  of  the 
stock  shall  be  payable  in  property,  labor  or  services  at  a  just  valua- 
tion to  be  fixed  by  the  incorporators,  or  by  the  directors  at  a  meeting 
called  for  such  purpose.  Property,  labor  or  services  may  also  be  pur- 
chased or  paid  for  with  capital  stock  at  a  just  valuation  of  such  prop- 
erty, labor  or  services,  to  be  fixed  by  the  directors  of  the  company 
at  a  meeting  called  for  such  purpose." 

Knight  &  Wall  Co.  v.  Tamva  Brick  Co.,  55  Fla.  728  (1908).  Holders 
of  stock  issued  as  a  bonus  upon  the  purchase  of  bonds  are  Hable  to 
creditors. 

Georgia.  Allen  v.  Grant,  122  Ga.  552  (1905).  If  stock  is  issued  for 
property  known  to  be  worth  not  more  than  10  per  cent  of  the  par 
value  of  the  stock,  the  holders  are  hable  to  creditors.  "If  the  con- 
tract to  receive  less  in  money  than  the  face  of  the  stock  will  not  defeat 


310  NOTE.  (chap.  III. 

his  right  to  recover,  neither  should  it  be  defeated  by  a  fraudulent 
agreement  to  receive  less  in  property.  .  .  .  Neither  the  eorporiilion  nor 
the  subscriber,  nor  the  two  together,  can  defeat  the  creditor's  rights. 
They  can  not  do  so  by  an  express  contract  to  issue  non-assessable 
fully  paid-up  stock  for  any  numljer  of  dollars  less  than  the  amount  of 
the  subscrijjtion.  Neither  can  they  bring  about  such  a  result  by 
agreeing  to  receive  property  whose  value  is  less  than  the  amount  of 
the  subscription." 

Idaho.  Section  9  of  Art.  11  of  the  Constitution  provides:  "  No  cor- 
poration shall  issue  stocks  or  bonds,  except  for  labor  done,  services 
performed,  or  money  or  property  actually  received;  and  all  fictitious 
increase  of  stock  or  indebtedness  shall  Ix^  void." 

Section  2769  of  the  Revised  Codes,  as  amende<l  by  the  Laws  of 
1909,  p.  104,  provides:  "When  any  corjioration  shall  issue  stock  or 
bontls  for  labor  tlone,  .services  ixTformcd  or  property  actually  re- 
ceived, the  judgment  of  the  directoi-s  of  such  corporation  lus  to  the 
value  of  such  labor,  services,  or  projx^rty  shall,  in  the  absence  of 
fraud  in  the  transiiction,  l)c  conclusive." 

See  Wall  v.  Baffin  Mining  Co.,  Ltd.,  1(>  Idaho,  313. 

Illinms.  Bates  v.  Great  Western  Tel.  Co,  134  111.  53G  (1890). 
Holders  of  stock  issued  as  fully  paid  at  a  discount  are  liable  to 
creditors. 

Coleman  v.  Howe,  l')4  111.  AiiS  (1895).  Iloldei-s  of  stock  issued  as 
fully  paid  for  overvalued  proi)erty  are  liabh^  to  creilitors.  Here  prop- 
erty worth  $7'), 000  was  capitalized  at  $300, (XK),  and  the  parties  knew 
that  the  projx^rty  w;ls  being  overvalued.  An  extract  from  the  opinion 
is  set  forth,  supra,  in  the  note  to  Douglass  v.  Ireland. 

Gillett  V.  Chicago  Title  &  Trust  Co.,  230  111.  373  (1907).  Extracts 
from  the  opinion  are  set  forth,  supra. 

Section  25  of  chap.  32  of  the  Revised  Statutes  of  1913  (Hurd) 
provides:  "If  any  corporation  .  .  .  shall  allow  any  execution  or  de- 
cree of  any  court  of  record,  for  a  payment  of  money,  after  demand 
made  by  the  officer,  to  be  returned  *No  property  found'  .  .  .  suits 
in  equity  may  be  brought  again.st  all  persons  who  were  stockholders 
at  the  time,  or  liable  in  any  way,  for  the  debts  of  the  corporation, 
by  joining  the  corporation  in  such  suit ;  and  each  stockholder  may  be 
required  to  pay  his  pro  rata  share  of  such  debts  or  Uabilities  to  the 
extent  of  the  unpaid  portion  of  his  stock,  after  exhausting  the  assets 
of  such  corporation." 

Sprague  v.  National  Bank  of  America,  172  111.  149  (1898).  The 
rights  of  creditors  are  not  dependent,  in  any  degree,  upon  their 
knowledge,  at  the  time  of  extending  credit,  that  subscriptions  to 
stock  were  not  paid  in  full.  The  statute  [the  provisions,  now  sec- 
tion 25  of  chap.  32  of  Revised  Statutes  of  1913,  given  above,  were 


CHAP.  III.]  NOTE.  311 

then  in  force]  expressly  declares  that  the  creditor  shall  be  invested 
with  a  right  to  recover  if  the  stock  has  not  been  fully  paid.  "  The  leg- 
islative intent  was,  that  any  amount  unpaid  upon  subscription  to  the 
capital  stock  of  a  corporation  should  constitute  a  fund,  to  which  a 
creditor  of  the  corporation  might  resort  to  obtain  satisfaction  of  his 
demand  against  the  corporation"  (p.  169). 

Parmalee  v.  Price,  208  111.  544  (1904).  "The  stock  of  appellees 
was  paid  for  partly  in  cash  and  partly  in  property,  and  this  property 
was  fraudulently  overvalued  to  such  an  extent  that  in  fact  only 
forty  per  cent  of  the  subscription  was  paid.  While  this  transaction 
was  voidable  as  to  creditors  or  other  stockholders  prejudiced  thereby, 
it  was  binding  upon  the  corporation." 

People  V.  Sterling  Mfg.  Co.,  82  111.  457  (1876).  Stock  was  issued 
as  full  paid,  upon  the  receipt  of  a  fraction  of  the  par  value.  Later 
the  corporation  resolved  that  all  the  fictitious  stock  should  be  can- 
celed. One  stockholder  refused  to  comply  with  the  resolution,  and 
it  was  held  that  he  could  not  compel  the  corporation  to  transfer  his 
stock  to  his  assignee. 

Indiana.  Bent  v.  Underdown,  156  Ind.  516  (1900).  Where  it  was 
provided  in  the  articles  of  association  of  a  corporation  that  only  15  per 
cent  of  the  par  value  of  each  share  of  stock  should  be  paid,  this 
was  held  binding  on  creditors  on  the  ground  that  they  were  affected 
with  notice  of  the  contents  of  the  articles. 

Coffin  V.  Ransdell,  110  Ind.  417  (1886).  The  opinion  in  this  case 
is  set  forth,  supra. 

Brown  v.  Clow,  158  Ind.  403  (1901).  Where  mortgage  bonds  of  the 
corporation  and  substantially  all  its  capital  stock  are  issued  for  prop- 
erty which  is  worth  less  than  the  amount  of  the  mortgage  bonds, 
this  is  an  improper  issue  of  stock,  and  the  directors  are  responsible 
for  the  consequences. 

It  would  seem  to  follow  from  Marion  Trust  Co.  v.  Blish,  170  Ind. 
686  (1908),  that,  if  a  receiver  should  be  permitted  to  recover  from 
stockholders  for  unpaid  subscriptions,  all  the  creditors  would  share 
in  the  amounts  recovered. 

Iowa.  Sections  1641b  of  the  Code  Supplement,  1907,  provides 
that  no  stock  shall  be  issued  "until  the  corporation  has  received  the 
par  value  thereof.  If  it  is  proposed  to  pay  for  said  capital  stock  in 
property  or  in  any  other  thing  than  money,  the  corporation  pro- 
posing the  same  must,  before  issuing  capital  stock  in  any  form,  apply 
to  the  executive  council  of  the  state  of  Iowa  for  leave  so  to  do.  Such 
application  shall  state  the  amount  of  capital  stock  proposed  to  be 
issued  for  a  consideration  other  than  money,  and  set  forth  specifically 
the  property  or  other  thing  to  be  received  in  payment  for  such  stock. 
Thereupon,  it  shall  be  the  dut}^  of  the  executive  council  to  make 


312  NOTE.  [chap.  III. 

investigation,  under  such  rules  as  it  may  prescribe,  and  to  ascertain 
the  real  value  of  the  property  or  other  thing  which  the  corj)oration 
is  to  receive  for  the  stock;  and  shall  enter  its  fintling,  fixing  the  value 
at  which  the  corporation  may  receive  the  same  in  payment  for  capi- 
tal stoclc;  and  no  corporation  shall  issue  capital  stock  for  the  said 
property  or  thing  in  a  greater  amount  than  the  value  so  fixed  and 
determined  by  the  executive  council."  This  provision  was  enacted 
in  1907.  See  chap.  71,  Acts  32  O.A. 

Bmilton  Carbon  Co.  v.  Mills,  78  Iowa,  460  (1889).  Holder  of  stock 
issued  as  a  bonus  was  held  liable  to  creditors. 

iitaie  Trust  Co.  v.  Turner,  111  Iowa,  664  (1900).  Stock  had  been 
issued  as  full  paid  in  payment  of  a  patent.  The  court  reviewed  the 
authorities  and  said  that  holdei-s  of  stock  issued  for  overvalued  prop- 
erty were  liable  to  creditors  to  the  extent  of  the  overvaluation. 
"The  parties  have  the  right  in  good  faith  to  agree  on  the  value  of 
the  property  taken,  but  this  shoulil  not  be  a  speculative  or  fictitious 
one.  An  honest  mistake  in  judgment  will  not  necessarily  destroy 
the  value  agreed  upon,  but  it  must  be  such  a  valuation  as  prudent 
and  sensible  business  men  would  approve"  (p.  671). 

But  the  holdei"s  are  not  liable  to  creditors  who  extended  credit  to 
the  corporation  witii  knowledge  of  the  facts. 

Sykes  v.  Pure  Food  Cider  Co.,  157  Iowa,  601  (1912).  Stock  was 
issued  for  property  in  1909,  without  leave  from  the  Executive  Council. 
The  parties  seem  to  have  gone  through  the  form  of  paying  in  money 
to  the  corporation  and  paying  it  out  again  for  the  property.  The 
certificates  of  stock  recited  that  they  had  been  paid  in  cash.  The 
corporation  became  insolvent.  A  purchaser  of  some  of  the  stock  so 
issued  was  allowed  to  recover  the  amount  paid  for  his  stock  from  an 
officer  of  the  corporation  who  had  taken  part  in  authenticating  and 
issuing  the  certificates. 

Kansas.  Bank  v.  iXorthup,  82  Kan.  638  (1910).  Stockholders  in 
a  corporation  decided  that  certain  property  could  be  handled  to 
better  advantage  by  a  separate  corporation.  They  agreed  among 
themselves  that  the  property  was  worth  $25,000  and  that  any  stock- 
holder not  desiring  to  take  his  share  of  the  stock  of  the  new  company 
should  be  entitled  to  his  share  of  825,000.  The  property  was  capi- 
talized at  S1,000,000,  and  the  stockholders  were  held  liable  to  cred- 
itors. The  court  treated  the  case  as  substantially  the  same  as  a  case 
of  issue  of  stock  at  a  discount. 

It  cited  with  approval  the  decisions  that  creditors  cannot  com- 
plain who  extend  credit  with  a  knowledge  of  the  facts,  but  held  that 
the  creditor  in  question  had  no  knowledge  of  the  facts.  And  see 
Walburn  v.  Chenault,  43  Kan.  352  (1890). 

Kentucky.  Section  193  of  the  Constitution  provides:  "No  cor- 
poration shall  issue  stocks  or  bonds  except  for  an  equivalent  in 


CHAP.  III.]  NOTE.  313 

money  paid  or  labor  done,  or  property  actually  received  and  applied 
to  the  purposes  for  which  such  corporation  was  created,  and  neither 
labor  nor  property  shall  be  received  in  payment  of  stock  or  bonds  at 
a  greater  value  than  the  market  price  at  the  time  such  labor  was  done 
or  property  delivered,  and  all  fictitious  increase  of  stock  or  indebt- 
edness shall  be  void."  And  see  Ky.  Stat.,  section  568. 

Haldeman  v.  Ainslie,  82  Ky.  395  (1884).  The  court  said  that  if 
stock  is  issued  at  a  discount  the  holders  are  liable  to  creditors.  But 
a  creditor  cannot  complain  who  extended  credit  with  knowledge  of 
the  facts.  Miller  v.  Higgenhotham' s  Adm'r,  93  S.W.  655. 

Kentucky  Mutual  Co.  v.  Schaefer,  120  Ky.  227  (1905).  The  court 
said  (p.  229)  that  stockholders  "must  be  held  liable  [to  creditors]  for 
the  difference  between  the  amount  they  actually  paid  and  the  amount 
of  stock  they  received,  at  par  value.  The  fact  that  they  did  not  pay 
any  money,  but  paid  in  something  else,  is  immaterial." 

Horton  v.  Sherrill-Russell  Lumber  Co.,  147  Ky.  226  (1912).  The 
question  considered  by  the  court  was  whether  the  stockholders  of  a 
foreign  corporation  to  whom  stock  had  been  issued  as  full-paid  for 
overvalued  property  were  liable  to  creditors  "at  common  law."  The 
court,  relying  on  Cook  on  Corporations,  held  that  they  were  not. 
But  the  question  remains  whether  the  statement  in  Cook  is  justified 
by  the  authorities;  in  the  opinion  of  the  editor  it  is  not. 

Louisiana.  Section  3  of  Act  267,  1914,  provides:  "Where  sub- 
scriptions to  the  capital  stock  of  a  corporation  organized  under  this 
act  consist,  in  whole  or  in  part,  of  property  or  good  will,  there  must 
appear  in,  or  be  annexed  to,  the  articles  of  incorporation  and  be 
read  in  connection  therewith,  an  accurate  detailed  and  itemized 
description  of  such  property,  as  to  amount,  location,  extent,  character 
and  state  of  improvement,  together  with  a  statement  of  its  value 
as  appraised  by  the  directors,  and  a  statement  of  the  value  placed 
upon  any  good  will  included  in  the  capital  stock.  .  .  ,  Stock  so 
issued  shall,  in  the  absence  of  fraud,  be  full-paid  stock."  And  see 
Art.  266  of  the  Constitution. 

Belknap  v.  Adams,  49  La.  Ann.  1350  (1897).  Holders  of  stock 
issued  without  consideration  are  liable  to  creditors,  even  if  the  stock 
had  been  purchased  by  the  corporation  and  reissued. 

Dilzell  Engineering  Co.  v.  Lehmann,  120  La.  273  (1907).  The 
value  of  the  labor  or  property  received  in  payment  of  the  stock 
must  be  equal  to  the  face  value  of  the  stock.  "To  the  extent,  there- 
fore, of  the  difference  between  the  value  of  the  lease  and  charred 
ruins  given  for  the  stock  and  the  face  value  of  the  602  shares  of  stock, 
defendants  are  liable  to  the  creditors  of  the  corporation."  And  see 
Wehre  v.  Christ,  130  La.  450  (1912). 

Maine.  Section  50  of  chap.  47  of  the  Revised  Statutes  (1904) 
provides:  "Any  corporation  may  purchase  mines,  manufactories 


314  NOTE.  [chap.  III. 

and  other  property  necessary  for  its  business,  and  the  stock  of  any 
company  or  companies  owning,  mining,  manufacturing  or  pro- 
ducing materials  or  other  property  necessary  for  its  business,  and 
issue  stock  to  the  amount  of  the  value  thereof  in  payment  therefor, 
and  may  likewise  issue  stock  for  services  rendered  to  such  corporation 
and  the  stock  so  issued  shall  be  full-paid  stock  and  not  liable  to  any 
further  call  or  payment  thereon;  and  in  the  absence  of  actual  fraud 
in  the  transaction,  the  judgment  of  the  directors  as  to  the  value  of 
the  property  purchased,  or  services  rendered,  shall  be  conclusive." 
This  provision  was  enacted  in  1901.  In  the  report  of  the  Commis- 
sioner on  the  Revision  of  the  Public  Laws,  dated  December  15,  1914, 
this  provision  is  drafted  as  section  54  of  chap.  49. 

Barron  v.  Burrill,  86  Me.  GG  (1893).  Persons  to  whom  stock  is 
issued  at  a  discount  are  liable  to  creditors. 

Gillin  V.  Sawyer,  93  Me.  151  (1899).  The  court  was  construing  an 
earlier  statute,  and  held  that  the  creditors  might  "go  behind  even 
the  honest  opinion  of  the  directoi-s  of  the  corporation  and  question 
the  actual  sufficiency  of  the  consideration  paid  for  the  shares." 

Maryland.  Sections  35  and  3G  of  chap.  240  of  Acts  of  1908  (sections 
35  and  36  of  Art.  23  of  Bagby's  Annotated  Code)  provide  that  stock 
may  be  issued  for  services  or  for  property;  "that  the  value  of  such 
services  and  property,  and  the  propriety  of  issuing  stock  therefor, 
shall  be  agreed  upon  and  the  issue  authorized  by  the  affirmative 
vote  of  a  majority  of  all  the  stock";  that  a  certificate  particularly 
specifying  the  nature  and  character  of  such  property  or  services 
shall  be  filed  in  a  designated  public  office;  and  "that  the  valuation 
placed  b}'  the  stockholdei-s  upon  such  services  or  property  .  .  .  shall 
in  the  absence  of  actual  fraud  be  conclusive  against  and  binding 
upon  any  and  all  creditors  of  the  corporation." 

Hooper  v.  Central  Trust  Co.,  81  Md.  559,  580  (1895).  Persons  to 
whom  stock  was  issued  without  consideration  are  hable  to  creditors. 
And  see  Hughes  v.  Hall,  117  Md.  547  (1912). 

Brant  v.  Ehlen,  59  Md.  1  (1882).  Creditors  were  pursuing  the 
stockholders  of  a  West  Virginia  corporation,  most  of  the  stock  of 
which  had  been  issued  for  property.  The  court  said  (p.  29)  that  "so 
long  as  the  transaction  stands  unimpeached  for  fraud,  courts  will 
treat  as  a  pajTnent  that  which  the  parties  themselves  have  agreed 
shall  be  a  payment,  and  this  too  in  cases  where  the  rights  of  cred- 
itors are  involved." 

Crawford  v.  Rohrer,  59  Md.  599  (1882).  The  court  said  (p.  604): 
"Any  arrangement,  therefore,  among  the  stockholders,  or  those  in 
charge  of  the  affairs  of  the  corporation,  by  which  the  stock  is  but 
nominally  paid  for,  whether  in  money  or  property,  the  corporation 
not  in  fact  getting  the  benefit  of  the  price  in  good  faith,  will  be  re- 
garded as  a  sham,  and  not  as  a  valid  payment,  as  against  the  cred- 


CHAP.  III.]  NOTE.  315 

itors  of  the  corporation,  however  it  may  be  regarded  as  between  the 
coi-poration  and  the  subscriber." 

Massachusetts.  Section  14  of  chap.  437  of  the  Acts  of  1903  pro- 
vides that  stock  "may  be  issued  for  cash,  property,  tangible  or  in- 
tangible, services  or  expenses."  Sections  11  and  14  provide,  in  case 
stock  is  issued  for  property  or  services  that  a  statement  of  the  de- 
scription of  the  property  shall  be  prepared  and  filed  in  a  designated 
public  office.  "  If  such  property  consists  in  any  part  of  real  estate,  its 
location,  area  and  the  amount  of  stock  to  be  issued  therefor  shall  be 
stated ;  if  any  part  of  such  property  is  personal,  it  shall  be  described 
in  such  detail  as  the  commissioner  of  corporations  may  require,  and 
the  amount  of  stock  to  be  issued  therefor  stated.  If  any  part  of  the 
capital  stock  is  issued  for  services  or  expenses,  the  nature  of  such 
services  or  expenses  and  the  amount  of  stock  which  is  issued  therefor 
shall  be  clearly -stated." 

Under  the  statute  in  force  prior  to  the  adoption  of  chap.  437  of  the 
Acts  of  1903,  if  stock  were  paid  in  property,  the  commissioner  of  cor- 
porations was  required  to  certify  that  he  was  satisfied  that  the  valua- 
tion put  upon  the  property  was  a  fair  and  reasonable  one.  (Section 
23  of  chap.  109  of  R.L.) 

Cabot  Bridge  v.  Chapin,  6  Cush.  50  (1850).  Where  the  defendant 
subscribed  to  stock  on  the  condition  that  a  total  of  400  shares  should 
be  subscribed  for,  he  cannot  be  held  on  his  subscription  where  some 
of  the  other  subscriptions  were  payable  in  property  worth  less  than 
the  par  of  the  shares. 

New  Haven  Horse  Nail  Co.  v.  Linden  Spring  Co.,  142  Mass.  349 
(1886).  The  court  declinecfto  determine  the  liability  to  creditors  of 
stockholders  of  a  Connecticut  corporation  by  reason  of  receiving 
stock  issued  in  payment  of  overvalued  property.  There  is  a  dictum 
by  Devens,  J.,  as  follows:  "That,  in  the  absence  of  fraud,  an  agree- 
ment may  ordinarily  be  made  by  which  stockholders  can  be  allowed 
to  paj'  for  their  shares  in  patents,  mines,  or  other  property,  to  which 
it  is  not  easy  to  assign  a  determinate  value,  appears  to  be  well  settled. 
The  bill  does  not  aver  any  fraud  actually  committed,  or  intended  to 
be  committed,  upon  the  public  or  the  plaintiff,  by  these  defendants, 
by  obtaining  from  those  with  whom  the  corporation  dealt  a  false 
credit." 

Anthony  Co.  v.  Metropolitan  Art  Co.,  190  Mass.  35  (1906).  The 
court  was  considering  the  liability  of  the  officers  and  stockholders  of 
a  foreign  corporation,  doing  business  in  Massachusetts,  under  a  stat- 
ute which  imposed  liability  to  creditors  if  the  capital  stock  of  the 
corporation  had  been  paid  by  a  conveyance  to  the  corporation  of 
property  at  an  unfair  valuation.  The  court  held  that  the  liability  was 
incurred.  The  defendants  did  not  have  any  fraudulent  intent,  or 
actual  knowledge  that  the  values  were  false,  or  wilful  intent  to 


316  NOTE.  [chap.  III. 

make  a  false  statement,  but  did  have  reasonable  cause  to  know, 
and  they  ought  to  have  known,  that  the  valuation  was  an  unfair 
one. 

Harvey-Watts  Co.  v.  Worcester  Umbrella  Co.,  193  Mass.  138  (1906). 
The  court  was  considering  the  liability  of  officers  of  a  corporation 
formed  while  R.L.  chaps.  109  and  110  were  in  force.  It  held  that,  if 
a  stockholder  gave  to  the  corporation  a  check  in  payment  of  his  suV)- 
scription,  and  the  corporation  then  gave  the  stockholder  a  chock  of 
a  like  amount  for  an  assignment  of  property,  the  stock  was  not  paid 
in  cash  within  the  meaning  of  the  statute. 

On  the  propriety  of  ever  speaking  of  a  stockholder's  liability  to 
creditors  as  "a  common-law  obligation,"  see  New  Haven  Horse  Nail 
Co.  v.  Linden  Spring  Co.,  142  Mass.  349,  353. 

Michigan.  Section  2  of  Act  146 of  the  Laws  of  1907  (section  95.33  of 
Howell's  Annotated  Statutes,  1913)  provides:  "Such  capital  stock 
may  be  paitl  in,  either  in  cash  or  in  other  property,  real  or  pei-sonal; 
but  where  payment  is  made  otherwise  than  in  cash  there  shall  be 
included  in  the  articles  an  itemized  description  of  the  property  in 
which  such  pa^mient  is  made,  with  the  valuation  at  which  each  item 
is  taken,  which  valuation  shall  l)e  conclusive  in  absence  of  actual 
fraud:  Provided,  That  only  such  property  shall  be  so  taken  in  pay- 
ment for  capital  stock  as  the  purposes  of  the  corporation  shall  re- 
quire, and  only  such  property  as  can  be  sold  and  transferred  by  the 
corporation,  and  as  shall  be  subject  to  levy  and  sale  on  execution,  or 
other  process  issued  out  of  any  court  having  competent  jurisdiction, 
for  the  satisfaction  of  any  judgment  or  decree  against  such  corpora- 
tion: And  Provided  further,  That  there  shall  be  made  and  attached 
to  any  such  articles  of  association  an  affidavit  by  at  least  three  of  the 
organizers  of  such  corporation,  that  they  know  the  property  de- 
scribed in  such  articles  of  association  and  that  the  same  has  been 
actually  transferred  to  such  corporation,  and  that  such  property  is 
of  the  actual  value  therein  stated." 

Utica  Fire  Alarm  Co.  v.  Waggoner  Clock  Co.,  166  Mich.  618  (1911). 
Persons  to-^vhom  stock  is  issued  at  a  discount  are  liable  to  creditors. 

Graves  v.  Brooks,  117  Mich.  424  (1898).  Patents  worth  820,000 
were  capitalized  at  $100,000.  The  court  held  that  the  stockholders 
were  not  liable  to  creditors;  that  it  was  not  enough  to  show  that  the 
property  was  overvalued,  but  that  it  was  necessary  to  establish 
"either  an  intentional  fraud  in  fact,  or  such  reckless  conduct  in  fix- 
ing the  value  of  the  property  conveyed,  without  regard  to  its  actual 
value,  that  an  intent  to  defraud  may  be  inferred." 

Dieterle  v.  Paint  &  Enamel  Co.,  143  ISIich.  416  (1906).  Stock  was 
paid  for  in  the  stock  of  another  corporation  which  was  in  fact  in- 
solvent, and  in  a  secret  formula.  Stockholders  were  held  liable  to 
creditors.    "However  much  the  original  shareholders  may  have 


CHAP.  III.]  NOTE.  317 

acted  in  good  faith  as  to  the  creditors,  what  was  done  was  as  to  them 
a  fraud"  (p.  422).  And  see  Wood  v.  Sloman,  150  Mich.  177  (1907). 

Minnesota.  See  section  6193  of  General  Statutes,  1913. 

McConey  v.  Belto7i  Oil  Co.,  97  Minn.  190  (1906).  The  corporation 
in  question  was  an  Arizona  corporation.  A  person  to  whom  stock 
was  issued  at  a  discount  was  held  liable  to  creditors.  Otherwise,  as 
to  mining  companies,  owing  to  provisions  in  the  General  Statutes 
of  1878,  peculiar  to  mining  corporations:  Ross  v.  Kelly,  36  Minn.  38 
(1887). 

Hastings  Malting  Co.  v.  Iron  Range  Co.,  65  Minn.  28  (1896).  Per- 
sons to  whom  stock  was  issued  for  overvalued  property  were  held 
liable  to  creditors. 

Hospes  V.  Northwestern  Car  Co.,  48  Minn.  174  (1892).  Extracts 
from  the  opinion  in  this  case  are  set  forth,  supra. 

State  V.  Minnesota  Thresher  Mfg.  Co.,  40  Minn.  213,  226  (1889). 
The  court  refused  to  declare  the  franchise  of  a  corporation  forfeited 
because  it  had  issued  stock  for  overvalued  property. 

Mississippi.  Section  921  of  Code  of  1906  provides:  "A  note, 
obligation,  or  security  of  any  kind  given  or  transferred  by  any  sub- 
scriber for  stock  in  any  corporation  shall  not  be  considered,  taken, 
or  held  as  pajmient  of  any  part  of  the  capital  stock  of  the  company." 

Alford  V.  Improvement  Co.,  86  Miss.  375  (1905).  The  court,  corn- 
meriting  on  the  statutory  provision  which  is  now  section  921  of  the 
Code  of  1906,  said:  "The  plain  intendment  of  the  law  being  that  all 
stock  must  be  fully  and  actually  paid  for." 

Lee  V.  Cutrer,  96  Miss.  355  (1909).  The  majority  of  the  court  con- 
strued a  statute  requiring  the  payment  of  the  capital  stock  in  cash 
as  permitting  it  to  be  paid  in  property  or  services.  There  seems  to 
have  been  no  question  but  that  the  property  and  services  were  taken 
at  a  fair  valuation. 

Missouri.  Section  8  of  Art.  xii  of  the  Constitution  provides:  "No 
corporation  shall  issue  stock  or  bonds,  except  for  money  paid,  labor 
done  or  property  actually  received,  and  all  fictitious  increase  of 
stock  or  indebtedness  shall  be  void."  Same,  Revised  Statutes,  1909, 
section  2981. 

Skrainka  v.  Allen,  76  Mo.  384  (1882).  A  person  to  whom  stock  is 
issued  at  a  discount  is  liable  to  creditors. 

Van  Cleve  v.  Berkey,  143  Mo.  109  (1897).  See  extract  from  the 
opinion  in  this  case  cited  in  Meyer  v.  Mining  Co.,  supra. 

Berry  v.  Rood,  168  Mo.  316  (1901).  Lands  in  which  were  certain 
onyx  deposits  were  capitalized  (with  other  property)  at  a  figure 
largely  in  excess  of  their  value.  But  the  trier  of  the  facts  found  that 
the  incorporators  acted  without  any  intent  to  defraud;  that  they 


318  NOTE.  [chap.  III. 

valued  the  properties  as  a  whole  believing  that  the  corporation  could 
earn  a  dividend  of  at  least  six  per  cent  on  the  valuation;  and  that  if 
the  lands  "had  been  really  lands  having  large  deposits  of  onyx  of 
good  quality,  they  might  well  have  been  thought  worth  the  par 
value  of  the  stock  issued  for  them."  The  court  held  that  the  stock- 
holders were  liable  to  creditors  for  the  difference  between  the  par 
value  of  their  stock  and  the  actual  value  of  the  property  transferred. 
Property  could  not  be  capitalized  at  its  imagined  future  worth.  The 
inquiry  "is  not  whether  the  stockholder  believed  or  had  reason  to 
believe  that  the  property  was  equal  in  value  to  the  par  value  of  the 
capital  stock;  but  whether,  in  point  of  fact,  it  was  such  equivalent." 

Colonial  Trust  Co.  v.  McMillan,  188  Mo.  547  (1905).  A  creditor 
who  knew  the  facts  when  he  extended  credit  is  not  entitled  to  com- 
plain. 

Montana.  Section  10  of  Art.  xv  of  the  Constitution  provides: 
"No  corporation  shall  issue  stocks  or  bonds,  except  for  labor  done, 
services  performed,  or  money  and  property  actually  received;  and 
all  fictitious  increase  of  stock  or  indebtedness  shall  be  void." 

Section  3824  of  the  Revised  Codes,  1907,  provides:  "The  di- 
rectoi-s  of  any  corporation  may  purchase  mines,  manufactories  and 
other  property  necessary  for  its  business  and  issue  stock  to  the 
amount  of  the  value  thereof  in  pajmicnt  therefor,  and  the  stock  so 
issued  shall  be  declared  and  taken  to  l^e  full-paid  stock  and  not  liable 
to  any  further  call,  neither  shall  the  holders  thereof  be  liable  for  any 
further  payments  under  the  provisions  of  §  3853  this  Code;  Provided, 
That  on  mines  any  arbitrary  value  may  be  fixed  and  such  value  shall, 
regardless  of  the  actual  value,  be  deemed  the  value  thereof,  so  as  to 
make  the  stock  issued  in  payment  therefor  at  such  arbitrary  value, 
full-paid  stock  as  above  defined." 

See  Kelly  v.  Clark,  21  Mont.  291  (1898). 

Nebraska.  See  Gilkie  Co.  v.  Daioson  Gas  Co.,  46  Neb.  333  (1895), 
and  Penfield  v.  Dawson  Gas  Co.,  57  Neb.  231  (1898).  The  opinion  in 
the  latter  case  is  set  forth,  supra. 

York  Park  Bld'g  Ass'n  v.  Barnes,  39  Neb.  834  (1894).  If  stock  is 
issued  without  consideration,  the  corporation  may  .compel  the  holder 
to  pay  therefor. 

State  V.  Atchison  R.R.  Co.,  24  Neb.  143  (1888).  The  improper 
issue  of  stock  is  a  cause  for  the  forfeiture  of  the  corporate  franchise. 

Nevada.  Sections  1155  and  1156  of  the  Revised  Laws,  1912,  pro- 
vide: "Any  corporation  existing  under  any  law  of  this  state  may 
issue  stock  for  labor  done  or  personal  property  or  real  estate  or 
leases  thereof;  in  the  absence  of  fraud  in  the  transaction,  the  judg- 
ment of  the  directors  as  to  the  value  of  such  labor,  property,  real 


CHAP.  III.]  NOTE.  319 

estate  or  leases  shall  be  conclusive.  All  [such]  stock  .  .  .  shall  be 
fully  paid  and  not  liable  to  any  further  call  or  assessment  (and  this 
shall  be  so  stated  on  the  face  of  the  certificate).  But  it  shall  be  the 
duty  of  the  corporation  to  have  its  minutes  or  other  permanent 
records  to  show,  with  reasonable  detail,  the  items  and  character  of 
property  (and  of  the  labor  or  services)  for  which  any  stock  or  bonds 
were  so  issued." 

As  to  mining  corporations,  see  sections  1200,  and  1332  to  1335, 
and  State  v.  Manhattan  Verde  Co.,  32  Nev.  474. 

NeiD  Hampshire.  Sections  9  and  10  of  chap.  149  of  the  Public 
Statutes  (1901)  provides:  "No  corporation  shall  sell  or  dispose  of  any 
of  the  shares  of  its  capital  stock  at  a  price  less  than  the  par  value 
thereof,  except  in  sales  of  shares  at  auction  for  nonpayment  of  as- 
sessments. .  .  .  No  certificate  shall  be  issued  until  the  par  value  of 
the  shares  mentioned  in  it  has  been  fully  paid  to  the  corporation." 

Section  9  of  chap.  150  provides:  "No  note  or  obligation  given  bj^  a 
stockholder,  whether  secured  by  pledge  or  otherwise,  shall  be  con- 
sidered as  payment  of  any  part  of  the  capital  stock." 

Libhy  V.  Mt.  Monadnock  Co.,  67  N.H.  587  (1893).  Stockholders 
are  liable  to  pay  for  their  stock  in  full,  although  there  was  an  oral 
agreement  with  the  promoters  that  they  were  to  pay  only  a  fraction 
of  the  par  value. 

Peterborough  R.R.  Co.  v.  Nashua  R.R.  Co.,  59  N.H.  385  (1879). 
A  corporation  may  borrow  money  and  pledge  an  amount  of  its  stock 
as  collateral  equal  to  the  amount  borrowed,  and  if  on  default  the 
pledgee  sells,  the  corporation  is  liable  for  the  deficiency. 

Kimhall  v.  Grate  Co.,  69  N.H.  485  (1898).  2997  shares  of  stock 
were  issued  in  payment  of  a  patent.  On  the  same  day  1497  of  these 
shares  were  transferred  to  a  trustee  for  the  benefit  of  the  corpora- 
tion. The  referee  found  that  the  pretended  issue  of  the  1497  shares 
was  without  consideration,  and  the  court  said  that  no  part  of  such 
shares  could  be  reissued,  even  to  bona  fide  purchasers,  except  upon 
payment  of  the  par  value.  The  bill  was  by  stockholders  in  the  cor- 
poration, who  prayed  that  a  part  of  these  1497  shares  should  be 
canceled.  This  relief  was  granted.  The  court  said  that  the  validity 
of  this  issue  was  open  to  several  objections,  of  which  the  objection 
noted  above  was  one. 

New  Jersey.  Sections  48  and  49  of  an  act  concerning  corporations 
(Revision  of  1896)  provided:  "Nothing  but  money  shall  be  consid- 
ered as  payment  of  any  part-  of  the  capital  stock  of  any  corporation 
organized  under  this  act,  except  as  hereinafter  provided  in  case  of 
the  purchase  of  property.  ..." 

Section  49:  "Any  corporation  formed  under  this  act  may  pur- 
chase mines,  manufactories  or  other  property  necessary  for  its  busi- 


320  NOTE.  [chap.   III. 

ness,  or  the  stock  of  any  company  or  companies  owning,  mining, 
manufacturing  or  producing  materials,  or  other  property  necessary 
for  its  Inisiiiess,  anil  issue  stock,  to  the  amount  of  the  value  thereof  in 
payment  therefor,  and  the  stock  so  issued  shall  he  full-paid  stock 
and  not  liahle  to  any  further  call,  neither  shall  the  holder  thereof  be 
liable  for  any  further  payment  under  any  of  the  provisions  of  this 
act;  and  in  the  abst>nce  of  actual  fraud  in  the  transaction,  the  judg- 
ment of  the  ilirectors  as  to  the  value  of  the  property  purchased  shall 
be  conclusive;  and  in  all  statements  and  reports  of  the  corporation 
to  be  i)ul)lished  or  tiletl  this  stock  shall  not  be  stated  or  reporteil  as 
being  issued  for  cash  paid  to  the  corporation,  but  shall  be  reported 
in  this  resiH'ct  according  to  the  fact." 

Section  41)  was  amended  by  chap.  15  of  the  Acts  of  1913  so  as  to 
read  as  follows:  "Any  corporation  formed  under  this  act  may  pur- 
chaac:  property,  real  and  i)ei-sonal,  and  the  stock  of  any  corporation, 
necessary  for  its  business,  and  issue  stock  to  the  amount  of  the  value 
thereof  in  payment  therefor,  subject  to  th(>  provisions  hereinafter 
set  foiih,  and  the  stock  so  i.ssued  shall  be  full-|)aid  stock,  and  not 
liable  to  any  further  call;  and  siiid  corporation  may  also  issue  stock 
for  the  amount  it  actually  pays  for  labor  performed. 

''  Proridvil,  that  when  property  is  purchased  the  purchasing  cor- 
poration nuist  receive  in  property  or  stock  what  the  same  is  rea- 
sonably worth  in  money  at  a  fair,  bona  fitle  valuation;  and  provided 
further,  that  no  fictitious  stock  shall  be  issued;  that  no  stock  shall 
be  issued  for  profits  not  yet  earned,  but  only  anticipated;  and  pro- 
vided further,  that  when  stock  is  issueil  on  the  basis  of  the  stock 
of  any  other  corporation  it  may  purchase,  no  stock  shall  be  issued 
thereon  for  an  amount  gi-eater  than  the  sum  it  actually  pays  for 
such  stock  hi  cash  or  its  equivalent;  and  provided  further,  that  the 
property  purchased  or  the  jjiojierty  owned  by  the  corporation  whose 
stock  is  purchased  shall  be  cognate  in  character  and  use  to  the  prop- 
erty used  or  contemplated  to  be  used  by  the  purchasing  corporation 
in  the  direct  conduct  of  its  own  proper  business;  and  in  all  cases 
when  stock  is  to  be  issued  for  pro|)erty  purchased,  or  for  the  stock 
of  other  coqiorations  purchased,  a  statement  in  writing,  signed  by 
the  directors  of  the  purchasing  company  or  by  a  majoiit}'  of  them, 
shall  be  filed  in  the  office  of  the  Secretary  of  State,  showing  what 
property  has  Ijecn  purchased,  and  what  stock  of  any  other  corpora- 
tion has  been  purchased,  and  the  amount  actually  paid  therefor." 
[Signing  a  false  statement  is  made  a  misdemeanor.] 

Hebberd  v.  Southwestern  Land  &  Cattle  Co.,  55  N.J.  Eq.  18,  31 
(1896).  Persons  to  whom  stock  is  issued  as  a  bonus  are  hable  to 
creditors. 

See  V.  Heppenheimer,  69  N.J.  Eq.  36  (1905).  Extracts  from  the 
opinion  in  this  case  are  set  forth,  supra. 

Holcombc  v.  Trctiton  White  City  Co.,  80  N.J.  Eq.  122  (1912).  The 


CHAP.  III.]  NOTE.  321 

court  held  that  the  provision  of  section  49  of  the  Act  of  1896,  that  "  in 
the  absence  of  actual  fraud  in  the  transaction,  the  judgment  of  the  di- 
rectors as  to  the  value  of  the  property  purchased  shall  be  conclusive," 
was  merely  declaratory,  and  that  the  standards  fixed  by  See  v.  Hep- 
penheimer  applied  where  the  stock  was  issued  after  the  enactment  of 
such  provision. 

Easton  National  Bank  v.  American  Brick  Co.,  70  N.J.  Eq.  732 
(1906).  Extracts  from  the  opinion  in  this  case  are  set  forth,  supra. 

Arnold  v.  Searing,  73  N.J.  Eq.  262  (1907).  Holder  of  stock  is- 
sued as  a  bonus  has  a  standing  to  bring  a  suit  as  a  stockholder. 

New  Mexico.  Sections  56  and  57  of  chap,  xxiii  of  the  Statutes 
(1915)  contain,  in  substance,  the  same  provisions  as  sections  48  and 
49  of  the  Corporation  Act  of  New  Jersey,  set  forth  above,  prior  to 
the  amendments  made  in  1913. 

Medlerv.  Hotel  Co.,  6  N.M.  331,  344  (1892).  It  was  held  that  the 
facts  did  not  show  either  an  intentional  overvaluation  of  the  prop- 
erty taken  in  payment  of  stock,  or  such  a  great  discrepancy  between 
the  actual  value  of  the  property  and  the  amount  of  the  stock  as  to 
raise  a  presumption  of  fraud  in  law. 

New  York.  Section  55  of  the  Stock  Corporation  Law  (Consoli- 
dated Laws  of  1909)  provides:  "No  corporation  shall  issue  either 
stock  or  bonds  except  for  money,  labor  done  or  property  actually 
received  for  the  use  and  lawful  purposes  of  such  corporation.  Any 
corporation  maj^  purchase  any  property  authorized  by  its  certifi- 
cate of  incorporation,  or  necessary  for  the  use  and  lawful  purposes  of 
such  corporation,  and  may  issue  stock  to  the  amount  of  the  value 
thereof  in  payment  therefor,  and  the  stock  so  issued  shall  be  full- 
paid  stock  and  not  liable  to  any  further  call,  neither  shall  the  holder 
thereof  be  liable  for  any  further  payment  under  any  of  the  provisions 
of  this  chapter;  and  in  the  absence  of  fraud  in  the  transaction  the 
judgment  of  the  directors  as  to  the  value  of  the  property  purchased 
shall  be  conclusive;  and  in  all  statements  and  reports  of  the  corpora- 
tion, by  law  required  to  be  published  or  filed,  this  stock  shall  not  be 
stated  or  reported  as  being  issued  for  cash  paid  to  the  corporation, 
but  shall  be  reported  as  issued  for  property  purchased." 

Section  42  of  chap.  564  of  the  Laws  of  1890  provided:  "No  cor- 
poration shall  issue  either  stock  or  bonds  except  for  money,  labor 
done,  or  property  actually  received  for  the  use  and  lawful  purposes  of 
such  corporation,  at  its  fair  value,  and  all  stock  issued  in  violation 
of  the  provisions  of  this  section  shall  be  void."  This  was  amended 
in  1892  so  as  to  read:  "No  corporation  shall  issue  either  stock  or 
bonds  except  for  money,  labor  done  or  property  actually  received 
for  the  use  and  lawful  purposes  of  such  corporation.  No  such  stock 
shall  be  issued  for  less  than  its  par  value.   No  such  bonds  shall  be 


322  NOTE.  [CIIAP.  III. 

issued  for  less  than  the  fair  market  value  thereof."  Section  42  of 
chap.  G88  of  the  Law  of  1892.  This  vvjxs  amended  in  1901  into  a  pro- 
vision substantially  the  same  as  the  existing  provision.  Chap.  354  of 
the  Laws  of  1901. 

The  substance  of  the  provisions  of  chap.  40  of  the  Laws  of  1848, 
and  chap.  333  of  the  Laws  of  1853  appears  from  the  opinions  in 
Dougla.'is  v.  Ireland,  73  N.Y.  100,  and  Lake  Superior  Iron  Co.  v. 
Drexel,  90  N.Y.  87,  extracts  from  which  are  set  forth,  supra. 

Chap.  351  of  the  Laws  of  1912  makes  it  legal  to  form  some  cor- 
porations having  stock  without  a  par  value. 

iSection  10  of  the  Stock  Corporation  Law  contains  special  provisions 
relating  to  the  issue  of  securities  by  a  corporation  formed  to  take 
over  the  properties  of  a  corporation  bought  at  foreclosure  sale. 

SmUhwarth  v.  Morgan,  205  N.Y.  293  (1912).  Kxtracts  from  the 
opinion  in  this  ca.«!e  are  set  forth,  supra. 

Douglass  v.  Ireland,  73  N.Y.  100  (1878).  Extracts  from  the  opinion 
in  this  case  are  set  forth,  supra. 

Lake  Superior  Iron  Co.  v.  Drexel,  90  N.Y.  87  (1882).  Extracts 
from  the  opinion  in  this  case  are  set  forth,  supra. 

Flour  City  National  Bank  v.  Shire,  88  N.Y.  App.  Div.  401,  aff'd 
179  N.Y.  587  (1904).  The  corporation  in  question  was  formed,  and 
the  stock  issued,  in  1899.  HiscocK,  J.,  said  (p.  407):  "In  our  judg- 
ment the  evidence  fully  justified  the  referee  in  finding  such  a  dis- 
parity between  the  actual  value  of  the  property  thus  transferred  and 
the  amount  of  capital  stock  issued  therefor,  as  to  take  the  transaction 
outside  of  the  rule  making  allowance  for  discretion  and  even  honest 
error  in  the  judgment  of  directoi-s  executing  such  a  transaction,  and 
to  take  it  within  the  rule  which  governs  where  such  directors  have 
been  guilty  of  willful  and  intentional  overvaluation  and  resultant 
fraud." 

As  to  the  pereons  entitled  to  requii-e  the  stockholders  to  make 
further  payments,  where  stock  has  been  issued  for  overvalued  prop- 
erty, see  Bostwick  v.  Young,  118  N.Y.  App.  Div.  490,  aff'd  194 
N.Y.  516  (1909),  and  In  re  Jassoij  Co.,  178  Fed.  515  (1910). 

As  to  issues  of  stock  made  after  the  amendment  in  1901  see  Peo- 
ple V.  Public  Service  Commission,  158  N.Y,  App.  Div.  251  (1913), 
and  Archer  v.  Hesse,  164  N.Y.  App.  Div.  493  (1914).  In  the  latter 
case  McLaughlin,  J.,  said  (p.  496):  "It  could  issue  the  same  pro- 
vided full  value  were  received  for  services  rendered,  property  pur- 
chased, or  money  paid." 

As  to  section  10  of  the  Stock  Corporation  Law  see  People  v. 
Public  Service  Commission,  203  N.Y.  299  (1911). 

North  Carolina.  Sections  1159  and  1160  of  the  Statutes  (Pell's 
Revisal,  1908)  provide:  "When  any  corporation  shall  issue  stock  for 
labor  done  or  pei-sonal  property  or  real  estate,  or  leases  thereof, 


CHAP.  III.]  NOTE.  323 

which  stock  may  be  so  issued  by  any  corporation,  in  the  absence  of 
fraud  in  the  transaction,  the  judgment  of  the  directors  as  to  the 
value  of  such  labor,  property,  real  estate  or  leases  shall  be  con- 
clusive. 

"Nothing  but  money  shall  be  considered  as  payment  of  any  part 
of  the  capital  stock  of  any  corporation  organized  under  this  chapter, 
except  as  herein  provided  in  case  of  the  purchase  of  property  or 
labor  performed." 

Bernard  v.  Carr,  167  N.C.  481  (1914).  A  person  to  whom  stock 
is  issued  as  a  bonus  is  liable  to  creditors. 

Hohgood  v.  Ehlen,  141  N.C.  344  (1906).  The  stock  was  issued  by  a 
Delaware  corporation,  the  Delaware  statute  making  the  judgment  of 
the  directors  conclusive,  in  the  absence  of  actual  fraud.  The  stock- 
holder was  held  liable  to  creditors.  The  court  said  (p.  354):  "The 
property  must  be  taken  at  its  reasonable  monetary  value.  Although 
a  margin  may  be  allowed  for  an  honest  difference  of  opinion  as  to 
value,  a  valuation  grossly  excessive,  knowingly  made,  while  its  ac- 
ceptance may  bind  the  corporation,  is  a  fraud  on  creditors  and  they 
may  proceed  against  the  stockholder  individually,  who  sells  the 
property,  as  for  an  unpaid  subscription."  See  Whiilock  v.  Alexander, 
160  N.C.  465  (1912). 

North  Dakota.  Sections  4527  and  4528  of  the  Civil  Code  (Compiled 
Laws,  1913)  provide:  "No  corporation  shall  issue  any  certificates  of 
stock  under  an  agreement  or  with  the  understanding  that  the  full 
par  value  shall  not  be  paid.  Any  officer  of  a  corporation  who  issues 
certificates  of  stock  in  violation  of  the  provisions  of  this  chapter,  or 
who  has  laiowledge  thereof,  and  does  not  at  the  time  dissent  there- 
from in  writing  shall  be  liable  to  the  creditors  of  the  corporation  and 
to  purchasers  in  good  faith  of  such  stock  for  all  damages  they  may 
sustain  thereby. 

"No  corporation  shall  issue  stock  or  bonds  except  for  money, 
labor  done  or  property,  estimated  at  its  true  money  value,  actually 
received  by  it,  and  all  the  officials  of  a  corporation  who  consent  to 
the  issuance  of  stock  or  bonds  for  labor  or  property  in  excess  of  its 
actual  cash  value,  or  who  have  knowledge  thereof  and  do  not  at  the 
time  dissent  therefrom  in  writing  shall  be  jointly  and  severally  liable 
to  the  creditors  of  such  corporation  for  the  difference  between  the 
actual  cash  value  of  such  labor  or  property  at  the  time  such  stock 
or  bonds  were  issued  and  the  par  value  of  the  stock  or  bonds  issued 
therefor." 

Ohio.  Gates  v.  The  Tippecanoe  Stone  Co.,  57  Ohio  St.  60  (1897). 
Property  was  capitalized  at  twice  its  value.  The  trier  of  the  facts 
found  that  the  parties  acted  in  good  faith,  and  without  an  intent  to 
defraud  the  creditors  of  the  corporation  or  any  one  else.   A  stock- 


324  NOTE.  [chap.  III. 

holder  was  held  liable  to  creditors.  "Notwithstandinp;  the  freciuency 
with  which  corporations  are  created  with  fictitious  capital,  persons 
who  have  occasion  to  deal  with  those  organized  under  the  laws  of 
this  state  and  doing  business  within  its  borders,  are  not  bound  to 
anticipate  this  condition  of  its  affairs,  but  may  assume  that  it  is 
what  it  j)urports  to  be." 

Oklahoma.  Section  39  of  Art.  ix  of  the  Constitution  provides:  "No 
corporation  shall  issue  stock  except  for  money,  labor  done,  or  prop- 
erty actually  received  to  the  amount  of  the  par  value  thereof,  and 
all  fictitious  increase  of  stock  or  indebtedness  shall  be  void,  and  the 
Legislature  shall  prescribe  the  ncccssarj'  regulations  to  prevent  the 
issue  of  fictitious  stock  or  indebtedness." 

See  Webster  v.  Webster  Refining  Co.,  3G  Okl.  168  (1912). 

Oregon.  See  section  3  of  Art.  xi  of  the  Constitution  and  section 
5833  of  Lord's  Oregon  Laws  (1910). 

McAllister  v.  American  Hospital  Ass'n,  62  Or.  530  (1912).  Holders 
of  stock  issued  as  a  bonus  or  at  a  discoimt  are  liable  to  credjtoi-s. 
Dictum,  that  no  creditoi-s  may  com])lain  except  those  who  have 
relied  upon  the  representation  that  the  capital  stock  was  paid  in 
full. 

Macbeth  v.  Banfield,  45  Or.  553  (1904).  The  ownei-s  of  a  business 
associated  with  themselves  other  persons  who  put  -SoOOO  cash  into 
the  business.  Those  who  advanced  the  cash  were  to  have  a  one-half 
interest  in  the  business.  Then  forthwith  the  assets  of  the  business 
(other  than  the  S5000  cash)  were  capitalized  at  S16,000.  The  court 
found  that  there  was  conscious  overvaluation,  and  that  the  stock- 
holders were  liable  to  creditors. 

Pennsylvania.  Section  7  of  Art.  xvi  of  the  Constitution  provides: 
"No  corporation  shall  issue  stocks  or  bonds  except  for  money,  labor 
done,  or  money  or  property  actually  received;  and  all  fictitious  in- 
crease of  stock  or  indebtedness  shall  be  void." 

Section  17  of  Act  of  April  29,  1874,  P.L.  73  (Purden's  Digest,  vol. 
I,  p.  803),  provides:  "Every  corporation  created  under  the  provi- 
sions of  this  act,  or  accepting  its  provisions,  may  take  such  real  and 
pereonal  estate,  mineral  rights,  patent  rights,  and  other  property,  as 
is  necessary  for  the  purposes  of  its  organization  and  business,  and 
issue  stock  to  the  amount  of  the  value  thereof,  in  payment  thereof, 
and  the  stock  so  issued  shall  be  declared  and  taken  to  be  full-paid 
stock,  and  not  liable  to  any  further  calls  or  assessments;  and  in  the 
charter  and  the  certificates  and  statements  to  be  made  by  the  sub- 
scribers and  officers  of  the  corporation,  such  stock  shall  not  be  stated 
or  certified  as  ha\'ing  been  issued  for  cash  paid  into  the  company, 
but  shall  be  stated  or  certified  in  this  respect  according  to  the  fact. 


CHAP.  III.]  NOTE.  325 

No  such  corporation  shall  issue  either  bonds  or  stock  except  for 
money,  labor  done,  or  money  or  property  actually  received;  and  all 
fictitious  increase  of  stock  or  indebtedness  in  any  form  shall  be  void." 
[This  section  was  amended  in  1876,  but  not  so  as  to  alter  the  provi- 
sions set  forth  above.] 

By  the  same  law  it  is  also  provided:  "No  note  or  obligation 
given  by  a  stockholder,  whether  secured  by  pledge  or  otherwise, 
shall  be  considered  as  a  payment  of  any  part  of  the  capital  stock." 

Guarantee  Trust  Co.  v.  Dilworth  Coal  Co.,  235  Pa.  594  (1912).  The 
opinion  in  this  case  is  set  forth,  supra. 

It  is  apparently  the  law  of  Pennsylvania  that  property  may  be 
capitalized  at  any  value  which  the  incorporators  believe  it  will  de- 
velop, rather  than  the  present  cash  value.  See  Carr  v.  Le  Fevre,  27 
Pa.  413,  417  (1856);  Commonwealth  v.  Central  Passenger  Ry.,  52 
Pa.  506,  515  (1866);  American  Tube  Co.  v.  Baden  Gas  Co.,  165 
Pa.  489  (1895);  and  Finletter  v.  Acetylene  Light  Co.,  215  Pa.  86 
(1906). 

Rhode  Island.  The  editor  has  found  nothing  coming  within  the 
scope  of  this  note. 

South  Carolina.  Section  2836  of  the  Civil  Code,  1912,  provides: 
"All  subscriptions  to  the  capital  stock  of  any  corporation  organized 
under  this  Article  shall  be  payable  in  money,  or  in  labor  or  in  prop- 
erty at  its  money  value,  and  shall  be  listed,  the  labor  or  the  property 
and  the  value  thereof  to  be  specified  in  the  list  of  subscriptions ;  but 
no  subscription  in  labor  or  in  property  shall  be  received  miless  such 
labor  or  property  and  the  value  thereof,  so  to  be  specified  as  afore- 
said, be  approved  by  said  Board  of  Corporators."  The  Board  of 
Corporators  are  two  or  more  of  the  persons  petitioning  for  the  forma- 
tion of  the  corporation;  they  are  designated  by  the  Secretary  of 
State. 

South  Dakota.  Section  8  of  Art.  xvii  of  the  Constitution  provides: 
"No  corporation  shall  issue  stocks  or  bonds  except  for  money,  labor 
done,  or  money  or  property  actually  received;  and  all  fictitious  in- 
crease of  stock  or  indebtedness  shall  be  void." 

See  Rogers  v.  Mining  Company,  21  S.D.  412  (1907). 

Tennessee.  Section  2335  of  Shannon's  Code,  1896,  dealing  with 
mining,  quarrying,  boring,  and  manufacturing  companies,  provides : 
"Nothing  but  cash  shall  be  taken  in  payment  of  any  part  of  the 
capital  stock,  or  land  at  a  fair  cash  valuation."  But  section  2351 
provides:  "  Any  manufacturing  company  hereafter  or  heretofore  in- 
corporated may  receive  the  assignment  of  any  patent  in  paj'ment  of 
any  stock  subscribed  to  the  amount  of  the  value  of  said  patent,  as 


326  NOTE.  [chap.  III. 

agreed  on  by  the  subscriber  and  the  coiporation."  And  see  section  1 
of  chap.  474  of  the  Acts  of  1903. 

Section  1  of  chap.  174  of  the  Acts  of  1905  provides  "that  nothing 
but  cash  at  not  less  than  par  valuation  be  received  in  payment  for 
preferred  stock." 

Morroiv  v.  Iron  &  Steel  Co.,  87  Tenn.  202  (1889).  Each  subscriber 
was,  by  the  terms  of  the  subscription,  to  have  bonds  antl  also  stock 
of  the  company,  each  to  the  amount  of  his  subscription.  A  sub- 
scriber was  obliged  to  pay  for  his  stock,  and  the  stipulation  that  he 
should  also  have  bonds  was  treated  as  separable,  and  uncnforcible. 

Jones  V.  Whitworth,  94  Tenn.  C02  (1895).  A  representative  of 
creditors  sought  to  fasten  liability  on  persons  to  whom  stock  had  been 
issued  for  land.  The  court  held  that  an  allegation  that  the  property 
was  "not  conveyed  at  a  fair  cash  value,  but  very  far  in  excess  of  it" 
was  so  general  as  to  be  demui-ra])le,  and  that  it  must  be  alleged  and 
proved  "that  the  property  was  sold  at  an  overvaluation  which  was 
intentionally  fraudulent,  or  which  was  so  gross  as  to  be  construc- 
tively fraudulent,  as  against  corporate  creditors." 

The  court  also  held  (p.  608)  that  all  creditors  —  even  those  who 
had  extended  credit  prior  to  the  issue  of  stock  —  would  be  entitled 
to  share  in  the  amount  recovered. 

Texas.  Section  6  of  Art.  xii  of  the  Constitution  provides:  "No 
corporation  shall  issue  stock  or  bonds  except  for  money  paid,  labor 
done  or  propert}'  actually  received,  and  all  fictitious  increase  of 
stock  or  indebtedness  shall  be  void." 

Articles  1125  et  seq.  of  the  Re\dsed  Civil  Statutes,  1911,  pro\ide 
that,  before  a  corporation  is  chartered,  the  full  amount  of  its  au- 
thorized capital  stock  shall  be  subscribed,  and  fifty  per  cent  be 
paid;  that  satisfactory  evidence  must  be  furnished  to  the  secretary 
of  state  that  the  fifty  per  cent  has  been  "paid  in  cash,  or  its  equiva- 
lent in  other  property  or  labor  done,  the  product  of  which  shall  be  to 
the  company  of  the  actual  value  at  which  it  was  taken,  or  property 
actually  received";  that  the  incorporators  must  submit  to  the 
secretary  of  state  their  affidavit  showing  "the  cash  value  of  any 
property  received,  giving  its  description,  location  and  from  whom 
and  the  price  at  which  it  was  received,  [and]  the  amount,  character 
and  value  of  labor  done,  from  whom,  and  price  at  which  it  was  re- 
ceived"; and  that  the  secretary  of  state  may  require,  at  the  ex- 
pense of  the  incorporators,  other  and  more  satisfactory  evidence 
than  such  affidavit.  Certain  corporations  are  exempted  from  these 
provisions.  These  provisions  were  enacted  in  1907  (Acts  of  1907, 
chap.  CLXVi). 

.  Mathis  V.  Pridham,  1  Tex.  Civ.  App.  58,  83  (1892).  Persons  to 
whom  stock  is  issued  at  a  discount  are  liable  to  creditors. 

O'Bear-N ester  Glass  Co.  v.  Antiexplo  Co.,  101  Tex.  431  (1908). 


CHAP.  III.]  NOTE.  327 

A  corporation  was  formed  in  1904.  Stock  was  issued  in  payment  of 
an  unpatented  secret  formula  of  a  compound  to  be  mixed  with  gaso- 
line, etc.,  to  prevent  explosion.  Held,  that  this  was  not  "  property 
actually  received"  within  the  meaning  of  the  Constitution,  and  that 
the  persons  who  received  the  stock  were  liable  to  creditors  of  the  cor- 
poration for  the  par  value  of  their  shares.  But  contract  rights  may 
be  received  in  payment  of  stock.  Cole  v.  Adams,  92  Tex.  171  (1898). 
•Cole  V.  Adams,  19  Tex.  Civ.  App,  507  (1898).  The  contention  was 
made  that  holders  of  stock  "issued  for  property  at  an  overvalua- 
tion are  not  liable  to  creditors,  as  for  unpaid  stock,  if  said  valuation 
was  bona  fide  and  without  intent  to  defraud  on  the  part  of  said  cor- 
poration and  those  receiving  the  stock."  The  court  said  (p.  512): 
"While  it  is  true  this  proposition  is  sustained  by  the  decisions  of 
courts  of  high  respectability,  we  think  the  wiser  and  better  rule  is 
that,  as  to  creditors  without  notice,  property  conveyed  in  payment 
of  stock  is  not  to  be  considered  as  a  pajinent  except  to  the  extent  of 
its  money,  or  actual  value." 

Utah.  Section  5  of  Art.  xii  of  the  Constitution  provides:  "Cor- 
porations shall  not  issue  stock,  except  to  bona  fide  subscribers  thereof 
or  their  assignee,  nor  shall  any  corporation  issue  any  bond,  or  other 
obligation,  for  the  payment  of  money,  except  for  money  or  property 
received,  or  labor  done.  .  .  .  All  fictitious  increase  of  stock  or  in- 
debtedness shall  be  void." 

Section-316  of  the  Compiled  Laws,  1907,  provides:  "Where  sub- 
scriptions to  the  capital  stock  of  any  corporation  formed  under  the 
provisions  of  this  chapter  shall  consist,  in  whole  or  in  part,  of  prop- 
erty necessary  to  the  pursuit  agreed  upon,  there  must  appear  in  the 
articles  of  incorporation  a  description  of  the  property  so  taken,  with 
a  statement  of  the  fair  cash  value  thereof,  which  statement,  except 
in  the  case  of  corporations  organized  for  mining  or  irrigating  pur- 
poses, shall  be  supplemented  by  the  affidavits  of  three  persons,  to 
the  effect  that  they  are  acquainted  with  said  property,  and  that  it  is 
reasonably  worth  the  amount  in  cash  for  which  it  was  accepted  by 
the  corporation;  and  the  owners  of  such  property  shall  be  deemed  to 
have  subscribed  such  amount  to  the  capital  stock  of  such  corporation 
as  will  represent  the  fair  estimated  cash  value  of  so  much  of  such 
property,  or  of  such  interest  therein,  as  they  may  have  convej^ed  to 
such  corporation  by  deed  actually  executed  and  delivered." 

Rolapp  V,  Ogden  R.R.  Co.,  37  Utah,  540  (1910).  Bonds  issued  as  a 
bonus,  and  which  have  not  passed  into  the  hands  of  bona  fide  pur- 
chasers, are  unenforcible.  The  court  said  (p.  554):  "If  we  keep  in 
mind  all  of  our  own  constitutional  and  statutory  provisions,  we 
think  it  is  manifest  that  it  was  the  intention  both  of  the  people  who 
adopted  the  Constitution  and  the  Legislature  who  passed  the  fore- 
going sections  that  the  capital  stock  of  corporations,  excepting  those 


328  NOTE.  [chap.   Ill, 

created  for  mining  and  irrigation,  shall  represent  full  actual  value, 
either  in  money  or  pro[)erty,  and  further  that  the  subscribers  for 
stock  shall  pay  one  hundred  cents  on  the  dollar,  or  its  equivalent, 
for  the  stock  subscribed  for  by  thera,  and  until  so  paid  that  they  arc 
liable  to  creditors  of  the  corporation  in  a  proper  proceeding  for  any 
balance  remaining  unpaid  on  their  subscriptions." 

Henderson  v.  Turngren,  9  Utah,  432  (1893).  If  stock  is  issued  in 
payment  of  conveyances  of  mining  claims  and  properties  in  which 
the  grantors  had  in  fact  no  interest,  the  stockholders  are  liable  to 
creditors.  Evidence  that  the  incorporators  honestly  thought  the 
claims  were  valuable  was  rejected  at  the  trial  as  immaterial.  And 
see  Salt  Lake  Hardware  Co.  v.  Tintic  Milling  Co.,  13  Utah,  423  (1896). 

Richardson  v.  Mining  Co.,  23  Utah,  36G  (1901).  Stock  of  a  mining 
corporation  may  be  paid  in  mining  property  "at  its  estimated  fair 
cash  market  value,  whatever  its  actual  cash  value  may  be,  and  this 
is  so  even  where  the  projicrty  has  no  ascertainable  market  value. 
The  fixing  of  such  value  is  a  matter  of  opinion.  It  requires  the  exer- 
cise of  judgment,  and  the  exercise  of  judgment  for  such  purposes,  it  is 
clear,  the  legislature  left  to  the  incorporators,  where  the  corporation 
is  organized  for  mining  purposes.  An  opinion  thus  formed  must  be 
one  honestly  entertained,  but  it  is  subject  to  no  other  qualification." 

Vermont.  Section  19  of  no.  141  of  the  Acts  of  1915  provides:  "Cap- 
ital stock  shall  be  issued  only  for  (1)  cash  to  the  amount  of  each 
share  of  stock  at  par;  or  (2)  real  or  personal  property,  rights  or  fran- 
chises at  such  value  and  to  such  an  amount  as  may  be  determined  by 
vote  of  the  incorporators  at  a  meeting  held  at  the  time  of  the  or- 
ganization of  the  corporation;  and  subsequent  to  such  organization 
capital  stock  shall  be  so  issued  for  said  consideration  at  such  value 
and  to  such  an  amount  as  ma}'  be  determined  by  a  vote  of  the  stock- 
holders. No  stock  shall  be  issued  until  after  there  has  been  filed  with 
the  secretary  of  state  an  affidavit  executed  by  a  majority  of  the  in- 
corporators or  directors  of  the  corporation,  setting  forth  specifically 
(a)  the  amount  of  stock  proposed  to  be  issued;  and  (6)  the  property 
or  consideration  which  is  to  be  received  for  such  stock;  and  (c)  that 
in  their  judgment  the  property  for. which  such  stock  is  issued  is 
actually  worth  in  money  the  par  value  of  such  stock.  The  descrip- 
tion of  such  property  or  consideration  shall  be  sufficient  in  detail  to 
satisfy  the  secretary  of  state  that  the  same  can  be  readily  identified. 
Stock  so  issued  shall  be  for  all  purposes  full-paid  stock  and  not  liable 
to  further  call.  An  officer  or  director  of  a  corporation  who  issues  or 
consents  to  the  issue  of  any  shares  of  capital  stock  before  having 
filed  such  affidavit,  or  who  makes  or  consents  to  the  making  of  any 
false  statement  in  any  such  affidavit,  shall  be  fined  not  more  than 
one  thousand  dollars,  or  imprisoned  not  more  than  twelve  months, 
or  both." 


CILIP.  III.]  NOTE.  329 

[In  1915  the  editor  was  employed  by  the  state  of  Vermont  to  draft 
a  General  Corporation  Act  for  submission  to  the  Legislature.  The 
provision,  as  to  the  issue  of  stock,  which  he  recommended  should 
be  adopted  was  as  follows :  — 

"Capital  stock  may  be  issued  pursuant  to  the  vote  of  the  di- 
rectors. 

"Capital  stock  shall  not  be  issued,  directly  or  indirectly,  except  for 
(1)  cash  equal  to  the  par  value  of  the  stock  so  issued;  or  (2)  property 
other  than  cash  (includmg  patents,  copja-ights,  franchises,  privileges, 
contract  rights,  good  will  and  other  intangible  property)  of  a  value, 
ascertained  as  hereinafter  provided,  not  less  than  the  par  value  of 
the  stock  so  issued;  or  (3)  promotion  expenses,  to  the  extent  here- 
inafter permitted. 

"The  governor  and  secretary  of  state  and  the  state  commissioner 
of  taxes  shall  by  virtue  of  their  offices  be  commissioners  of  corpora- 
tions. 

"The  market  value  of  property  is  the  amount  of  cash  which  such 
property  would  presently  bring  at  a  sale  from  a  seller  who  desires 
to  sell  but  is  under  no  pressure  to  sell  to  a  buyer  who  is  able  to  pay 
in  cash  and  who  desires  to  buy  but  is  under  no  pressure  to  buy. 

"If  stock  is  to  be  issued  for  property  other  than  cash  the  cor- 
poration shall  present  a  petition  to  the  commissioner  of  corpora- 
tions describing  the  property  and  asking  for  authority  to  issue  a 
specified  amount  of  stock  for  such  property.  An  affidavit  verified  by 
at  least  three  directors  shall  be  annexed  to  such  petition  declaring 
that  each  of  the  subscribers  to  such  affidavit  (speaking  for  himself 
but  not  for  the  other  subscribers)  believes  himself  competent  to  ap- 
praise with  substantial  accuracy  the  market  value,  as  defined  in  this 
act,  of  such  property,  and  that  he  believes  that  the  market  value  of 
such  property  is  not  less  than  the  par  value  of  the  stock  which  the 
corporation  seeks  authority  to  issue. 

"The  commissioners  may  in  their  discretion  employ  competent 
persons  to  make  an  independent  appraisal  of  the  property.  In  such 
case  they  may  fix  the  amount  to  be  paid  such  appraisers  for  their 
services  and  expenses ;  but  such  amount  shall  not  exceed  one-half  of 
one  per  cent  of  the  par  value  of  the  stock  which  the  corporation  seeks 
authority  to  issue.  If  such  par  value  amounts  to  more  than  fifty 
thousand  dollars  it  shall  not  exceed  a  maximum  to  be  agreed  upon 
by  the  commissioners  and  the  corporation  before  further  proceedings 
relating  to  the  petition  are  had.  Such  appraisers  may  in  an  action 
on  this  statute  recover  the  amount  so  fixed  from  the  corporation, 
or,  if  such  amount  is  not  paid  by  the  corporation  within  thirty  days 
after  it  is  fixed  by  the  commissioners,  from  the  directors  who  sub- 
scribed such  affidavit,  and  such  directors  shall  be  jointly  and  sever- 
ally liable  therefor. 

"The  commissioners  may  authorize  such  property  to  be  received 


330  NOTE.  [chap.  III. 

in  payment  of  an  amount  of  stock  to  be  specified  by  them  in  a  writing 
under  their  seals,  and  they  shall  in  such  writing  state  the  names  and 
addresses  of  the  independent  appraisers,  if  any,  who  were  employed. 
The  petition,  affidavit  of  directors,  and  such  authorization  shall  be 
filed  with,  and  recorded  by,  the  secretary  of  state. 

"A  corporation  may  issue  stock  for  promotion  expenses,  which 
shall  include  compensation  to  the  promoters;  the  organization  fee 
and  the  amount  paid  to  appraisers  under  the  provisions  of  this  sec- 
tion within  one  year  after  it  is  formed;  legal  expenses  relating  to  the 
formation  of  the  corporation  and  the  issue  of  stock  issued  within 
one  year  after  it  is  formed;  and  the  commission  paid  for  untlcrwrit- 
ing  its  stock  issued  within  one  year  after  it  is  formed.  The  amount 
of  stock  issued  for  promotion  expenses  shall  not,  in  any  event,  exceed 
twelve  and  one-half  per  cent  of  the  whole  amount  of  stock  lawfully 
issued  by  the  corporation  within  one  year  after  it  is  formed. 

"A  corporation  may  carry  its  corporate  franchise  as  an  asset  equal 
to  the  amount  of  stock  issued  for  promotion  expenses.  But  it  shall 
annually  mark  off  ten  per  cent  of  the  value  originally  set  upon  such 
asset  until  it  is  no  longer  carried  as  an  asset.  These  provisions  shall 
not  be  held  to  fix  the  value  of  the  corporate  franchise,  if  it  is  taken 
by  an  exercise  of  the  power  of  eminent  domain. 

"If  stock  is  paid  in  cash  but  the  cash  or  some  part  thereof  is  used, 
pursuant  to  any  agreement  or  understanding  had  at  the  time  such 
stock  was  paid  in  cash  and  with  intent  to  evade  the  provisions  of 
this  section,  in  the  pajnnent  of  property  or  promotion  expenses,  so 
that,  in  substance,  the  stock  is  issued  for  such  property  or  promo- 
tion expenses,  all  persons  to  whom  or  for  whose  benefit  or  account 
such  stock  was  issued  shall  be  jointly  and  severally  liable  to  pay  the 
corporation  the  difference  between  the  par  value  of  the  stock  and 
the  actual  value  of  the  property,  if  any,  for  which,  in  substance,  it 
was  issued,  with  interest  at  ten  per  cent.  Such  amount  may  be  re- 
covered in  an  action  or  actions  on  this  statute  and  no  lapse  of  time 
shall  bar  the  bringing  of  such  action  or  actions."] 

Virginia.  Section  167  of  the  Constitution  provides:  "Whenever 
stock  or  bonds  are  to  be  issued  by  a  corporation,  it  shall,  before  is- 
suing the  same,  file  with  the  State  Corporation  Commission  a  state- 
ment (verified  by  the  oath  of  the  president  or  secretary  of  the  cor- 
poration, and  in  such  form  as  may  be  prescribed  or  permitted  by  the 
commission)  setting  forth  fully  and  accurately  the  basis,  or  financial 
plan,  upon  which  such  stock  or  bonds  are  to  be  issued;  and  where 
such  basis  or  plan  includes  services  or  property  (other  than  money), 
received  or  to  be  received  by  the  company,  such  statement  shall  ac- 
curately specify  and  describe,  in  the  manner  prescribed,  or  permitted, 
by  the  commission,  the  services  and  property,  together  with  the 
valuation  at  which  the  same  are  received  or  to  be  received." 


CHAP.  III.]  NOTE.  331 

By  Subd.  9  of  section  llOoe  of  the  Code,  1904,  this  constitutional 
provision  is  enacted,  and  it  is  further  provided  that  "the  judgment 
of  the  directors  as  to  the  value  of  such  land  or  other  property  .  .  . 
in  the  absence  of  fraud,  participated  m  by  both  parties  to  the  trans- 
action, shall  be  conclusive."  For  a  violation  of  this  provision  a 
penalty  may  be  imposed  upon  the  corporation. 

Martin  v.  South  Salem  Land  Co.,  94  Va.  28  (1896).  Persons  to 
whom  stock  is  issued  at  a  discount  are  liable  to  creditors  who  ex- 
tended credit  without  notice  of  the  facts. 

Monk  V.  Barnett,  113  Va.  635  (1912).  The  opinion  in  this  case  is 
set  forth,  supra. 

Washington.  Section  6  of  Art.  xii  of  the  Constitution  provides: 
"Corporations  shall  not  issue  stock,  except  to  bona  fide  subscribers 
therefor,  or  their  assignees;  nor  shall  any  corporation  issue  any  bond 
or  other  obligation  for  the  payment  of  money,  except  for  money  or 
property  received  or  labor  done.  .  .  .  All  fictitious  increase  of  stock 
or  indebtedness  shall  be  void." 

As  to  mining  corporations,  see  section  7347  of  Remington  &  Bal- 
inger's  General  Statutes. 

Cox  V.  Dickie,  48  Wash.  264  (1908).  Persons  to  whom  stock  is 
issued  at  a  discount  are  liable  to  creditors. 

Lantz  V.  Moeller,  76  Wash.  429  (1913).  Extracts  from  the  opinion 
in  this  case  are  set  forth,  supra. 

Adamant  Mfg.  Co.  v.  Wallace,  16  Wash.  614,  622  (1897).  Cred- 
itors cannot  complain  who  dealt  with  the  corporation  with  knowl- 
edge of  the  facts. 

West  Virginia.  Section  2253  of  the  Code,  1906,  provides:  "In  no 
case  shall  stock  be  sold  or  disposed  of  at  less  than  par,  except  by  a 
vote  of  three-fourths  of  all  the  stock  of  the  corporation  outstand- 
ing at  the  time  the  vote  is  taken.  .  .  .  But  nothing  herein  contained 
shall  be  so  construed  as  to  prevent  any  mining  or  manufacturing 
corporation  subject  to  the  provisions  of  this  chapter,  from  issuing 
stock  or  bonds,  and  negotiating  the  sale  of  same,  in  payment  of  real 
and  personal  estate  for  the  use  of  such  corporation,  and  for  its  other 
corporate  purposes  and  business,  at  such  price  and  upon  such  terms 
and  conditions  as  may  be  agreed  upon  by  the  owners  and  the  di- 
rectors or  stockholders  of  such  corporation.  And  any  subscriber  to 
the  capital  stock  of  any  such  mining  or  manufacturing  corporation 
may  pay  for  the  same  by  the  transfer  and  conveyance  to  such  cor- 
poration of  real  or  personal  property,  or  both,  proper  or  necessary 
for  the  uses  and  purposes  of  the  corporation,  upon  such  tei-ms  as 
may  be  mutually  agreed  upon.  All  stock  so  issued  shall  be  full}'- 
paid  and  not  liable  to  any  further  call  or  assessment,  and,  in  absence 
of  actual  fraud  in  the  transaction,  the  valuation  of  the  property  so 


332  NOTE.  [chap.  hi. 

purchased  shall  be  conclusive;  but  it  shall  be  the  duty  of  the  corpo- 
ration to  have  its  minutes  or  other  permanent  records  to  show  with 
reasonable  detail  the  items  of  the  property  in  payment  for  which 
stock  or  bonds  were  so  issued." 

Bank  v.  Belington  Coal  Co.,  51  W.Va.  60  (1902).  Holders  of  stock 
issued  for  overvalued  property  are  not  liable  to  creditors,  if  no  fi-aud 
has  been  practised  upon  the  corporation.  "  Property  should  be 
purchased  by  corporations  at  reasonably  fair  valuation  even  if  paid 
for  in  the  capital  stock  of  the  company.  But  our  statute  throws  the 
gate  wide  open  for  the  sale  of  stock  and  purchase  of  property  in 
payment  therefor  at  such  price  and  on  such  terms  and  conditions 
as  contracting  parties  may  agree  upon"  (p.  80).  And  see  In  re 
Charles  Taum  Light  Co.,  199  Fed.  846  (1912). 

There  was  a  dictum  in  Bank  v.  Belington  Coal  Co.  that  when 
stock  is  issued,  at  the  formation  of  a  corporation,  "for  cash  at  less 
than  par,  parties  taking  that  stock  are  liable  to  creditors  for  the 
unpaid  value  thereof"  (p.  80).  And  see  Security  Trust  Co.  v.  Ford, 
75  Ohio  St.  322  (1906). 

Wisconsin.  Section  1753  of  the  Statutes,  1911,  provides:  "No 
corporation  shall  issue  any  stock  or  certificate  of  stock  except  in  con- 
sideration of  money  or  of  labor  or  property  estimated  at  its  true 
money  value,  actually  received  by  it,  equal  to  the  par  value  thereof, 
nor  any  bonds  or  other  evidences  of  indebtedness  except  for  money 
or  for  labor  or  property  estimated  at  its  true  money  value,  actually 
received  by  it,  equal  to  seventy-five  per  cent  of  the  par  value  thereof, 
and  all  stocks  and  bonds  issued  contrary  to  the  provisions  of  law 
and  all  fictitious  increase  of  the  capital  stock  of  any  corporation 
shall  be  void." 

Gager  v.  Paul,  111  Wis.  638  (1901).  A  holder  of  stock  which  the 
corporation  had  agreed  should  be  full-paid,  although  in  fact  only 
part  had  been  paid,  was  held  liable  to  creditors. 

Gogebic  Investment  Co.  v.  Iron  Chief  Mining  Co.,  78  Wis.  427 
(1891).  Persons  to  whom  stock  is  issued  for  overvalued  property  are 
liable  to  creditors.  The  complaint  alleged  that  the  property  was  not 
worth  10  per  cent  of  the  par  value  of  the  stock,  and  that  this  fact  was 
known  to  the  stockholders  when  they  received  their  stock.  The  case 
further  held  that  if  creditors  extended  credit  to  the  corporation  with 
knowledge  of  the  facts,  the  burden  of  proving  this  was  upon  the 
stockholders.  And  see  Whitehill  v.  Jacobs,  75  Wis.  474  (1890). 

National  Bank  of  Merrill  v.  Illinois  Lumber  Co.,  101  Wis.  247 
(1898).  If  property  is  purchased  for  820,000  and  capitalized  at 
$80,000,  it  is  for  the  jury  to  say  whether  the  stock  is  full-paid.  "It 
must  appear  that  the  corporation  and  the  stockholders  fraudulently 
agreed  that  stock  should  be  issued  and  property  should  be  received 
therefor  at  a  valuation  substantially  in  excess  of  its  real  value  for 


CHAP.  III.]  NOTE.  333 

the  very  purpose  of  creating  apparently  full-paid  stock,  and  falsely 
holding  the  same  out  to  the  world  as  such.  A  gross  and  obvious  over- 
valuation of  property  would  be  strong  evidence  of  such  fraud." 

Wyoming.  Section  3989  of  the  Compiled  Statutes,  1910,  provides: 
''The  directors  of  such  company  may  purchase  mines,  manufac- 
tories and  other  property  necessary  for  their  business,  and  issue 
stock  to  the  amount  of  the  value  thereof  in  payment  therefor,  and 
the  stock  so  issued  shall  be  declared  and  taken  to  be  full  stock,  and 
not  liable  to  any  further  calls,  neither  shall  the  holders  thereof  be 
liable  to  any  further  payments  [under  other  sections  of  the  Statutes], 
but  in  all  statements  and  reports  of  the  company  this  stock  shall  not 
be  stated  or  reported  as  being  issued  for  cash  paid  into  the  company, 
but  shall  be  reported  in  this  respect  according  to  the  facts." 

Note.  —  Statutes  providing  that  public  service  corporations  shall 
not  issue  stock  without  the  approval  of  a  public  board  are  now  com- 
mon. See  Fall  River  Gas  Co.  v.  Gas  Commissioners,  214  Mass.  529  ; 
People  V.  Stevens,  197  N.Y.  1;  People  v.  Steve7is,  203  N.Y.  7;  People 
V.  Public  Service  Commission,  203  N.Y.  299;  People  v.  Public  Serv- 
ice Commission,  210  N.Y.  456. 


334  ERLAXGER    V.  NEW    SOMBRERO    PHOSPHATE    CO.       [cHAP.  IV, 


CHAPTER  IV. 

TRANSACTIONS  BETWEEN  PROMOTERS   AND  THE 
CORPORATION   PRO.MOTED. 


ERLANGER  t-.   NEW  SO.MBRERO    PHOSPHATE  CO. 

L.R.  3  A.C.  1218.     1878. 

Appeal  against  a  decision  of  the  Court  of  Appeal  which  had  re- 
versed a  decree  of  \'icc-Chancellor  Malins. 

Sombrero,  a  small  island  in  the  \\'est  Indies,  the  property  of  the 
Crown,  had  been  leased  out  by  the  Crown  for  twenty-one  years  from 
1865.  This  lease. had  been  assigned  to  "The  Sombrero  Company," 
which  undertook  to  woik  the  beds  of  phosphate  of  lime  with  which 
the  island  abounded.  This  company  was  ordered  to  be  wound  up. 
The  lease  was  ordered  to  be  sold  by  the  official  liquidator,  Mr.  Chat- 
teris. Erlanger  and  othei-s  formed  a  s}Tidicate  to  purchase  it,  and 
did  purchase  it  for  £55,000.  The  purchase  was  effected  l)y  a  pro- 
visional contract  August  30,  1871,  though  not  formally  concluded 
until  later.  The  syndicate  desired  to  resell  the  lease  at  a  profit;  and 
with  that  view  proceeded  to  get  up  a  company  to  purchase  it  from 
the  syndicate. 

Erlanger,  who  acted  for  the  sjnidicate,  took  steps  to  form  a  com- 
pany, under  the  Companies  Act.  A  memorandum  of  association 
was  drawn  up  by  the  solicitor  of  the  syndicate,  and  was  signed  by 
seven  persons  all  of  whom  were  mere  nominees  of  the  sjTidicate.  The 
articles  of  association  for  the  company  were  drawn  by  the  same  solici- 
tor, and  bore  date  September  20,  1871.  These  articles  provided  that 
the  first  board  of  directors  should  consist  of  five  specified  persons; 
that  two  directors  should  be  a  quorum  for  the  transaction  of  busi- 
ness; and  that  the  directors  might  without  any  further  authority 
from  the  members,  adopt  and  carry  into  effect  the  contract,  of  even 
date,  for  the  assignment  to  the  company  of  the  island  of  Sombrero 
for  the  residue  of  the  term  of  the  lease. 

A  contract  had  also  been  dra^vn  up,  and  dated  September  20,  for 
the  sale  of  the  lease  to  the  new  company.  This  contract  was  between 
Evans  as  vendor  and  Pa\'y  as  purchaser  on  behalf  of  the  new  com- 
pany. Evans  was  a  trustee  or  agent  for  the  members  of  the  syn- 
dicate. The  contract  was,  on  the  face  of  it,  a  provisional  one,  to  the 
extent  that  it  was  subject  to  the  formation  of  the  company,  and  the 


CHAP.  IV.]       ERLANGER    V.  NEW    SOMBRERO    PHOSPHATE    CO.  335 

adoption  of  the  contract  by  it.  This  contract  recited  the  purchase 
by  the  sjTidicate  on  August  30,  but  did  not  name  the  price  then 
given.  The  price  to  the  new  company  was  to  be  £110,000,  of  which 
£80,000  was  to  be  paid  in  cash,  and  the  remainuig  £30,000  to  be  sat- 
isfied by  fully  paid-up  shares  in  the  new  company.  The  money  was 
to  be  obtained  by  the  subscriptions  for  the  shares,  which  were  to  be 
13,000  in  number,  of  £10  each. 

The  five  persons  specified  in  the  articles  as  directors  were  all 
named  by  the  syndicate.  Two  of  them  were  persons  not  likely  to 
act,  and  who  did  not  act,  in  the  early  proceedings  of  the  board. 
The  other  three  were  Evans,  Macdonald  and  Dakin.  Evans's  shares 
were  given  to  him  by  Erlanger.  Macdonald  held  shares  only  as 
trustee  for  Erlanger.  Dakin  had  not  sufficient  knowledge  of  the 
facts  to  form  an  independent  judgment.  The  first  meeting  of  the 
directors  was  held  September  29,  1871;  and  was  attended  by  Evans, 
Macdonald  and  Dakin.  It  was  resolved  that  the  contract  of  pur- 
chase for  £110,000  "be  approved  and  confirmed."  A  prospectus  was 
soon  issued;  and  after  its  publication  the  nmnber  of  applications 
for  shares  became  considerable.  On  or  before  November  2,  1871, 
30,000  full-paid  shares  and  £80,000  in  cash  were  issued  or  paid  by 
the  company  to  the  vendors. 

There  was  never  any  confirmation  of  the  purchase  by  vote  of  the 
stockholders. 

Sul^sequently,  after  new  directors  had  been  chosen,  the  bill  in  this 
suit  was  filed  by  the  company  against  Erlanger  and  all  the  members 
of  the  syndicate;  one  prayer  being  that  the  contract  of  September 
20  might  be  set  aside,  and  the  purchase  money  repaid  to  the  com- 
pany. 

The  case  was  heard  before  Vice-Chancellor  Malins,  who  ordered 
the  bill  to  be  dismissed,  but  without  costs.  On  appeal  by  the  com- 
pany, the  contract  was  ordered  to  be  rescinded  as  to  all  members  of 
the  syndicate,  the  purchase  money  paid  by  the  companj^  repaid,  and, 
on  payment  of  the  money  so  ordered  to  be  repaid  to  the  company, 
the  island  was  to  be  restored  by  the  company  to  the  syndicate. 

Erlanger  et  at.  then  brought  the  present  appeal  to  the  House  of 
Lords. 

The  case  was  twice  argued. 

Lord  Penzance.  Can  a  contract  so  obtained  be  allowed  to  stand? 
The  bare  statement  of  the  facts  is,  I  think,  sufficient  to  condemn  it. 
From  that  statement  I  invite  your  Lordships  to  draw  two  conclu- 
sions: first,  that  the  company  never  had  an  opportunity  of  exercis- 
ing, through  independent  directors,  a  fair  and  independent  judg- 
ment upon  the  subject  of  this  purchase;  and,  secondly,  that  this 
result  was  brought  about  by  the  conduct  and  contrivance  of  the  vendors 
themselves.  It  was  the  vendors,  in  their  character  of  promoters, 
who  had  the  power  and  the  opportunity  of  creating  and  forming  the 


336  ERLANGER    V.  NEW    SOMBRERO    PHOSPHATE    CO.       [CHAP.  IV. 

company  in  such  a  manner  that  with  adequate  disclosures  of  fact, 
an  mdependent  judgment  on  the  company's  behalf  might  have  been 
formed.  But  instead  of  so  doing  they  used  that  power  and  oppor- 
tunity for  the  advancement  of  their  own  interests.  Placed  in  this 
position  of  unfair  advantage  over  the  company  which  they  were 
about  to  create,  they  were,  as  it  seems  to  me,  bound  according  to  the 
princii)les  constantly  acted  upon  in  the  Courts  of  Equity,  if  they 
wished  to  make  a  valid  contract  of  sale  to  the  company,  to  nominate 
inde])endcnt  director  and  fully  disclose  the  material  facts.  The 
obligation  rests  upon  them  to  shew  they  have  not  made  use  of  the 
position  which  they  occupied  to  benefit  themselves;  but  I  find  no 
proof  in  the  case  that  they  have  discharged  that  obligation.  There 
is  no  proof  that  either  Sir  Thomas  Dakin  or  Admiral  IVIacdonald  was 
aware  of  the  price  at  which  the  property  had  just  been  bi-ought  under 
the  authority  of  the  Court  of  Chancery,  nor,  indeed,  that  they  even 
knew  that  the  real  vendoi-s  were  also  the  promoters  of  the  company. 
And  there  is  certainly  no  proof  that  in  the  selection  of  the  directors 
who  were  to  be  the  company's  agents  for  accepting  and  affirming  the 
proposed  i:)urchase,  the  vendors  used  their  power  as  promoters  in 
such  a  waj'  as  to  create  an  independent  body  capable  of  acthig  im- 
partially in  defence  of  the  company's  interests. 

A  contract  of  sale  effected  under  such  circumstances  is,  I  conceive, 
upon  principles  of  equity  liable  to  be  set  aside. 

The  principles  of  equity  to  which  I  refer  have  been  illustrated  in 
a  variety  of  relations,  none  of  them  perhaps  precisely  similar  to  that 
of  the  present  parties,  but  all  resting  on  the  same  basis,  and  one 
which  is  strictly  applicable  to  the  present  case.  The  relations  of 
principal  and  agent,  trustee  and  cestui  que  trust,  parent  and  child, 
guardian  and  ward,  priest  and  penitent,  all  funiish  instances  in  which 
the  Courts  of  Equity  have  given  protection  and  relief  against  the 
pressure  of  unfair  advantage  resulting  from  the  relation  and  mu- 
tual position  of  the  parties,  whether  in  matters  of  contract  or  gift; 
and  this  relation  and  position  of  unfair  advantage  once  made  ap])ar- 
ent,  the  Courts  have  alwaj'S  cast  upon  him  who  holds  that  position, 
the  burden  of  shewing  that  he  has  not  used  it  to  his  own  benefit. 

Lord  Cairns.  It  is  now  necessary  that  I  should  state  to  your 
lordships  in  what  position  I  understand  the  promoters  to  be  placed 
with  reference  to  the  company  which  they  proposed  to  form.  They 
stand,  in  my  opinion,  undoubtedly  in  a  fiduciary  position.  They 
have  in  their  hands  the  creation  and  moulding  of  the  company;  they 
have  the  power  of  defining  how,  and  when,  and  in  what  shape,  and 
under  what  supervision,  it  shall  start  into  existence  and  begin  to  act 
as  a  trading  corporation.  If  they  are  doing  all  this  in  order  that  the 
company  may,  as  soon  as  it  starts  into  life,  become,  through  its 
managing  directors,  the  purchaser  of  the  property  of  themselves,  the 
promoters,  it  is,  in  my  opinion,  incumbent  upon  the  promoters  to 


CHAP.   IV.]       ATTORNEY-GENERAL    V.  STANDARD    TRUST    CO.  337 

take  care  that  in  forming  the  company  they  provide  it  with  an  execu- 
tive, that  is  to  say,  with  a  board  of  directors,  who  shall  both  be 
aware  that  the  property  which  they  are  asked  to  buy  is  the  property 
of  the  promoters,  and  who  shall  be  competent  and  impartial  judges 
as  to  ,vhether  the  purchase  ought  or  ought  not  to  be  made.  I  do  not 
say  that  the  owner  of  property  may  not  promote  and  form  a  jomt- 
stock  company,  and  then  sell  his  property  to  it,  but  I  do  say  that  if 
he  does  he  is  bound  to  take  care  that  he  sells  it  to  the  company' 
through  the  medium  of  a  board  of  directors  who  can  and  do  exercise 
an  independent  and  intelligent  judgment  on  the  transaction,  and  who 
are  not  left  under  the  belief  that  the  property  belongs,  not  to  the 
promoter,  but  to  some  other  person.  ...  I  cannot  but  regard  a  meet- 
ing at  which  two  of  the  principal  directors  did  not  and  could  not  at- 
tend, at  which  one  who  did  attend  and  take  part  in  the  deliberations 
was  at  once  a  person  buying  and  selling,  where  the  legal  ad\aser 
present  and  assisting  was  virtually  another  vendor,  and  where  the 
two  remaining  directors  are  not  shewn  to  have  had  the  means  of 
exercising,  or  to  have  exercised,  any  intelligent  judgment  on  the  sub- 
ject, as  Httle  else  than  a  mockery  and  a  delusion. 


ATTORNEY-GENERAL  FOR  CANADA  v.   STANDARD 
TRUST  CO. 

[1911]    A.C.    498. 

Viscount  Haldane.  In  this  appeal  the  question  which  has  to 
be  decided  is  whether  the  appellant,  the  Attorney-General  for  the 
Dominion  of  Canada,  can  successfully  object  to  a  claim  by  the  re- 
spondents to  be  admitted  as  creditors  of  the  South  Shore  Railway 
Company  for  a  sum  of  $348,000.  The  material  facts  of  the  case  are 
these : — 

In  the  year  1893  a  railwaj^  extending  from  St.  Lambert,  opposite 
Montreal,  to  Sorel,  a  distance  of  about  forty-five  miles,  had  been 
built,  and  belonged  to  the  Montreal  and  Sorel  Railway  Company. 
Bonds  for  lOOL  each  had  been  issued  by  the  company  to  the  extent 
of  about  1500.  The  company  had  become  bankrupt  and  the  railway 
was  not  being  worked.  On  March  1  in  that  year  Messi-s.  Tourville, 
Leduc,  Fortier,  and  Beauchemin  agreed  to  form  themselves  into  a 
syndicate  for  the  purpose  of  acquiring  the  railway  and  of  completing 
and  equipping  it  and  putting  it  into  good  condition.  They  bought 
up  1453  of  the  bonds  at  a  price  amounting  to  about  34,000Z.  They 
also  bought  up  a  judgment  against  the  company  for  a  substantial 
sum,  and  they  spent  a  good  amount  of  their  own  money  in  improving 
the  railway.  Under  an  Act  of  the  Quebec  Legislature,  assented  to 
on  January  8,  1894,  a  company  known  as  the  South  Shore  Railway 


338  ATTORNEY-GEXERAL    V.  STANDARD    TRUST    CO.       [CHAP.  IV. 

Company  was  incorporated,  with  power  to  construct  and  acquire 
railways  in  tiie  locality  of  the  Montreal  and  Sorel  Railway.  This 
Act  and  the  incoiporation  under  it  of  the  South  Shore  Company  were 
procured  by  the  four  members  of  the  syndicate.  The  whole  of  the 
shares  in  the  company  in  reality  belonged  to  them,  and  there  were 
no  independent  shareholders.  Each  of  them  subscribed  for  $75,00() 
of  the  company's  stock.  Along  with  three  other  persons,  nominees 
whom  they  had  qualified,  they  were  elected  directors,  and  Mr.  Tour- 
ville  was  elected  president.  On  January  16  a  meeting  of  the  share- 
holdci-s  was  held,  at  which  the  directoi-s  were  authorized  to  enter 
into  agreements  with  railway  companies  and  with  other  persons  in 
accordance  with  the  provisions  of  the  Act.  On  June  1,  1894,  the 
Montreal  and  Sorel  Railway  was  sold  by  the  Sheriff  of  Montreal 
under  a  judgment  obtained  l)y  the  Collector  of  Taxes,  and  it  was 
bought,  at  a  nominal  price  of  SKUX),  by  Mr.  Tourville,  a  member  of 
the  s>Tidicate,  and  the  president  of  the  South  Shore  Company.  On 
June  4,  at  a  meeting  of  the  directors,  Mr.  Tourville,  on  the  narration 
that  the  real  value  of  the  railways  was  represented  by  the  bonds  of 
the  Montreal  and  Sorel  Company  acquired  by  the  members  of  the 
syndicate  and  by  them  transferred  in  part  to  the  South  Shore  Com- 
pany in  payment  for  the  stock  they  had  subscribed  for,  agreed  to 
transfer  the  railway  to  the  South  Shore  Company  at  a  purchase  price 
to  be  settled  at  a  later  period.  The  deed  of  sale  to  the  company  from 
the  sheriff  was  executed  on  July  7.  On  October  8.  1895,  the  directors 
and  their  nominees,  the  only  persons  interested  in  the  company, 
fixed  the  sale  price  at  $648,000,  and  took  credit  in  their  own  favoui" 
for  the  $300,000  subscribed  by  the  members  of  the  sjmdicate  and 
paid  in  bonds  as  already  stated.  Tliis  price  has  not  been  shewn  to 
be  excessive,  although  it  amounted  to  much  more  than  the  syndi- 
cate had  actually  spent  in  acquiring  and  improving  the  railway.  The 
indebtedness  of  the  company,  after  taking  credit  for  the  $300,000  of 
sul)scription  money,  thus  amounted  to  $348,000,  and  this  sum  was 
allocated  as  an  indebtedness  of  $87,000  to  each  of  the  four  members 
of  the  s^iidicate.  with  interest  at  6  per  cent.  A  formal  agreement  to 
this  effect  between  the  members  of  the  sjmdicate  and  the  South 
Shore  Company  was  executed  on  December  2,  1895.  These  debts 
were  subsequently  transferred  to  the  respondents. 

In  1902  the  South  Shore  Railway  Company  was  amalgamated 
with  the  Quebec  Southern  Railway  Company.  In  1904,  the  com- 
panies having  become  insolvent  and  having  failed  to  work  the  rail- 
ways, the  Minister  of  Railways  and  Canals  for  the  Dominion  of 
Canada  instituted  proceedings  in  the  Exchequer  Court  of  Canada, 
under  the  provisions  of  the  Canadian  statute  3  Edw.  7,  c.  21,  against 
the  amalgamated  companies  for  a  sale.  Under  the  provisions  of  this 
and  a  subsequent  statute  passed  for  the  purpose,  a  sale  was  ordered 
on  September  11,  1905,  and  the  railways  were  sold  for  $1,051,000. 


CHAP.  IV.]   ATTORNEY-GENERAL  V.   STANDARD  TRUST  CO.       339 

By  a  subsequent  order  it  was  referred  to  the  referee  of  the  Court  to 
investigate  the  claims  of  the  creditors  of  the  companies.  The  re- 
spondents put  in  a  claim  on  the  basis  above  indicated.  The  At- 
torney-General of  the  Dominion,  as  an  unsecured  creditor  of  the 
amalgamated  railway  companies,  intervened  and  contested  this 
claim,  as  did  also  the  Bank  of  St.  Hyacinthe. 

The  case  put  forward  by  the  Attorney-General,  the  present  ap- 
pellant, and  by  the  bank,  was  that  the  proceedings  of  the  members 
of  the  syndicate  as  directors  of  the  South  Shore  Company,  authoriz- 
ing the  purchase  of  the  Montreal  and  Sorel  Railway  and  the  transfer 
of  bonds  in  payment  for  the  stock  subscribed  for  by  the  syndicate, 
was  ultra  vires  and  a  breach  of  duty.  It  was  said  that  Mr.  Tourville 
and  his  associates  in  the  syndicate  were  promoters  of  the  South 
Shore  Company  and  occupied  a  fiduciary  position  towards  it,  and 
that  the  resolution  of  the  directors  fixing  the  price  of  the  railway  at 
$648,000  was  not  binding  and  that  the  price  was  unfair.  The  re- 
spondents' answer  was  that  the  price  was  not  in  excess  of  the  real 
value,  and  that  the  Attorney-General  and  the  bank  had  no  title  to 
object. 

The  referee,  after  hearing  evidence  and  argument,  by  his  final 
report,  dated  May  25,  1908,  dismissed  the  case  of  the  Attorney-Gen- 
eral and  the  bank  and  allowed  the  claim  of  the  respondents.  The 
Attorney-General  and  the  bank  both  moved  to  vary  this  report,  but 
the  Exchequer  Court,  by  order  dated  October  31,  1908,  dismissed 
the  motions.  From  this  order  the  Attorney-General  and  the  bank 
both  appealed  to  the  Supreme  Court  of  Canada,  which, bj'^  a  judgment 
dated  February  15,  1910, dismissed  the  appeals, Idington,  J.,  dissent- 
ing.  The  Attorney-General  alone  now  appeals  to  the  Pri\n>r  Council. 

The  appellant  contends,  on  the  footing  of  being  an  unsecured 
creditor  of  the  Quebec  Southern  Railway  Company  as  amalgamated, 
that  the  fund  arising  from  the  sale  directed  by  the  Exchequer  Court 
ought  not  to  be  diminished  by  admitting  the  claim  of  the  respondents. 
He  alleges  that  the  price  of  $648,000  paid  in  1894  to  the  sjTidicate 
for  the  railway  was  excessive,  that  the  transaction  was  ultra  vires, 
and  that,  apart  from  this,  the  members  of  the  syndicate,  being  also 
directors,  were  m  a  fiduciary  position  towards  the  South  Shore 
Company,  such  that  the  transaction  cannot  stand.  In  the  view  of 
the  case  taken  by  their  Lordships,  it  is  not  necessary  to  enter  into 
the  question  whether  the  price  of  $648,000  was  excessive.  The  re- 
feree, after  hearing  evidence,  decided  that  it  was  not,  and  this  find- 
ing of  fact  is  not  dissented  from  by  any  of  the  judges  in  the  Courts 
below,  except  Idington,  J.  But  whatever  may  have  been  the  char- 
acter of  this  transaction,  it  was  approved,  with  full  knowledge  of 
the  facts,  by  all  of  those  who  owned,  or  were  beneficially  interested 
in,  the  stock  of  the  company  at  the  time.  It,  therefore,  does  not 
matter,  for  the  purposes  of  a  case  such  as  the  present,  that  these 


310  ATTOIIXEY-GENERAL    V.  STANDARD    TRUST    CO.       (ciIAP.  IV. 

persons  wore  also  promoters  and  vendoi-s.  If  the  trans:iction  had 
been  ultra  vires  in  the  sense  of  hein^  outside  the  legal  capacity  of 
the  company,  and  accordingly  not  its  act,  the  case  would  have  been 
tlifferent.  But,  although  this  has  been  suggested,  their  Lordships 
can  find  no  foundation  for  the  argument.  Under  the  provisions  of 
the  statute  of  the  (Quebec  Legislature  incorporating  it,  the  company 
had  power  to  purcha.se  the  Montreal  and  Sorel  Railway,  and  was  au- 
thorized to  take  payment  for  the  amount  subscribetl  for  its  stock  in 
bonds  of  any  railway  company.  The  transaction  was  actually  carried 
out  in  this  form,  and  was  on  the  face  of  it  within  the  powers  con- 
ferred by  the  statute  on  the  company.  If,  therefore,  what  the  di- 
rectors did  is  to  \)C  impeached,  it  nmst  be  on  the  giound,  not  of  its 
having  lieen  ultra  vires  of  the  company,  but  of  its  having  been  a 
breach  of  duty  by  the  directors.  Now,  although  the  capital  of  the 
company  was  .S1,(M)(),0(K),  the  only  slock  i.ssued  was  to  the  amount 
of  §:iOO,(KK),  and  this  wtus  taken  uj)  and  owned  by  the  members  of 
the  svTidicate  and  no  one  else.  They  and  they  alone  were  interested 
in  the  capital  of  the  company.  This  is  not  a  case  of  winding  up,  but 
even  if  it  were,  it  would  make  no  difTerence.  In  proceedings  of  the 
character  of  the  present  the  title  of  a  lifjuidator  as  representing  cred- 
itor cannot  be  higher  than  the  title  of  the  comjiany  against  whom 
the  creditors  claim.  In  this  ca.se  the  interests  of  the  company  and 
of  the  sjiulicate  were  identical.  The  only  persons  beneficially  in- 
terested in  the  company  were  the  four  members  of  the  syndicate. 
The  law  gave  them  the  complete  control  of  its  action.  Under  that 
control  the  company  gave  effect  to  the  policy  of  the  only  persons  who 
had  any  Ix^neficial  interest  in  its  capital.  The  case  is  not  one  in 
which  the  apparent  procedure  can  be  said  to  have  been  unreal,  or  to 
have  been  a  cloak  under  which  a  conspiracy  to  defrautl  was  con- 
cealed. Under  these  circumstances,  their  Lordships  are  of  opinion 
that  the  company,  notwithstanding  that  no  general  meeting,  apart 
from  the  meeting  of  directoi-s,  appears  to  have  been  held  for  the  pur- 
pose, was  completely  bound  by  the  transactions  sought  to  be  im- 
peached, and  that  the  appellant,  who  has  certainly  no  title  higher 
than  that  of  the  company  against  the  assets  of  which  he  claims,  is 
bound  likewise. 

In  the  course  of  the  argument  for  the  appellant  the  well-known 
case  of  Erlanger  v.  New  Sombrero  Phosphate  Co.,  3  App.  Cas.  1218, 
was  much  relied  on,  as  shewing  that  the  action  of  the  directors  could 
not  stand.  It  is  sufficient  to  observe  that,  for  the  reasons  given  in 
the  House  of  Lords  in  Salomon  v,  Salomon  [1897],  A.C.  22,  the  doc- 
trine of  the  former  case  has  no  application  to  circumstances  .such  as 
those  of  the  present  case,  where  everj'  one  interested  in  the  capital 
of  the  company  has,  with  full  knowledge,  concurred  in  the  act  im- 
peached. Their  Lordships  will  humbly  advise  His  Majesty  that  the 
appeal  should  be  dismissed.  The  costs  must  be  paid  by  the  appellant. 


CHAP.  IV.]        OLD    DOMINION    COPPER    CO.  V.  LEWISOHN.  341 

OLD   DOMINION   COPPER  CO.   v.  LEWISOHN. 

210  U.S.  20G.     1908. 

Mr.  Justice  Holmes  delivered  the  opinion  of  the  court. 

This  is  a  bill  in  equity  brought  by  the  petitioner  to  rescind  a  sale 
to  it  of  certain  mining  rights  and  land  by  the  defendants'  testator, 
or  in  the  alternative  to  recover  damages  for  the  sale.  The  bill  was 
demurred  to  and  the  demurrer  was  sustained.  136  Fed.  Rep.  915. 
Then  the  bill  was  amended  and  again  demurred  to,  and  again  the 
demurrer  was  sustained,  and  the  bill  was  dismissed.  This  decree  was 
affirmed  by  the  Circuit  Court  of  Appeals.  148  Fed.  Rep.  1020;  79 
CCA.  534.  The  ground  of  the  petitioner's  case  is  that  Lewisohn, 
the  deceased,  and  one  Bigelow,  as  promoters,  formed  the  petitioner 
that  they  might  sell  certain  properties  to  it  at  a  profit,  that  they 
made  their  sale  while  they  owned  all  the  stock  issued,  but  in  con- 
templation of  a  large  further  issue  to  the  public  without  disclosure 
of  their  profit,  and  that  such  an  issue  in  fact  was  made.  The  Su- 
preme Judicial  Court  of  Massachusetts  has  held  the  plaintiff  entitled 
to  recover  from  Bigelow  upon  a  substantially  similar  bill.  188  Mas- 
sachusetts, 315. 

The  facts  alleged  are  as  follows :  The  property  embraced  in  the 
plan  was  the  mining  property  of  the  Old  Dominion  Copper  Com- 
pany of  Baltimore,  and  also  the  mining  rights  and  land  now  in 
question,  the  latter  being  held  by  one  Keyser,  for  the  benefit  of  him- 
self and  of  the  executors  of  one  Simpson,  who  with  Keyser  owned 
the  stock  of  the  Baltimore  company.  Bigelow  and  Lewisohn,  in  May 
and  June,  1895,  obtained  options  from  Simpson's  executors  and 
Keyser  for  the  purchase  of  the  stock  and  the  property  now  in  ques- 
tion. They  also  formed  a  syndicate  to  carry  out  their  plan,  with  the 
agreement  that  the  money  subscribed  by  the  members  should  be 
used  for  the  purchase  and  the  sale  to  a  new  corporation,  at  a  large 
advance,  and  that  the  members,  in  the  proportion  of  their  subscrip- 
tions, should  receive  in  cash  or  in  stock  of  the  new  corporation  the 
profit  made  by  the  sale.  On  May  28,  1895,  Bigelow  paid  Simpson's 
executors  for  their  stock  on  behalf  of  the  syndicate,  in  cash  and  notes 
of  himself  and  Lewisohn,  and  in  June  Keyser  was  paid  in  the  same 
way. 

On  July  8,  1895,  Bigelow  and  Lewisohn  started  the  plaintiff  cor- 
poration, the  seven  members  being  their  nominees  and  tools.  The 
next  day  the  stock  of  the  company  was  increased  to  150,000  shares 
of  twenty-five  dollars  each,  officers  were  elected,  and  the  corporation 
became  duly  organized.  July  11,  pursuant  to  instructions,  some  of 
the  officers  resigned,  and  Bigelow  and  Lewisohn  and  three  other 
absent  members  of  the  syndicate  came  in.  Thereupon  an  offer  was 
received  from  the  Baltimore  company,  the  stock  of  which  had  been 


342  OLD    DOMINION    COPPER    CO.  V.  LEWISOHN.  [CHAP.  IV. 

bought,  as  stated,  by  Bip;olow  and  Lcwisolin,  to  sell  sul)stantially 
all  its  property  for  100,00(J  shares  of  the  plaintiff  company.  The 
offer  was  accepted,  and  then  Lewisohn  offered  to  sell  the  real  estate 
now  in  question,  obtained  from  Kcyscr,  for  30,000  shares,  to  be  issued 
to  Bigelow  and  himself.  This  also  was  accepted  and  possession  of  all 
the  mining  property  was  delivered  the  next  day.  The  sales  "were 
consummatetl "  by  delivery  of  deeds,  and  afterwards,  on  July  18, 
to  raise  working  capital,  it  was  voted  to  offer  the  remaining  20,000 
shares  to  the  public  at  par,  and  they  were  taken  by  subscribers  who 
did  not  know  of  the  profit  nuule  by  Bigelow  and  Lewisohn  and  the 
syndicate.  On  September  18,  the  100,000  and  30,(MX)  shares  were 
issued,  and  it  was  voted  to  issue  the  20,000  when  paid  for.  The  bill 
alleges  that  the  property  of  the  Baltimore  company  was  not  worth 
more  than  $1,000,000,  the  sum  paid  for  its  stock,  and  the  property 
here  concerned  not  over  So, (MX),  as  Bigelow  and  Lewisohn  knew. 
The  market  value  of  the  petitioner's  stock  was  [not]  less  than  par, 
so  that  the  price  paid  was  S2,r)00,000,  it  is  said,  for  the  Baltimore 
company's  property  and  $750,000  for  that  here  concerned.  Whether 
this  view  of  the  price  paid  is  correct,  it  is  unnecessary  to  decide. 

Of  the  stock  in  the  petitioner  received  by  Bigelow  and  Lewisohn 
or  their  Baltimore  corporation,  40,000  shares  went  to  the  syndicate 
as  profit,  and  the  members  had  their  choice  of  receiving  a  like  ad- 
ditional number  of  shares  or  the  repayment  of  their  original  sub- 
scription. As  pretty  nearly  all  took  the  stock,  the  sjiulicate  re- 
ceived about  80,000  shares.  The  remaining  20,000  of  the  stock  paid 
to  the  Baltimore  company,  Bigelow  and  Lewisohn  divided,  the 
plaintiff  believes,  without  the  knowledge  of  the  s>nidicate.  The 
30,000  shares  received  for  the  property  now  in  question  they  also 
divided.  Thus  the  plans  of  Bigelow  and  Lewisohn  were  carried  out. 

The  argument  for  the  petitioner  is  that  all  would  admit  that  the 
promoters  (assuming  the  English  phrase  to  be  well  applied)  stood  in 
a  fiduciary  relation  to  it,  if,  when  the  transaction  took  place,  there 
were  membei"S  who  were  not  informed  of  the  profits  made  and  who 
did  not  acquiesce,  and  that  the  same  obligation  of  good  faith  extends 
down  to  the  time  of  the  later  subscriptions,  which  it  was  the  pro- 
moters' plan  to  obtain.  It  is  an  argument  that  has  commanded  the 
assent  of  at  least  one  court,  and  is  stated  at  length  in  the  decision. 
But  the  courts  do  not  agree.  There  is  no  authority  binding  upon  us 
and  in  point.  The  general  observations  in  Dickerman  v.  Northern 
Trust  Co.,  176  U.S.  181,  were  obiter,  and  do  not  dispose  of  the  case. 
Without  spending  time  upon  the  many  dicta  that  were  quoted  to  us, 
we  shall  endeavor  to  weigh  the  considerations  on  one  side  and  the 
other  afresh. 

The  difficulty  that  meets  the  petitioner  at  the  outset  is  that  it  has 
assented  to  the  transaction  with  the  full  knowledge  of  the  facts.  It 
is  said,  to  be  sui*e,  that  on  September  18,  when  the  shares  were  issued 


CHAP.  IV.]        OLD    DOMINION    COPPER    CO.  V.  LEWISOHN.  343 

to  the  sellers,  there  were  already  subscribers  to  the  20,000  shares  that 
the  public  took.  But  this  does  not  appear  from  the  bill,  unless  it 
should  be  inferred  from  the  ambiguous  statement  that  on  that  day 
it  was  voted  to  issue  those  shares  "to  persons  who  had  subscribed 
therefor,"  upon  receiving  payment,  and  that  the  shares  "were  there- 
after duly  issued  to  said  persons,"  etc.  The  words  "had  subscribed" 
may  refer  to  the  time  of  issue  and  be  equivalent  to  "should  have 
subscribed"  or  may  refer  to  an  already  past  event.  But  that  hardly 
matters.  The  contract  had  been  made  and  the  property  delivered  on 
July  11  and  12,  when  Bigelow,  Lewisohn  and  some  other  members  of 
the  syndicate  held  all  the  outstanding  stock,  and  it  is  alleged  in  terms 
that  the  sales  were  consummated  before  the  vote  of  July  18  to  offer 
the  stock  to  the  public  had  been  passed. 

At  the  time  of  the  sale  to  the  plaintiff,  then,  there  was  no  wrong 
done  to  any  one.  Bigelow,  Lewisohn  and  their  syndicate  were  on 
both  sides  of  the  bargain,  and  they  might  issue  to  themselves  as 
much  stock  in  their  corporation  as  they  liked  in  exchange  for  their 
conveyance  of  their  land.  Salomon  v.  Salomon  &  Co.  [1897],  A.C. 
22;  Blum  v.  Whitneij,  185  N.Y.  232;  Tompkins  v.  Sperry,  96  Mary- 
land, 560.  If  there  was  a  wrong  it  was  when  the  innocent  public 
subscribed.  But  what  one  would  expect  to  find,  if  a  wrong  happened 
then,  would  not  be  that  the  sale  became  a  breach  of  duty  to  the  cor- 
poration nunc  pro  tunc,  but  that  the  invitation  to  the  public  without 
disclosure,  when  acted  upon,  became  a  fraud  upon  the  subscribers 
from  an  equitable  point  of  view,  accompanied  by  what  they  might 
treat  as  damage.  For  it  is  only  by  virtue  of  the  innocent  subscribers' 
position  and  the  promoter's  invitation  that  the  corporation  has  any 
pretense  for  a  standing  in  court.  If  the  promoters  after  starting  their 
scheme  had  sold  their  stock  before  any  subscriptions  were  taken,  and 
then  the  purchasers  of  their  stock  with  notice  had  invited  the  public 
to  come  in  and  it  did,  we  do  not  see  how  the  company  could  main- 
tain this  suit.  If  it  could  not  then,  we  do  not  see  how  it  can  now. 

But  it  is  said  that  .from  a  business  point  of  view  the  agreement 
was  not  made  merely  to  bind  the  corporation  as  it  then  was,  with 
only  forty  shares  issued,  but  to  bind  the  corporation  when  it  should 
have  a  capital  of  $3,750,000;  and  the  implication  is  that  practically 
this  was  a  new  and  different  corporation.  Of  course,  legally  speak- 
ing, a  corporation  does  not  change  its  identity  by  adding  a  cubit  to 
its  stature.  The  nominal  capital  of  the  corporation  was  the  same 
when  the  contract  was  made  and  after  the  public  had  subscribed. 
Therefore  what  must  be  meant  is,  as  we  have  said,  that  the  corpora- 
tion got  a  new  right  from  the  fact  that  new  men  who  did  not  know 
what  it  had  done  had  put  in  their  money  and  had  become  members. 
It  is  assumed  in  argument  that  the  new  members  had  no  ground  for 
a  suit  in  their  own  names,  but  it  is  assumed  also  that  their  position 
changed  that  of  the  corporation,  and  thus  that  the  indirect  effect  of 


344  OLD    DOMINION    COPPER    CO.  V.   LEWISOHN.         [cHAP.  IV. 

their  acts  was  greater  than  the  direct;  that  facts  that  gave  tlieiii  no 
claim  gave  one  to  the  corporation  because  of  them,  notwithstanding 
its  assent.  We  shall  not  consider  whether  the  new  members  hatl  a 
personal  claim  of  any  kind,  and  therefore  we  deal  with  the  case  with- 
out prejudice  to  that  question,  and  without  taking  advantage  of 
what  we  understand  the  petitioner  to  concede. 

But,  if  we  are  to  leave  technical  law  on  one  side  and  approach  the 
case  from  what  is  supposed  to  be  a  business  point  of  view,  there  are 
new  matters  to  be  taken  into  account.  If  the  corporation  recovers, 
all  the  stockholders,  guilty  as  well  as  innocent,  get  the  benefit.  It  is 
answered  that  the  coiporation  is  not  precluded  from  recovering  for 
a  fraud  upon  it,  because  the  party  committing  the  fraud  is  a  stock- 
hokler.  Old  Dominion  Copper  Mining  and  Smelting  Co.  v.  Bigelmv, 
188  Massachusetts,  315,  327.  If  there  had  been  innocent  members 
at  the  time  of  the  sale,  the  fact  that  there  were  also  guilty  ones 
would  not  j)revent  a  recovery,  and  even  mi^ht  not  be  a  sufhcient  rea- 
son for  requiring  all  the  guilty  membei-s  to  be  joined  as  defendants 
in  order  to  avoid  a  manifest  injustice.  Stockton  v.  Anderson,  40  N.J. 
Eq.  48G.  The  same  principle  is  thought  to  apply  wh(>n  innocent 
members  are  brought  in  later  under  a  scheme.  But  it  is  obvious  that 
this  answer  falls  back  uj^on  the  technical  divei-sity  between  the  cor- 
poration and  its  members,  ^^hich  the  business  point  of  view  is  sup- 
posed to  transcend,  as  it  must,  in  order  to  avoid  the  objection  that 
the  corporation  has  assented  to  the  sale  with  full  notice  of  the  facts. 
It  is  mainly  on  this  diversity  that  the  answer  to  the  objection  of  in- 
justice is  based  in  New  Sombrero  Phosphate  Co.  v.  Erlanger,  5  Ch.  D, 
73,  114,  122. 

Let  us  look  at  the  business  aspect  alone.  The  sjTidicate  was  a 
party  to  the  scheme  to  make  a  profit  out  of  the  corporation.  Whether 
or  not  there  was  a  subordinate  fraud  committed  by  Bigelow  and 
Lewisohn  on  the  agreement  with  them,  as  the  petitioner  believes,  is 
immaterial  to  the  corporation.  The  issue  of  the  stock  was  ap.parent, 
we  presume,  on  the  books,  so  that  it  is  difficult  to  suppose  that  at 
least  some  members  of  the  syndicate,  representing  an  adverse  in- 
terest, did  not  know  what  was  done.  But  all  the  members  were  en- 
gaged in  the  plan  of  buying  for  less  and  selling  to  the  corporation 
for  more,  and  were  subject  to  whatever  equity  the  corporation  has 
against  Bigelow  and  the  estate  of  Lewisohn.  There  was  some  argu- 
ment to  the  contrary,  but  this  seems  to  us  the  fair  meaning  of  the  bill. 
Bigelow  and  Lewisohn,  it  is  true,  divided  the  stock  received  for  the 
real  estate  now  in  question.  But  that  was  a  matter  between  them 
and  the  sjTidicate.  The  real  estate  was  bought  from  Keyser  by  the 
syndicate,  along  wdth  his  stock  in  the  Baltimore  company,  and  was 
sold  by  the  syndicate  to  the  petitioner  along  with  the  Baltimore  com- 
pany's property,  as  part  of  the  scheme.  The  syndicate  was  paid  for 
it,  whoever  received  the  stock.   And  this  means  that  two-fifteenths 


CHAP.  IV.]        OLD    DOMINION    COPPER    CO.  V.  LEWISOHN.  345 

of  the  stock  of  the  corporation,  the  20,000  shares  sold  to  the  public, 
are  to  be  allowed  to  use  the  name  of  the  corporation  to  assert  rights 
against  Lewisohn's  estate  that  will  enure  to  the  benefit  of  thirteen- 
fifteenths  of  the  stock  that  are  totally  without  claim.  It  seems  to  us 
that  the  practical  objection  is  as  strong  as  that  arising  if  we  adhere 
to  the  law. 

Let  us  take  the  business  point  of  view  for  a  moment  longer.  To 
the  lay  mind  it  would  make  little  or  no  difference  whether  the 
20,000  shares  sold  to  the  public  were  sold  on  an  original  subscription 
to  the  articles  of  incorporation  or  were  issued  under  the  scheme  to 
some  of  the  syndicate  and  sold  by  them.  Yet  it  is  admitted,  in  ac- 
cordance with  the  decisions,  that  in  the  latter  case  the  innocent  pur- 
chasers would  have  no  claim  against  any  one.  If  we  are  to  seek  what 
is  called  substantial  justice  in  disregard  of  even  peremptory  rules  of 
law,  it  would  seem  desirable  to  get  a  rule  that  would  cover  both  of 
the  almost  equally  possible  cases  of  what  is  deemed  a  wrong.  It 
might  be  said  that  if  the  stock  really  was  taken  as  a  preliminary  to 
selling  to  the  public,  the  subscribers  would  show  a  certain  confidence 
in  the  enterprise  and  give  at  least  that  security  for  good  faith.  But 
the  syndicate  believed  in  the  enterprise,  notwithstanding  all  the 
profits  that  they  made  it  pay.  They  preferred  to  take  stock  at  par 
rath3r  than  cash.  Moreover,  it  would  have  been  possible  to  issue 
the  whole  stock  in  payment  for  the  property  purchased,  with  an 
understanding  as  to  20,000  shares. 

Of  course,  it  is  competent  for  legislators,  but  not,  we  think,  for 
judges,  except  by  a  gwast-legislative  declaration,  to  establish  that  a 
corporation  shall  not  be  bound  by  its  assent  in  a  transaction  of  this 
kind,  when  the  parties  contemplate  an  invitation  to  the  public  to 
come  in  and  join  as  original  subscribers  for  any  portion  of  the  shares. 
It  may  be  said  that  the  corporation  cannot  be  bound  until  the  con- 
templated adverse  interest  is  represented,  or  it  may  be  said  that 
promoters  cannot  strip  themselves  of  the  character  of  trustees  until 
that  moment.  But  it  seems  to  us  a  strictly  legislative  determination. 
It  is  difficult,  without  inventing  new  and  qualifying  estabhshed 
doctrines,  to  go  behind  the  fact  that  the  corporation  remains  one 
and  the  same  after  once  it  really  exists.  When,  as  here,  after  it 
really  exists,  it  consents,  we  at  least  shall  require  stronger  equities 
than  are  shown  by  this  bill  to  allow  it  to  renew  its  claim  at  a  later 
date  because  its  internal  constitution  has  changed. 

To  sum  up :  In  our  opinion,  on  the  one  hand,  the  plaintiff  cannot 
recover  without  departing  from  the  fundamental  conception  em- 
bodied in  the  law  that  created  it;  the  conception  that  a  corporation 
remains  unchanged  and  unaffected  in  its  identity  by  changes  in  its 
members.  Donnell  v.  Herring-Hall-Marvin  Safe  Co.,  208  U.S.  267, 
273;  Salomon  v.  Salomon  &  Co.  [1897],  A.C.  22,  30.  On  the  other 
hand,  if  we  should  undertake  to  look  through  fiction  to  facts,  it 


346  DAVIS    V.  LAS    OVAS    CO.  [cilAP.  IV. 

appears  to  us  that  substantial  justice  would  not  be  accomi)lishocl,  but 
latlicr  a  great  injustice  cUjne,  if  the  corporation  were  allowed  to  dis- 
regard its  i)revious  assent  in  order  to  charge  a  single  member  with 
the  whole  results  of  a  transaction  to  which  thirteen-lifteenths  of  its 
stock  were  parties,  for  the  benefit  of  the  guilty,  if  there  was  guilt  in 
any  one,  and  the  innocent  alike.  We  decide  oidy  what  is  necessary. 
We  exj)ress  no  opinion  as  to  whether  the  defeiulant  i)roperly  is  called 
a  promoter,  or  whether  the  plaint  iff  has  not  been  guilty  of  laches,  or 
whether  a  remedy  can  be  had  for  a  part  of  a  single  transaction  in  the 
form  in  which  it  is  souglit,  or  whether  tliere  was  any  personal  claim 
on  the  part  of  the  innocent  subscribers,  or  as  to  any  other  question 
than  that  which  we  have  discussed. 

The  English  case  cliiefly  relied  upon,  Erlangcr  v.  New  Sombrero 
Phosphate  Co.,  3  App.  C'as.  1218,  affirming  S.C.,  5  Ch.D.  73,  seems 
to  us  far  from  estai>lishing  a  tliflerent  doctrine  for  that  jurisdiction. 
There,  to  1)C  sure,  a  syndicate  had  made  an  agreement  to  sell,  at  a 
profit,  to  a  company  to  \)Q  got  up  by  the  sellers.  But  the  company, 
at  the  first  stage,  was  made  up  mainly  of  outsiders,  some  of  them 
instruments  of  the  sellei-s,  but  innocent  instruments,  and,  according 
to  Lord  C'aiunh,  the  contract  was  provisional  on  the  shares  being 
taken  and  the  company  forn.ed  (p.  1239).  There  never  was  a  mo- 
ment when  the  company  had  assented  with  knowledge  of  the  facts. 
The  shares,  with  perhaps  one  excei.tion,  all  were  taken  by  sub- 
scril)ei-s  ignorant  of  the  facts,  5  (  h.D.  113,  and  the  contract  seems 
to  have  reachetl  forward  to  the  moment  when  they  subscribed.  As 
it  is  put  in  2  Morawetz,  Corp.  (2d  ed.)  §  292,  there  was  really  no 
company  till  the  shares  were  issued.  Here  thirteen-fifteenths  of  the 
stock  had  been  taken  by  the  syndicate,  the  corporation  was  in  full 
life  and  had  as.sented  to  the  sale  with  knowledge  of  the  facts  before 
an  outsider  joined.  There  most  of  the  syndicate  were  strangers  to  the 
corporation,  yet  all  were  joined  as  defendants  (p.  1222).  Here  the 
membei-s  of  the  syndicate,  although  members  of  the  corporation, 
are  not  joined,  and  it  is  sought  to  throw  the  burden  of  their  act  upon 
a  single  one.  Gluckstein  v.  Barnes  [1900],  A.C.  240,  certainly  is  no 
stronger  for  the  plaintiff,  and  in  Yeiser  v.  United  States  Board  & 
Paper  Co.,  107  Fed.  Rep.  340,  another  case  that  was  relied  upon,  the 
transaction  equally  was  carried  through  after  innocent  subscribers 
had  paid  for  stock.  Decree  affirmed. 


DAVIS  V.   LAS  OVAS  CO. 

227  U.S.  SO.     1912. 

Mr.  Justice  Lurton.  This  is  a  bill  by  the  appellee  to  recover 
from  appellants  secret  profits  made  by  them  as  promoters  of  the  Las 
Ovas  Company  in  the  purchase  of  a  part  of  a  tract  of  land  known 


CHAP.  IV.]  DAVIS  V.   LAS  OVAS  CO.  347 

as  Las  Ovas  in  the  Republic  of  Cuba,  and  also  for  the  cancellation 
of  certain  shares  of  stock  issued  to  them  as  promoters. 

The  facts  essential  to  judgment  are  not  in  serious  dispute.  They 
are  found  clearly  and  fully  stated  in  the  opinion  by  Mr.  Justice 
Gould  of  the  Supreme  Court  of  the  District  of  Columbia,  and  again 
in  the  opinion  of  the  Court  of  Appeals  of  the  District  by  Mr.  Justice 

ROBB. 

From  the  facts  found  by  both  courts  it  appears :  — 
a.  That  the  appellants  and  certain  other  persons,  not  parties  to 
this  suit,  signed  an  agreement  on  March  19,  1904,  by  which  they 
agreed  to  purchase  for  a  corporation  which  they  were  to  organize 
a  specified  part  of  a  tract  of  land  in  Cuba  called  the  Las  Ovas  planta- 
tion, for  the  price  of  $34,000,  to  which  it  was  later  agreed  to  add  an- 
other small  parcel  at  an  additional  price  of  $1,000. 

6.  It  was  further  agreed  that  they  should  organize  a  corporation, 
of  which  they  should  be  the  incorporators,  with  a  capital  stock  of 
$150,000,  and  that  40  per  cent  of  the  shares  should  be  issued  to 
them  for  service  as  promoters  and  that  the  remaining  stock  should 
be  subscribed  for  by  them.  For  this  subscribed  stock  they  were  to 
pay  an  amount  sufficient  to  cover  the  purchase  money  of  $35,000 
and  to  create  an  expense  fund  of  $5,000. 

c.  It  was  agreed  that  the  property  should,  when  acquired,  be 
placed  in  the  hands  of  one  of  the  group  of  promoters  until  the  forma- 
tion of  the  company,  and  then  conveyed  to  it. 

d.  The  scheme  was  one  originated  and  engineered  by  the  ap- 
pellants, who  at  the  time  of  this  agreement  had  already  secretly 
secured  an  option  for  themselves  for  the  purchase  of  this  property  at 
the  price  of  $20,000.  To  conceal  the  true  consideration  from  their 
associates  they  caused  the  property  to  be  conveyed  by  the  vendor  to 
one  Escalante,  a  stranger  selected  by  them.  The  deed  to  Escalante 
recited  the  true  consideration.  Later,  in  pursuance  of  the  promoters' 
agreement,  they  caused  Escalante  to  convey  to  the  member  of  the 
syndicate  selected  to  hold  the  title  until  organization,  reciting  a  con- 
sideration of  $35,000. 

The  corporation  was  organized  as  planned.  The  promoters' 
shares  were  duly  issued  and  the  remaining  shares  taken  by  the  pro- 
moters upon  the  agreed  terms,  its  officers  and  directors  being  com- 
posed exclusively  of  the  members  of  the  syndicate.  Thereupon  the 
property  was  transferred  to  the  company  and  paid  for,  through  ap- 
pellants, out  of  the  proceeds  of  the  subscribed  stock. 

The  result  of  the  transaction  was  that  the  corporation  was  re- 
quired to  pay  to  those  who  had  assumed  to  act  for  and  represent  it, 
a  secret  profit  of  fifteen  thousand  dollars  and  also  to  compensate 
them  for  their  services  in  buying  the  land  and  organizing  the  com- 
pany by  issuing  to  each  of  them  fifteen  thousand  dollars  in  non- 
assessable shares  of  its  stock. 


348  DAVIS    V.  LAS    OVAS    CO.  [ciIAP.   IV. 

The  decree  below  required  the  appellants  to  account  for  the  pro- 
fits realized  by  them,  in  part  traced  to  certain  shares  in  their  liands, 
and  to  surrender  for  cancellation  the  shares  issued  to  them  as  pro- 
moters. 

It  is  now  said  that  the  corporation  was  "a  mere  convenient  re- 
ceptacle for  the  property,  erected  for  the  convenience  of  the  s\Tidi- 
cate."  That  the  property  was  bought  by  the  syndicate  for  their  own 
advantage  and  that  the  corporation  included  only  the  meml)crs  of 
the  syndicate.  That  the  stock  of  the  company  was  all  taken  by  the 
syndicate,  who,  for  property  which  Wius  their  own,  agreed  to  pay 
enough  to  cover  the  purchiuse  price  and  create  a  small  expen.se  fund. 

Upon  this  contention  it  is  urged  that  the  corporation  has  no  right 
to  the  relief  sought,  as  the  whole  transaction  was  a  mere  form 
adopted  by  the  {xirties  for  their  own  convenience  as  owners  of  the 
property  and  owners  of  the  corporation.  It  is  then  said:  "If  we 
admit,  for  the  purposes  of  this  point,  that  appellants  did  deceive 
some  of  the  syndicate,  what  has  the  company  to  do  with  it?"  For 
this  they  cite  Old  Dominion  Copper  Company  v.  Lcwimhn,  210  U.S. 
2()(),  where  it  was  held  that  a  subordinate  fraud  practiced  by  some 
of  the  promoters  of  a  corporation  ujwn  some  of  their  a.ssociates  was 
a  matter  wholly  between  them  and  the  sjTidicate  which  gave  rise 
to  no  corporate  right  of  action  in  the  absence  of  innocent  incorpora- 
tors or  stockholders. 

But  that  is  not  this  ca.se.  Some  of  those,  if  not  all,  interested  by 
appellants  in  the  property  and  in  its  purcha.se  for  a  proposed  con- 
sideration were  ignorant  of  the  real  price  which  they  were  to  pay  for 
it,  and  were  not,  therefore,  in  complicity  with  their  scheme  to  make 
a  secret  profit.  These  iimoccnt  members  of  the  syndicate  became 
stock  subscril)ers  and  directoi-s  of  the  company,  as  did  api^ellants. 
The  buyers  and  sellers  were  not  the  same.  Those  of  the  syndicate 
assuming  to  act  for  the  corporation  in  acquiring  the  property  were 
under  obligation  to  disclose  the  truth  and  deal  openly.  In  the  absence 
of  such  disclosure  the  corporate  assent  was  obtained  on  false  grounds. 
The  wrong  was  done  when  those  memlx?rs  of  the  syndicate  not  in 
complicity  with  appellants  subscribed  to  the  stock  of  the  company 
and  aided  their  guilty  a.ssociate  managers  in  the  corporate  action 
necessary  to  the  corporate  acquisition  of  the  property  at  the  exag- 
gerated price  placed  upon  it  by  those  who  were  to  realize  a  secret 
profit.  Thus,  the  original  fraud  practiced  upon  some  of  those  as- 
sociated with  them  in  the  promoters'  arrangement  became  operative 
against  the  corporation  itself.  The  standing  of  the  corporation  re- 
sults from  the  fact  that  there  were  innocent  and  deceived  members 
of  the  corporation  when  the  property  was  taken  over  by  it. 

Neither  is  the  corporate  right  of  action  defeated  by  the  fact  that 
the  recovery  will  inure  to  the  guilty  as  well  as  to  the  innocent,  nor  is 
the  fact  that  all  of  the  parties  who  may  have  shared  in  the  secret 


CHAP.  IV.]  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  349 

profits  are  not  sued  fatal  to  the  case.  The  corporation  may  well  sue 
either  one  or  all  of  those  who  received  secret  profits.  There  is  no 
want  of  necessary  parties  because  all  are  not  here  sued. 

The  distinction  between  a  case  in  which  all  of  the  owners  of  the 
property  and  all  of  the  members  of  the  buying  corporation  are  the 
same  persons,  and  participate  in  the  profit  realized,  and  the  case 
here  presented  is  fully  recognized  in  Old  Dominion  Copper  Com- 
pany V.  Lewisohn,  supra,  as  well  as  in  Phosphate  Company  v.  Er- 
langer,  5  Ch.  Div.  73,  and  in  the  well  considered  opinion  of  Judge 
Severens  in  Yeiser  v.  U.S.  Paper  Co.,  107  Fed.  Rep.  340. 

There  was  no  error  in  cancelling  the  shares  issued  to  the  plaintiffs 
in  error  for  promotion  of  the  corporation.  Thej^  and  the  other  mem- 
bers of  the  syndicate  received  these  shares  upon  the  assumption  that 
they  had  in  good  faith  served  the  corporation  in  the  procurement  of 
the  property.  Obviously  appellants  were  serving  themselves  to  the 
detriment  of  the  corporation  and  innocent  subscribers  to  its  stock. 
In  such  a  situation  the  corporation  may  recover  the  shares. 

The  decree  will  be  affirmed. 


OLD   DOMINION  COPPER  CO.   v.   BIGELOW. 

203  Mass.  159.     1909. 

RuGG,  J,  These  are  suits  in  equity,  by  which  the  plaintiff  seeks 
to  recover  secret  profits  made  by  the  defendant  as  one  of  its  organiz- 
ers, in  selling  to  it  while  under  the  absolute  control  and  management 
of  himself  and  his  associate,  one  Lewisohn,  certain  mining  properties 
belonging  to  him  and  Lewisohn.  The  allegations  of  the  bills  are  set 
out  at  length  in  188  Mass.  315,  where  one  of  the  cases  was  considered 
upon  demurrer.  After  the  overruling  of  the  demurrer  the  defendant 
answered,  and  the  cases  were  heard  before  a  single  justice,  who  en- 
tered decrees  in  favor  of  the  plaintiff  in  both  cases  and  filed  a  report 
of  the  facts  found  by  him.  Except  as  to  matters  immaterial  so  far 
as  the  questions  of  law  are  involved,  he  found  that  the  allegations 
were  sustained.  Briefly  recapitulated,  the  facts  appearing  in  the  re- 
port upon  which  the  plaintiff  rests  its  claim  are  that  in  April,  1895, 
the  defendant  and  Lewisohn  formed  a  device  to  secure  the  control 
of  the  stock  (the  par  value  of  which  was  S500,000)  of  the  Old  Do- 
minion Copper  Company  of  Baltimore  City,  called  the  Baltimore 
Company,  and  the  title  to  certain  other  neighboring  mining  prop- 
erties, called  the  outside  properties,  and  to  cause  these  properties 
and  the  real  estate  of  the  Baltimore  Company  to  be  transferred  to  a 
new  corporation  (which  they  should  procure  to  be  organized  with  a 
much  larger  capital),  for  an  increased  price.  Options  were  secured 
upon  these  properties,  and  the  price  agreed  to  be  paid  by  the  de- 


350  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  [CHAP.  IV. 

fendant  and  Lovvisohn  to  the  owners  was  §1,000,000,  divided  in  the 
proportion  of  547/1000  by  the  defendant,  and  453/1000  by  Lewisohn. 
The  outside  properties  were  regarded  by  all  parties  as  of  little  or  no 
value  and  were  thrown  in  as  a  makeweight  in  the  purchase  of  the 
stock  of  the  Baltimore  Company.  The  single  justice,  while  finding 
that  they  could  not  be  saitl  to  be  of  no  value,  was  satisfied  that  ihcir 
value  did  not  exceed  $50,000.  No  examination  to  ascertain  their 
value  was  made  by  the  defendant  or  Lewisohn,  or  by  any  one  in  be- 
half of  the  plaintiff.  For  the  purpose  of  providing  himself  with  funds 
to  meet  in  part  his  financial  obligations  for  the  purchOvSe  of  the  prop- 
erties, the  defendant,  before  taking  up  the  options,  organized  an 
underwriting  syndicate  and  another  s>Tidicate  called  the  Old  Do- 
minion Syndicate.  It  is  not  necessary  to  state  the  details  of  these 
arrangements,  further  than  to  say  that  it  is  found  as  a  fact  that  the 
defendant  did  not  deal  fairly  with  the  members  of  the  syndicate  in 
the  division  of  his  profits,  and  did  not  tlisclose  to  the  gi-eat  majority 
of  them  the  fact  of  the  secret  profit.  The  obligation  of  purchase  was 
assumed  wholly  by  the  defendant  and  Lewisohn,  and  the  device  for 
the  organization  of  the  new  corporation  was  entirely  theirs.  Al- 
though, as  first  conceived,  it  was  the  avowed  intention  of  the  de- 
fendant and  Lewisohn  (which  the  defendant  expressed  to  various 
members  of  the  syndicate)  to  form  a  new  corporation  with  a  caj)ital 
stock  of  $2,500,000  which  should  take  the  property  of  the  Baltimore 
Company  and  the  outside  properties  for  .S2, 000,000  of  its  capital 
stock  and  procure  a  working  cajiital  of  S500,000  by  the  sale  of  the 
rest  of  the  capital  stock  to  the  public  for  cash  at  par,  they  proceeded 
to  organize  the  plaintiff  corpoi-ation  imder  the  laws  of  New  Jersey, 
with  a  capital  stock  of  §3,750,000,  divided  into  one  hundred  and 
fifty  thousand  shares  of  the  par  value  of  S25  each.  But  it  was  the 
intention  of  the  defendant  and  Lewisohn  (as  found  by  the  single 
justice)  that  "twenty  thousand  shares  of  the  capital  stock  of  the 
plaintiff  should  be  issued  to  new  subscribers  at  par;  and  this  was 
done  in  the  summer  and  fall  of  1895."  This  organization  was  con- 
ducted and  controlled  wholly  by  the  defendant  and  Lewisohn  through 
themselves  and  their  agents  and  representatives.  Without  providing 
the  plaintiff  with  an  independent  board  of  officers  or  representatives 
they,  as  the  responsible  and  only  managers  of  the  plaintiff,  acting  in 
its  name,  contracted  with  themselves  as  mine  owners  to  sell  to  it  the 
real  estate  of  the  Baltimore  Company  for  $2,500,000  of  the  capital 
stock  of  the  plaintiff  and  the  outside  properties,  of  trifling  value  at 
best,  for  $750,000  of  such  capital  stock,  and  to  sell  to  the  general 
public  for  working  capital  the  remaining  $500,000  of  capital  stock 
of  the  plaintiff  at  par,  without  disclosing  that  they  had  sold  prop- 
erty costing  them  only  $1,000,000  for  three  and  a  quarter  times  its 
cost. 
The  first  meeting  of  the  stockholders  was  held  on  July  7,  1895, 


CHAP.  IV.]  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  351 

at  which  $1,000,  —  the  lowest  amount  of  capital  with  which  a  cor- 
poration organized  under  the  laws  of  New  Jersey  could  begin  busi- 
ness, —  was  paid  in  by  Lewisohn.  This  money,  although  deposited 
to  the  credit  of  the  plaintiff  company  upon  its  organization,  was 
afterwards  returned  by  it  to  Lewisohn  in  an  accounting  with  him. 
A  meeting  of  the  directors  was  held  in  New  York  on  July  11,  1895, 
at  which  the  defendant  became  a  director  and  the  president  of  the 
plaintiff  and  Lewisohn  a  director.  Votes  were  passed  to  increase  the 
capital  stock  and  two  separate  votes  for  the  purchase  of  the  mining 
properties  for  the  prices  in  stock  before  indicated.  The  stock,  the 
market  value  of  which  was  fully  as  great  as  its  par  value,  was  issued 
to  the  defendant  and  Lewisohn  and  one  Dumaresq,  their  nominee, 
by  votes  of  September  18,  1895,  on  that  or  the  following  day.  At  the 
same  time  a  certificate  for  the  remaining  twenty  thousand  shares  of 
stock  of  the  par  value  of  $500,000  was  made  out  in  the  name  of 
"Thomas  Nelson,  treasurer,"  but  this  stock  is  found  to  have  be- 
longed to  the  corporation,  and  Nelson  had  no  right  to  act  respecting 
it,  as  it  was  taken  up  by  direct  subscriptions  of  the  public.  The  con- 
veyances of  the  mines  by  the  Baltimore  Company  and  of  the  out- 
side properties  by  Lewisohn  were  not  made  until  December,  1895, 
or  January,  1896.  The  intrinsic  value  of  the  property  conveyed  by 
the  Baltimore  Company  is  found  to  have  been  not  more  than  $1,000,- 
000,  although  its  market  value,  largely  due  to  the  sldlful  manipula- 
tion of  the  defendant  and  Lewisohn,  and  "the  ingenious  manner  in 
which  they  created  a  desire  on  the  part  of  men  interested  in  mines, 
as  investors  or  speculators,  to  be  allowed  to  join  in  the  transaction 
they  were  carrying  out,"  was  something  less  than  $2,000,000.  The 
report  proceeds:  "But,  taking  the  most  favorable  view  of  the  situa- 
tion possible  for  the  defendant,  he  and  Lewisohn  did,  by  reason  of 
their  failure  to  disclose  the  real  facts  as  aforesaid,  make  out  of  their 
sale  to  the  plaintiff  company  a  secret  profit  of  fifty  thousand  shares 
of  its  capital  stock,  of  which  the  defendant's  portion  was  twenty- 
seven  thousand  three  hundred  and  fifty  shares,  and  Lewisohn's  por- 
tion was  twenty-two  thousand  six  hundred  and  fifty  shares.  If  he 
had  fully  disclosed  the  facts  to  the  plaintiff  company  and  secured  for 
it  independent  advice,  it  would  not  have  given  to  him  this  secret 
profit ;  .  .  .  Lewisohn  and  he  were  acting  in  the  formation  and  execu- 
tion of  the  scheme  together  and  in  concert.  Each  of  them  was  doing 
his  part  to  carry  out  a  joint  scheme,  which  was  intended  to  inure  to 
the  advantage  of  both.  The  control  exercised  by  them  over  the 
plaintiff  company  was  a  joint  control,  and  was  exercised  by  them  for 
the  benefit  of  both.  A  proper  disclosure  of  the  real  facts  by  either 
would  have  frustrated  the  schemes  of  both ;  they  both  acted  together 
in  pursuance  of  a  common  design,  and  for  the  profit  of  both." 
"  During  all  these  transactions  the  full  control  of  the  plaintiff  com- 
pany was  in  the  hands  of  and  was  exercised  by  the  defendant  and 


352  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  [cHAP.   IV. 

Lewisohn,  who  were  its  promoters  and  who  themselves  determinccl 
upon  and  dictated,  under  the  advice  of  their  coun.sel,  cverythinj^ 
that  was  done  by  the  plaintiff  company  or  in  its  behalf;  it  had  no 
directors,  representatives,  or  advisers  other  than  themselves  or  their 
agents;  and  they  did  not  disclose  to  it  any  of  the  facts  which  have 
been  stated.  This  continued  to  be  the  ca.se  until  April,  1902.  .  .  . 

"The  result  of  his  and  Lewisohn's  transactions  with  the  plaintiff 
company  was  that  for  the  $1,000,000  of  their  own  and  their  asso- 
ciates' money  which  they  invested,  they  received,  subject  to  the  pay- 
ment of  legitimate  expenses  of  not  over  S20,000,  stock  to  the  par 
value  of  S3,250,000,  and  of  the  actual  value  of  at  least  that  amount: 
that  is,  at  the  rate  of  more  than  three  dollars  for  one.  He  gave  to 
the  membera  of  his  syndicate  two  dollars  for  one,  either  wholly  in 
stock  or  half  in  cash  and  half  in  stock,  as  they  elected.  With  a  few 
individual  exceptions  he  did  not  disclose  the  facts  to  them.  The 
very  great  majority  of  the  members  of  his  syndicate  did  not  become 
aware  of  the  details  of  what  he  and  Lewisohn  had  done."  The  capi- 
tal stock  issued  to  defendant  and  Lewisohn  was  stamped  "Issued  for 
property  purcha.sed."  The  law  of  New  Jersey  required  that  such 
stock  be  issued  only  "to  the  amount  of  the  value"  of  the  property 
so  purchased.  Pub.  Laws  of  New  Jersey,  1889,  p.  414,  §  4;  1893, 
p.  444,  §  2.  The  vote  of  July  11,  1895,  to  purchase  the  mining  prop- 
erties was  in  fact  passed  by  a  majority  only  of  the  board  of  directors, 
for  three  do  not  appear  to  have  Ijeen  present  at  that  time.  At  the 
du'ectoi-s'  meeting  of  September  18,  1895,  when  the  votes  to  issue 
thirty  thousand  full  paid  shares  to  the  defendant  and  Lewisohn  and 
one  hundred  thousand  like  shares  to  their  nominee  Dumaresq  were 
passed,  seven  directoi-s  were  present,  the  five  aside  from  Bigelow 
and  Lewisohn  being  their  tools,  and  at  the  end  of  the  record  of  that 
meeting  all  the  directors  signed  an  assent  to  the  acts  done,  and  Bige- 
low and  Lewisohn,  signing  for  thirty  thousand  shares  of  capital 
stock,  Dumaresq  signing  for  one  hundred  thousand  shares  of  the 
capital  stock,  and  "Thomas  Nelson,  Treasurer,"  signing  for  twenty 
thousand  shares  of  capital  stock,  being  the  whole  number  of  shares, 
signified  a  written  approval  of  the  acts  of  that  meeting.  The  single 
justice  found  that  the  twenty  thousand  shares  were  the  property  of 
the  plaintiff,  and  that  Nelson  had  lio  right  to  attempt  to  act  as  their 
holder.  .  .  . 

The  next  inquiry  is  as  to  the  Uability  of  the  defendant.  The 
plaintiff  seeks  to  establish  this  on  the  ground  that  the  defendant  and 
Lewisohn  framed  a  scheme,  which  was  an  entirety  and  which  as  a 
whole  comprised  the  organization  and  continued  management  of  the 
plaintiff  by  themselves,  their  agents  and  representatives,  until  the 
completion  of  the  project;  this  scheme  was  the  capitalization  of  the 
plaintiff  for  $3,750,000;  the  sale  to  it  of  their  property,  costing  and 
intrinsically  worth  $1,000,000,  but  ha%ing  in  the  market  a  value  not 


CHAP.  IV.]  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  353 

over  $2,000,000,  for  S3, 250,000;  the  sale  to  the  general  public  at  par 
for  cash  of  the  remaining  $500,000  of  stock;  and  all  this  without  pro- 
viding the  plaintiff  with  any  independent  board  of  officers  or  advisers 
to  pass  upon  the  wisdom  of  the  purchase  and  without  disclosing  the 
substance  of  the  transaction  and  their  extraordinary  profit  to  the 
purchasers  of  its  stock  for  cash  at  par.  This  scheme  was  an  entity, 
one  part  of  it  was  just  as  essential  as  any  other  part,  and  one  part 
was  the  procurement  of  $500,000  in  cash  from  the  unenlightened 
public  as  a  working  capital  for  the  new  company. 

It  has  been  decided,  apparently  by  a  unanimous  court,  that  such 
a  transaction  creates  a  liability  on  the  part  of  the  defendant  to  ac- 
count for  his  profits  to  the  plaintiff  in  this  proceeding.  Hayward  v. 
Leeson,  176  Mass.  310.  One  of  the  present  suits  was  before  the  court 
as  reported  in  188  Mass.  315,  and  after  an  elaborate  review  of  the 
authorities  and  examination  of  the  grounds  for  judgment,  it  was  held 
that  the  defendant  was  hable,  notwithstanding  the  opposing  decision 
on  the  precise  point  by  the  United  States  Circuit  Court  in  Old 
Doyninion  Copper  Mining  &  Smelting  Co.  v.  Lewisohn,  136  Fed.  Rep. 
915.  Since  the  decision  reported  in  188  Mass.  315,  the  above  en- 
titled case  against  Lewisohn  has  been  considered  by  the  United 
States  Circuit  Court  of  Appeals  (148  Fed.  Rep.  1020)  and  by  the 
Supreme  Court  of  the  United  States  (210  U.S.  206)  and  without  dis- 
sent a  conclusion  has  been  reached  contrary  to  that  of  this  court. 
The  deference  due  to  a  decision  by  the  highest  court  in  the  land  and 
the  intrinsic  importance  of  the  question  at  issue  require  a  reconsidera- 
tion of  our  own  cases,  a  re-examination  of  the  authorities  and  a  care- 
ful consideration  of  the  principles  involved. 

The  plaintiff  seeks  to  recover  a  secret  profit  made  by  the  pro- 
moters in  the  sale  of  their  own  property  to  the  corporation,  basing 
its  claim  on  the  general  and  well  recognized  proposition  that  a  pro- 
moter cannot  take  lawfully  a  secret  profit  and  will  be  held  to  ac- 
count for  it  if  he  does.  Fundamentally  the  action  is  to  recover  profits 
obtained  by  a  breach  of  trust.  There  is  a  distinct  finding  by  the 
single  justice  that  the  defendant  and  Lewisohn  were  the  promoter^ 
of  the  plaintiff".  This  finding  is  amply  justified  by  the  evidence.  In 
their  brains 'it  was  conceived,  by  their  direction  the  formalities  of  its 
incorporation  were  carried  out,  their  resources  provided  its  mines, 
their  influence  and  reputation  with  those  desiring  to  invest  in  mines 
procured  its  working  cash  capital.  The  word  "promoter"  has  no 
precise  and  inflexible  meaning  in  this  country.  In  England  it  is 
defined  by  statute.  St.  7  &  8  Vict.  c.  110,  §  3.  See  also  St.  30  &  31 
Vict.  c.  131,  §  38.  But  even  there  the  duties  of  promoters  as  fidu- 
ciaries to  the  company  are  matters  of  common  law  cognizance. 
Erlanger  v.  New  Sombrero  Phosphate  Co.,  3  App.  Cas.  1218,  1269. 
In  a  comprehensive  sense  ''promoter"  includes  those  who  under- 
take to  form  a  corporation  and  to  procure  for  it  the  rights,  instru- 


354  OLD    DOMINION    COPPER    CO.  I'.   BIGELOW.  [ciIAP.  FV'. 

mentalities  and  capital  by  which  it  is  to  carry  out  the  purposes  Kct 
forth  in  its  charter,  and  to  establish  it  as  fully  able  to  do  its  business. 
Their  work  may  begin  long  before  the  organization  of  the  corporation, 
in  seeking  the  opening  for  a  venture  and  projecting  a  plan  for  its 
development,  and  may  continue  after  the  incorporation  by  attract- 
ing the  investment  of  capital  in  its  securities  and' providing  it  with 
the  commercial  breath  of  life.  It  is  now  established  without  excep- 
tion tiiat  a  promoter  stands  in  a  fiduciary  relation  to  the  corporation 
in  which  he  is  interested,  and  that  he  is  charged  with  all  the  duties 
of  good  faith  which  attach  to  other  trusts.  In  this  respect  he  is  held 
to  the  high  standards  which  binil  directors  and  other  pereons  oc- 
cupying fiduciary  relations. 

That  the  promoter  stands  in  the  relation  of  a  fiduciary  to  the  cor- 
poration which  he  organizes  seems  to  be  conceded  in  Old  Dominion 
Copper  Mining  &  Smelting  Co.  v.  Lewisohn,  210  U.S.  206.  The 
questions  to  be  answered  are,  whether  tiiis  rule  is  applical)le,  and 
if  it  is,  whether  the  plaintiff  is  in  a  position  to  assert  its  claim. 

Notwithstanding  this  fiduciary  relation  the  promoter  may  sell 
property  to  the  company  which  he  is  promoting.  But  in  order  that 
the  contract  may  be  al)Solutely  binding  he  must  j)Ui-su(^  one  of  four 
courses:  (a)  He  may  pro\'ide  an  independent  board  of  officers  in  no 
respect  directly  or  indirectly  under  his  control,  and  make  full  dis- 
closure to  the  corporation  through  them;  (6)  He  may  make  a  full 
disclosure  of  all  material  facts  to  each  original  subscriber  of  shares  in 
the  corporation;  (c)  He  may  procure  a  ratification  of  the  contract 
after  disclosing  its  circumstances  by  vote  of  the  stockholders  of  the 
completely  estajjlished  corporation;  (r/)  He  may  be  himself  the  real 
subscriber  of  all  the  shares  of  the  capital  stock  contemplated  as  a 
part  of  the  promotion  scheme.  The  defendant  does  not  contend 
upon  this  report  that  either  of  the  fii"st  two  courses  was  followed. 
He  does  rest  his  claim  chiefly  upon  the  third  and  fourth  courses. 
As  applied  to  the  facts  of  this  case  these  two  come  to  the  same  thing, 
for  the  reason  that  on  the  findings  of  the  single  justice  the  defend- 
ant and  his  associate  were  subscribers  for  only  one  hundred  and 
thirty  thousand  shares  out  of  a  total  one  hundred  and  fifty  thousand 
and  in  the  light  most  favorable  to  them  they  held  all  the  shares 
which  had  been  issued  at  the  time  of  the  ratification,  but  not  all 
which  it  was  proposed  to  issue  as  a  part  of  the  scheme  of  promotion. 
The  point  to  be  determined,  therefore,  is  whether  the  promoter  is 
immune  from  liability  if  he  and  his  associates  are  ownere  of  all  the 
issued  stock  at  the  time  of  the  act  complained  of,  although  intending 
as  a  part  of  their  plan  the  immediate  issue  of  further  stock  to  the 
public  without  disclosure,  and  whether,  while  a  substantial  portion 
of  the  stock  intended  to  be  issued  to  the  public  remains  unissued,  a 
vote  of  ratification  of  the  breach  of  trust  will  protect  him. 

A  review  of  the  authorities  seems  to  demonstrate  that  there  is  a 


CHAP.  IV.]  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  355 

liability  of  the  promoter  to  the  corporation  when  farther  original 
subscribers  to  capital  stock,  contemplated  as  an  essential  part  of  the 
scheme  of  promoters,  came  in  after  the  transaction  complained  of, 
even  though  that  transaction  is  known  to  all  the  then  stockholders, 
that  is  to  say,  to  the  promoters  and  their  representatives. 

Erlanger  v.  New  Sombrero  Phosphate  Co.,  3  App.  Cas.  1218,  is  one 
of  the  most  important  and  thoroughly  considered  cases,  and,  as  it 
has  been  said  to  be  a  case  often  misunderstood  (Lord  Davey  in 
Salomon  v.  Salomon  [1897],  A.C.  22,  57),  it  is  well  to  consider  it  at 
length.  It  was  first  heard  by  Vice-Chancellor  Malins  under  the 
name  of  New  Sombrero  Phosphate  Co.  v.  Erlanger  (5  Ch.D.  73),  then 
by  the  justices  of  appeal  (5  Ch.D.  102),  and  finally  by  the  House  of 
Lords,  where  it  was  twice  argued.  The  facts  were  these:  Erlanger 
and  his  associates,  hereafter  spoken  of  as  the  sjTidicate,  bought  of 
the  official  liquidator  of  a  broken  down  company  the  lease  of  a  phos- 
phate island,  for  £55,000.  The  agreement  for  purchase  was  signed 
on  September  11,  and  was  subject  to  the  approval  of  the  judge, 
which  was  given  on  September  15,  1871.  By  its  terms  the  contract 
was  to  be  completed  on  November  15,  1S71.  The  syiKlicate  then 
organized  the  New  Sombrero  Phosphate  Company  under  St.  25  & 
26  Vict.  c.  89  (3  App.  Cas.  1254).  The  articles  of  association  of  the 
new  corporation  were  signed  on  September  20,  1871,  and  the  com- 
pany registered  on  September  20  or  21  (5  Ch.D.  76).  On  registration 
the  corporation  was  created  under  25  &  26  Vict.  c.  89,  §  18  of  which 
provided  that  upon  registration  "the  subscribers  .  .  .  shall  t  hereupon 
be  a  body  corporate  .  .  .  capable  forthwith  of  exercising  all  the  func- 
tions of  an  incorporated  company."  The  signers  of  the  articles  of 
association  were  tools  of  the  s>Tidicate.  The  members  of  the  first 
board  of  directors  were  named  in  the  articles  of  association.  Two 
were  out  of  the  country  and  would  not  attend  meetings ;  others  were 
an  employee  of  Erlanger,  a  retired  admiral  of  the  English  navy, 
whose  shares  necessary  to  qualify  him  as  a  director  were  paid  for  by 
Erlanger  (5  Ch.D.  107,  108),  and  the  mayor  of  London;  three  di- 
rectors made  a  quorum,  and  the  last  three  named  attended  the  meet- 
ings. The  syndicate  anticipated  its  payments  required  by  its  con- 
tract and  acquired  the  lease  of  the  island  on  September  21,  1871. 
The  first  meeting  of  the  directors  was  held  on  September  29,  1871, 
at  which  was  produced  and  approved  by  resolution  an  agi'eement 
between  one  Evans  (in  whose  name  in  behalf  of  the  sjmdicate  the 
contract  for  the  purchase  of  the  lease  from  the  official  liquidator 
was  made),  and  one  Pavy  (acting  for  the  new  company),  dated 
September  20,  whereby  Evans  sold  and  Pavy  for  the  company 
bought  the  lease  of  the  island  for  £80,000  in  cash  and  £30,000  in 
paid  up  stock.  In  the  discussion  of  this  case  in  210  U.S.  at  p.  216 
this  contract  is  stated  to  have  been  "provisional  on  the  shares  being 
taken  and  the  company  formed,"  but  we  do  not  so  understand  it  as 


356  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  [CHAP.  IV. 

set  forth  in  5  Ch.D.  75,  76  and  95.  It  was  subject  to  the  new  com- 
pany being  registered  (which  was  done  on  September  20  or  21),  and 
to  the  contract  with  the  official  Uquidator  being  approved  by  the 
judge  (which  was  done  on  September  15)  and  duly  performed  (which 
was  done  on  September  21)  and  to  the  confirmation  by  the  com- 
pany (which  was  given  by  vote  of  the  directors  on  September  29, 
who  were  in  this  regard  clothed  by  the  articles  of  association  with  all 
the  authority  of  the  corporation  itself,  3  App.  Cas.  1273,  1274),  but 
it  contained  no  other  provisional  features.  The  directors  adopted  the 
contract  between  Evans  and  Pavy  without  investigation  into  its 
merits,  and  in  ignorance  of  the  profit  made  by  the  syndicate  except 
as  Evans  had  such  knowledge.  After  this  the  pubUc  over-sub- 
scribed. The  stock  was  issued,  £3(),00()  to  the  syndicate  and  £100,- 
000  to  the  puljlic;  and  on  Novcmlier  2  £80,000  was  paid  to  the  syn- 
dicate by  the  company.  5  Ch.D.  96.  Respecting  this  agreement  for 
sale  by  the  syndicate  it  is  further  said  in  210  U.S.  at  p.  217,  that 
"the  contract  seems  to  have  reached  forward  to  the  moment  when 
they  [tlie  pul^lic]  subscribed.  As  it  is  put  in  2  [1  is  meant]  Morawetz, 
Corp.  (2tl  ed.)  §  292,  there  was  really  no  company  till  the  shares 
were  issued,"  and  on  this  gi-ound  it  is  stated  by  the  court  at  p.  216 
that  the  English  case  "seems  to  us  far  from  establishing  a  different 
doctrine  for  that  jurisdiction."  We  cannot  accede  to  this  interpreta- 
tion. The  company  was  fully  formed  the  moment  it  was  registered. 
The  subscription  for  the  shares  required  as  a  prerequisite  to  registra- 
tion under  the  English  statute  established  the  company  as  fully  as 
the  forty  shares  subscribed  and  the  SI, 000  for  capital  stock,  paid 
into  the  plaintiff's  treasury  on  or  before  July  11,  1895,  established 
it.  It  was  enabled  to  make  any  contract  within  the  scope  of  its 
powers.  That  is  settled  by  the  plain  language  of  25  &  26  \kt.  c.  89, 
§  18,  quoted  above.  But  it  also  has  been  expressly  so  decided.  It  was 
said  in  Salomon  v.  Salomon  [1897],  A.C.  22,  at  p.  51:  "^^hen  the 
memorantlum  is  duly  signed  and  registered,  though  there  be  only 
seven  shares  taken,  the  subscribers  are  a  body  corporate  'capable 
forthwith,'  to  use  the  words  of  the  enactment,  'of  exercising  all  the 
functions  of  an  incorporated  company.'  Those  are  strong  words. 
The  company  attains  maturity  on  its  birth.  There  is  no  period  of 
minority  —  no  interval  of  incapacity."  This  apparently  demon- 
strates the  error  of  the  further  statement  in  1  Morawetz,  Corp. 
(2d  ed.)  279,  that  "Before  any  shares  were  issued  the  existence  of  the 
corporation  was  a  fiction."  The  remark  of  Lord  Cairns  (3  App.  Cas. 
at  p.  1239)  to  the  effect  that  the  contract  for  the  sale  of  the  island 
was  "provisional  on  the  shares  being  taken  and  the  company  com- 
pletely formed"  was  made  in  connection  with  the  defense  of  laches 
and  not  in  the  discussion  as  to  the  liability  of  the  defendants  (which 
he  had  concluded  on  an  earlier  page),  and  refers  only  to  the  fact  that 
the  scheme  of  the  defendants  to  get  £80,000  in  cash  out  of  the  new 


CHAP.  IV.]  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  357 

company  under  their  contract  with  it  was  dependent  as  a  practical 
matter  on  the  shares  being  taken  by  the  pubHc,  and  does  not  and 
cannot  apply  to  the  phraseology  of  the  contract  itself,  for  respecting 
that  it  is  not  correct.  The  only  conditions  named  in  the  contract 
were  that  the  company  should  be  registered  and  confirm  the  con- 
tract and  the  contract  of  the  syndicate  with  the  official  liquidator  be 
performed.  (See  5  Ch.D.  75,  76  and  95.)  The  distinction  which  ap- 
pears to  be  established  between  the  Erlanger  case  and  the  present 
one,  by  the  decision  of  the  United  States  Supreme  Court,  210  U.S. 
206,  is  that  if  promoters  organize  a  company  with  a  capital  of 
$3,750,000  and  sell  to  it  through  their  dummy  directors  property 
bought  by  them  for  this  purpose,  for  $3,250,000,  in  paid  up  shares, 
and  then  get  by  public  subscription  $500,000  for  working  capital, 
the  transaction  is  valid.  But  if  promoters,  having  bought  property 
for  £55,000,  organize  a  company  with  a  capital  of  £130,000,  and  while 
they  are  the  only  bona  fide  stockholders  by  vote  of  their  directors 
sell  to  it  their  property  for  £110,000,  to  be  paid  £80,000  in  cash  and 
£30,000  in  paid  up  shares,  £100,000  being  subscribed  in  cash  by  the 
public,  the  transaction  is  void.  The  only  difference  between  the 
two  cases  is  that  in  the  Erlanger  case  the  promoters  were  paid  a  part 
of  the  purchase  price  in  money,  the  proceeds  of  public  subscription, 
and  received  paid  up  shares,  which  they  took  in  payment  of  the 
balance  of  the  purchase  price  when  the  stock  was  issued  to  subscribers, 
while  in  the  present  case  the  whole  purchase  price  was  paid  in  stock, 
which  was  issued  before  any  stock  was  issued  to  the  public  although 
after  a  substantial  public  subscription.  In  other  words,  the  order  in 
which  the  transaction  is  carried  out,  and  not  its  substantial  nature, 
makes  the  difference  between  liability  and  immunity  of  the  pro- 
moter. It  is  true  that  in  the  Erlanger  case,  until  after  ratification  by 
the  company  of  the  contract  previously  made  in  its  behalf  for  the 
purchase  of  the  lease  of  the  island,  the  mayor  of  London  by  acting 
as  a  director  was  liable  to  take  shares  of  stock  and  intended  to,  and 
did  subsequently,  take  and  pay  for  fifty  shares.  He  and  possibly  one 
other  (3  App.  Cas.  1228)  appear  to  have  been  the  only  persons  up  to 
that  time  connected  with  the  company,  who  subsequently  became 
stockholders,  who  were  not  agents  of  the  promoters.  But  it  is  also 
the  fact  (as  stated  by  Jessel,  M.R.,  in  5  Ch.D.  at  p.  112)  that  "Up 
to  this  time  there  was  not  really  a  single  bona  fide  shareholder  dis- 
tinct from  the  promoters,"  and  of  course  all  these  assented  to  the 
transaction.  If  this  is  a  vital  circumstance,  that  case  is  distinguish- 
able in  principle  from  the  one  at  bar  and  from  the  case  decided  by 
the  United  States  Supreme  Court.  This  appears  to  us  to  be  a  differ- 
ence upon  an  immaterial  matter.  It  is  of  no  consequence  whether 
in  fact  the  dummy  directors  know  of  the  terms  of  sale  and  the  breach 
of  trust  of  the  promoters.  It  does  not  appear  in  the  present  case  that 
the  nominees  of  Bigelow  and  Lewisohn  knew  any  more  about  the 


358  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  [CHAP.  IV. 

profit  the  latter  were  making  than  did  tiie  dircctoi-s  of  the  New 
Sombrero  Company  of  the  piofits  of  the  syndicate.  The  point  Ls 
that  in  both  cases  the  directors  were  selected  with  the  purpose  that 
they  should  be  the  mere  instruments  of  the  promotci-s,  ai\d  thej' 
carried  out  the  will  of  their  ma.stors.  Under  the  Enpilish  statute  the 
instruments  of  the  promotci-s  in  the  New  S<)mi)rero  Company,  while 
its  directors,  were  as  fully  clothed  with  all  the  powers  of  the  cor- 
poration and  as  much  the  holders  of  all  its  stock  as  were  the  seven 
dh-ectors  of  the  plaintiff  holding  in  all  forty  shares  of  the  plaintiff  at 
the  time  the  contract  of  sale  in  the  present  case  was  made.  If  the 
assent  of  all  the  stockholders  is  good  in  the  one  case,  by  the  same 
token  it  should  be  equally  gooil  in  the  other;  and  the  breach  of  trust 
in  the  one  is  equally  a  breach  of  trust  in  the  other.  This  case  seems 
to  us  an  authority  in  favor  of  the  plaintiff. 

In  iVeic  Sombrero  Pfiosphate  Co.  v.  Erlangcr,  5  Ch.D.  73,  123,  it 
was  said  by  Baggallay,  L.J.:  "The  syndicate  were,  in  substance, 
not  only  the  ventloi's  of  the  property,  but  also  the  promoters  of  the 
company,  and  in  such  a  case  the  syndicate,  as  promoters,  being  in  a 
fiduciary  relation  to  the  company,  it  was  essential  that  the  ])uijlic, 
who  were  invited  to  become,  and  who  were  expected  to  become,  the 
shareholders  of  the  company,  and  to  constitute  the  company,  should 
have  the  fullest  information  as  to  all  the  surrounding  circumstances." 
See  also  Jessel,  j\I.R.,  s.c.  at  p.  113.  In  In  re  British  Seamless  Paper 
Box  Co.,  17  Ch.D.  467,  at  p.  471,  it  was  said  by  Jessel,  M.R.:  "If 
promoters  make  an  arrangement  to  get  a  profit  for  themselves  out  of 
what  is  apparently  paid  to  the  vendors,  it  is  immaterial  whether  the 
contract  with  the  vendors  is  approved  of  l)y  the  dircctoi-s  of  the  com- 
pany, who  are  the  promoters,  just  before  the  allotment  or  just  after: 
in  both  cases  it  is  intended  to  cheat  the  future  shareholders;  and  of 
course  it  makes  no  difference  whatever  that  the  persons  who,  at  the 
time  the  allotment  was  made,  were  in  fact  the  promoters  or  their 
nominees,  knew  of  the  fraud.  You  can  defraud  future  allottees  as 
well  as  present  allottees."  In  the  same  case  on  appeal  Cotton,  L.J., 
said  (17  Ch.D.  at  p.  479):  "The  directors  stand  in  a  fiduciary  rela- 
tion to  the  whole  company,  that  is,  not  only  to  the  existing  mem- 
bers but  to  all  whom  they  intend  to  bring  in."  In  Broderip  v.  Salo- 
mon [1895],  2  Ch.  323,  at  p.  329,  it  wa-s  said  by  Vaughan  Williams, 
J.  (whose  conclusion  was  approved  in  s.c.  sub  nomine  Saloinon  v. 
Salomon  [1897],  A.C.  22):  "Of  course,  purchasing  at  an  exorbitant 
price  may  be  a  fraud,  even  if  all  the  shareholders  know  of  it,  if  there 
is  an  intention  to  allot  further  shares  at  a  later  period  to  future  al- 
lottees." This  point  was  apparently  left  open  in  the  House  of  Lords 
[1897],  A.C.  at  p.  37.  In  In  re  Leeds  &  Hanley  Theatres  of  Varieties 
[1902],  2  Ch.  809,  at  p.  823,  occurs  this  language:  "At  first  there  were 
only  four  directors  .  .  .  and  the  seven  necessary  signatories  of  the 
memorandum  of  the  association.  Wlien  it  is  said  that  the  promoters 


CHL^P.  IV.]  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  359 

stood  in  a  fiduciary  position  towards  the  company,  that  does  not 
mean  that  they  stood  in  such  a  relation  to  these  directors  and  these 
seven  signatories.  It  means  that  they  stood  in  a  fiduciary  relation 
to  the  future  allottees  of  shares  —  to  the  persons  who  were  invited 
to  come  and  take  up  the  shares  of  the  company."  In  Gluckstein  v. 
Barnes  [1900],  A.C.  240,  257,  Lord  Robertson  says:  "The  people 
for  whom  these  gentlemen  [the  promoters]  were  bound  to  act  were 
their  coming  constituents,  the  persons  out  of  whose  money  they 
proposed  to  make  their  gain."  In  Densmore  Oil  Co.  v.  Densmare, 
64  Penn.  St.  43,  at  p.  50,  it  is  said:  "Where  persons  form  such  an 
association,  or  begin  or  start  the  project  of  one,  from  that  time  they 
do  stand  in  a  confidential  relation  to  each  other,  and  to  all  others 
who  may  subsequently''  become  members  or  subscribers,  and  it  is  not 
competent  for  any  of  them  to  purchase  property  for  the  purposes  of 
such  a  company,  and  then  sell  it  at  an  advance  without  a  full  dis- 
closure of  the  facts."  This  language  is  quoted  with  approval  and 
applied  in  Burbank  v.  Dennis,  101  Cal.  90,  98,  and  iff  South  Joplin 
Land  Co.  v.  Case,  104  Mo.  572,  580.  To  the  same  point,  Pittsburg 
Mining  Co.  v.  Spooner,  74  Wis.  307,  321-323.  In  Pietsch  v.  Milbrath, 
123  Wis.  647,  at  p.  656,  it  is  held  that  "Persons  who  act  as  pro- 
moters of  a  corporation  do  not  necessarily  cease  to  be  such  when  the 
corporation  is  organized  to  do  business.  ...  So  long  as  there  are 
prospective  original  subscribers  for  stock  and  the  promoters  and 
those  concerting  with  them  remain  in  control  of  the  corporation,  it 
is  in  a  position  to  be  deceived.  ...  It  is  deceived  in  a  legal  sense 
when  it  is  rendered  helpless  by  its  managers  as  to  protecting  those 
invited  to  subscribe  for  its  stock,  and  is  then  used  to  aid  in  defraud- 
ing them."  This  is  supported  by  Fred  Macey  Co.  v.  Macey,  143 
Mich.  138,  152,  a  case  singularly  like  the  one  at  bar  in  its  essentia,! 
features,  where  relief  was  gi-anted  to  the  corporation  against  the 
promoters  although  they  subscribed  for  all  the  capital  stock.  Other 
cases  which  in  principle  reach  the  same  result  are  Yeiser  v.  United 
States  Board  &  Paper  Co.,  107  Fed.  Rep.  340,  348;  London  Trust  Co. 
V.  Mackenzie,  62  L.J.  Ch.  (N.S.)  870;  Hinkley  v.  Sac  Oil  &  Pipe  Line 
Co.,  132  Iowa,  396.  It  was  said  in  Groel  v.  United  Electric  Co.,  4 
Robbins,  616,  622:  "There  can  be  no  question  that  promoters  are 
liable  to  the  corporation  for  profits  secretly  made  by  them  in  its 
promotion,  and  that  such  Hability  arises  in  cases  where  future  al- 
lottees of  stock  are  concerned.  Knoop  v.  Bohmrich,  4  Dick.  82. 
Plaquemines  Tropical  Fruit  Co.  v.  Buck,  7  Dick.  219.  Loudenslager 
V.  Woodbury  Heights  Land  Co.,  13  Dick.  556,  affirming  the  principle 
estabhshed  in  the  court  of  chancery  in  Woodbury  Heights  Land  Co. 
V.  Loudenslager,  10  Dick.  78."  In  Central  Trust  Co.  v.  East  Ten- 
nessee Land  Co.,  116  Fed.  Rep.  743,  and  Camden  Land  Co.  v.  Lewis, 
101  Maine,  78,  95,  Hayward  v.  Leeson,  176  Mass.  310,  to  this  point 
is  cited  with  approval.   St.  Louis,  Fort  Scott  &  W^ichita  Railroad  v. 


360  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  [cHAP.  IV. 

Tiernan,  37  Kans.  606,  and  Stewart  v.  St.  Louis,  Fort  Scott  &  Wichita 
Railroad,  41  Fed.  Rep.  736,  were  both  decided  on  the  assumption 
that  the  promoters  took  all  the  stock,  although  it  appeai-s  that  later 
some  stock  was  issued  to  nmnicii)ahties  through  which  the  tracks  of 
the  promoted  raih-oad  corj^oration  ran,  but  whetlier  as  a  part  of  the 
original  plan  of  promotion  does  not  appear,  and  no  weight  is  attached 
to  this  circumstance  in  the  opinions.  Numerous  other  cases  which 
have  been  cited  do  not  bear  upon  this  point  for  the  rea.son  that  in 
each  of  them  the  owners  of  the  property  conveyed  have  owned  either 
the  entire  capital  stock  of  the  corporation  or  all  that  it  was  contem- 
plated to  issue.  See  foster  v.  Seymour,  23  P'ed.  Rep.  65;  McCracken 
V.  Robison,  57  Fed.  Rep.  375;  liarr  v.  New  York,  Lake  Erie  &  West- 
ern Railroad,  125  N.Y.  263;  Bhnn  v.  Whitney,  185  N.Y.  232.  In  re 
Ambrose  Lake  Tin  &  Copper  Mining  Co.,  14  Ch.D.  390;  Salomon 
V.  Salomon  [1897],  A.C.  22;  In  re  liritish  Seamless  Paper  Box  Co.,  17 
Ch.D.  467;  Seymour  v.  Spring  Forest  Cemetery  Association,  144  N.Y. 
333;  II utchinson  v.  Simp.son,  92  App.  Div.  (N.Y.)  382;  Tompkins  v. 
Sperry,  96  Md.  5()0;  Lanxjdon  v.  Fogg,  18  Fed.  Rep.  5;  Flagler  En- 
graving Machine  Co.  v.  Flagler,  19  Fed.  Rep.  AQ>%;  I nswance  Press  v. 
Montauk  Fire  Detecting  Wire  Co.,  103  App.  Div.  (N.Y.)  472;  Ilig- 
gins  V.  Lansingh,  154  HI.  301 ;  In  re  Baglan  Hall  Colliery  Co.,  L.R.  5 
Ch.  346.  In  all  these  ca.ses  it  was  also  true  that  no  shares  were  ever 
issued  (.so  far  as  appears)  other  than  those  to  the  promoters,  except 
that  in  In  re  British  Seamless  Paper  Box  Co.,  17  Ch.D.  467,  at  a  time 
considerably  subsequent  to  the  organization  of  the  corporation,  a 
change  in  the  scheme  was  made  in  good  faith  liy  which  others  were 
brought  in  as  subscribers. 

In  this  respect  the  question  is  one  of  intention  of  the  promoters. 
If  they  actually  intend  at  the  time  the  company  is  brought  out  to 
remain  its  sole  owners  and  that  it  shall  not  receive  the  money  of  in- 
nocent shareholders  in  the  future,  then  although  thereafter  the  exi- 
gencies of  the  company  may  be  such  as  to  require  the  issue  of  addi- 
tional stock,  they  may  not  be  responsible.  In  re  British  Seamless 
Paper  Box  Co.,  17  Ch.D.  467,  is  an  illustration  of  this  principle. 
There  it  was  found  that  the  promoters  were  and  intended  to  remain 
the  sole  proprietors  of  the  property  of  the  company  and  the  sole 
members  of  the  company.  Cotton,  L.J.,  at  p.  479,  said:  "Here  it  is 
an  established  fact  that  when  the  company  was  formed  it  was  in- 
tended to  be  a  private  company,  that  is,  it  was  intended  to  carry  it 
on  without  calling  in  the  public,  or  issuing  any  shares  except  to  the 
then  existing  shareholders.  Therefore  the  doctrine  that  directors 
may  not  take  a  profit  for  themselves  is  inapplicable,  because  all  the 
members  knew  that  they  intended  to  make  a  profit.  It  is  true  that 
some  new  members  were  sul:)sequently  taken  in.  If  shortly  after  this 
transaction  a  prospectus  had  been  issued  and  the  pu])lic  had  been 
invited  to  come  in  and  take  shares,  no  court  would  have  listened  to 


CHAP.  IV.]  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  361 

directors  who  said  that  it  was  not  intended  to  take  in  fresh  members. 
But  this  was  commenced  and  carried  on  entirely  as  a  private  com- 
pany, and  a  considerable  time  elapsed  before  they  asked  any  one  to 
join  them." 

In  Wills  V.  Nehalem  Coal  Co.,  52  Ore.  70,  a  corporation  was  or- 
ganized by  promoters  with  a  capital  of  S150,000.  More  than  half  was 
issued  to  promotere  and  their  tools  in  return  for  property  of  one  of 
them  conveyed  at  an  overvaluation.  Afterwards  shares  were  sold 
to  the  public  without  disclosure  of  the  great  profit  made  by  pro- 
moters. Relief  was  gi'anted.  The  contention  that  the  corporation 
had  assented  with  full  knowledge  of  the  facts  by  all  who  were  the 
stockholders  at  the  time  of  the  sale  was  disposed  of  on  the  ground 
that  in  substance  a  wrong  was  done  the  corporation  in  diminishing 
the  common  fund  held  for  the  benefit  of  all  the  stockholders  by 
issuing  a  part  of  its  capital  stock  for  property  worth  less  than  its 
face  value.  In  Richlands  Oil  Co.  v.  Morriss,  103  Va.  288,  the  facts  as 
stated  in  the  opinion  were  that  the  promoters,  having  acquired  the 
control  of  certain  oil  leases  for  an  insignificant  price,  "  proceeded  to 
transfer  these  leases  to  a  company  which  they  organized  upon  a 
capitalization  of  1,000,000  shares  (the  par  value  of  each  share  being 
$1),  and  distributed  600,000  of  those  shares  to  themselves;  and  hav- 
ing perfected  the  organization  of  the  company  by  making  themselves 
the  president,  secretary,  treasurer,  and  directors  undertook  to  market 
the  residue  of  the  shares  of  stock,  amounting  to  400,000,  without  in- 
forming the  public  as  to  the  true  condition  of  affairs."  The  suit  of 
the  corporation'  was  upheld.  Upon  the  point  we  are  now  discussing 
these  two  cases  are  indistinguishable  in  principle  from  the  cases  at 
bar. 

This  review  of  decisions  seems  to  establish  abundantly  the  prop- 
osition that  promoters  stand  in  a  fiduciary  position  toward  the 
corporation,  as  well  when  as  a  part  of  the  scheme  of  promotion  unin- 
formed stockholders  are  expected  to  come  in  after  the  wrong  has 
been  perpetrated,  as  when  at  that  time  there  are  shareholders  to 
whom  no  disclosure  is  made.  We  j5nd  no  authority  opposed  except 
the  Lewisohn  cases  in  the  federal  courts  (210  U.S.  206). 

If  the  question  is  examined  on  principle  apart  from  authority, 
the  same  result  appears  clear.  The  starting  point  is  that  a  promoter 
is  a  fiduciary  to  the  corporation.  To  use  the  words  of  Lord  Cairns 
in  Erlanger  v.  New  Sombrero  Phosphate  Co.,  3  App.  Cas.  1218,  at  p. 
1236.:  Promoters  "have  in  their  hands  the  creation  and  moulding 
of  the  company:  they  have  power  of  defining  how,  and  w'hen,  and  in 
what  shape,  and  under  what  supervision,  it  shall  start  into  existence 
and  begin  business."  The  corporation  is  in  the  hands  of  the  pro- 
moter like  clay  in  the  hands  of  the  potter.  It  is  to  this  person, 
absolutely  helpless  and  incapable  of  independent  initiative  or  uncon- 
trolled action,  that  the  promoter  stands  as  trustee.   It  is  not  neces- 


362  OLD    DOMINION    COPPER    CO.  t'.   BIGELOW.  [cHAP,  IV. 

sary  to  inquire  how  far  he  may  be  trustee  also  for  sluirchoklei-s  or 
associates.  In  the  present  case  the  hujuiry  rehites  wlioUy  to  his 
obhgati(in  to  the  corporation.  Tlie  lichiciary  rehition  inu.st  in  reiuson 
continue  until  the  promoter  has  completely  establibhed  accordmg 
to  his  plan  the  being  which  he  has  undertaken  to  create.  His  lia- 
bility umst  be  connnensurate  with  the  .scheme  of  promotion  (tn  which 
he  h:is  emi)arke(l.  If  the  plan  contemplates  merely  the  oi-^anization 
of  the  corporation  his  duties  may  end  there.  But  if  the  scheme  is 
more  ambitious  and  includes  beside  the  hicorporation,  not  only  the 
conveyance  to  it  of  property  but  the  procurement  of  a  working 
capital  in  cash  from  the  public,  then  the  ol)ligation  of  faithfulness 
stretches  to  the  length  of  the  plan.  It  would  be  a  vain  thing  for  the 
law  to  say  that  the  promoter  is  a  trustee  subject  to  all  the  stringent 
liabilities  which  inhere  in  that  character  and  at  the  same  time  say 
that,  at  any  period  during  his  trusteeship  and  long  before  an  es- 
sential part  of  it  was  executed  or  his  general  duty  as  such  ended,  ho 
could,  by  changing  for  a  moment  the  cloak  of  the  promoter  for  that 
of  director  or  stockholder,  by  his  own  act  alone,  absolve  himself  from 
all  past,  present  or  future  liability  in  his  capacity  as  promoter.  The 
plaintilT  was  fully  organized  and  authorized  to  do  business  on  July  8 
and  11,  ISO."),  when  only  -SI, (MM)  in  capital  stock  had  been  paid  in.  It 
would  be  an  idle  ceremony  indeed  to  establish  for  promoters  the 
obligations  of  trustees,  and  at  the  same  time  hold  that  by  their  tools 
and  with  only  .Sl.OOO  paid  in,  and  that  as  a  mere  form  (for  it  was 
soon  after  repaid  to  one  of  them)  they  could  vote  to  themselves  a 
wholly  unwarranted  profit  of  $1,250,000,  kept  secret  from  other 
initial  shareholder,  because  at  that  moment  they  were  the  only 
stockholders.  By  such  a  course  the  law  would  be  holding  out  apples 
of  Sodom  to  the  wronged  corporation.  Corporations  can  l)e  formed 
through  irresponsible  agents  with  ea.se.  If  these  agents  can  vote 
away  a  substantial  part  of  the  capital  stock  for  property  of  compara- 
tively small  value,  and  still  with  inmiunity  to  themselves  and  their 
principals  receive  from  the  uninfornuvl  public  cash  subscrij)tions  for 
the  rest  of  the  capital  stock,  the  organization  and  management  of 
corporations  might  readily  become  a  "system  of  frauds."  Pcahody 
V.  Flint,  6  Allen,  52,  55.  It  is  answered  that  the  plaintiff  has  as- 
sented to  the  transaction  with  full  knowledge  of  the  facts.  But  it  has 
not  assented  when  it  stood  where  it  could  act  independently.  The 
assent  to  the  wrongful  act  of  the  promoters  was  given  at  the  behest 
and  by  vote  of  the  promoters  themselves,  while  still  occupj'ing  the 
position  of  protectors  to  their  own  creature,  while  it  was  bound  hand 
and  foot  by  them  and  prevented  from  taking  any  action  except 
through  them  as  a  step  in  its  further  exploitation,  and  while  their 
trust  was  uncompleted.  The  corporation  although  by  law  fully 
organized  was  still  in  its  swaddling  clothes,  so  far  as  the  plans  of  the 
promoters  were  concerned.  The  value  of  their  stock  taken  in  return 


CHAP.  IV.]  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  363 

for  their  mining  property  was  dependent  in  a  substantial  degree  upon 
the  corporation  having  $500,000  in  cash  for  a  working  capital.  They 
could  not  perfect  their  plans  nor  reap  their  contemplated  profit, 
except  by  retaining  their  hold  upon  the  corporation  until  the  public 
had  made  this  contribution.  In  one  sense  it  is  true  that  the  plaintiff 
was  completely  organized  on  July  11  and  on  September  20,  1895.  It 
was  fully  competent  to  be  bound  by  its  contracts  and  ratification 
of  contracts  with  those  dealing  with  it  at  arm's  length.  But  it  was 
not  free  from  its  wardship  to  its  promoters,  whose  scheme  from  the 
first  looked  forward  to  a  corporation  with  treasury  filled  by  sub- 
scriptions from  the  unenlightened  public.  The  corporation  was  not 
dealing  with  these  fiduciaries  upon  an  independent  ground.  The 
plaintiff,  although  a  legal  corporation  from  July  8,  leaned  wholly 
upon  its  promoters,  because  they  made  it  so  to  lean,  until  long  after 
the  events  here  in  controversy.  An  assent  under  these  conditions 
can  be  of  no  greater  effect  than  the  assent  of  a  minor  under  guardian- 
ship to  the  breaches  of  trust  of  his  guardian. 

The  situation  is  akin  to  the  conveyance  of  property  by  a  man 
solvent  but  in  contemplation  of  insolvency.  Such  conveyance  is  not 
wrong  until  the  contemplated  indebtedness  is  incurred  which  makes 
him  an  insolvent.  Then  the  executed  evil  intent  stretches  back  and 
invalidates  the  original  conveyance.  Here  the  conveyance  to  the 
corporation  with  the  secret  profit,  when  there  are  no  uninformed 
subscribers  to  stock,  if  nothing  more  is  ever  done,  is  not  an  action- 
able tort.  Biit  the  vicious  intent  looks  forward  to  the  procurement 
of  money  from  the  ignorant  public  by  means  of  original  subscriptions 
and  the  execution  of  this  evil  intent  extends  backward  to  contaminate 
the  sale  and  its  profit. 

Stress  has  sometimes  been  laid  upon  the  fact  that  the  promoters 
were  paid  a  part  of  their  purchase  price  out  of  the  public  subscrip- 
tions. But  there  is  no  difference  in  principle  between  such  a  case  and 
the  present,  where  a  substantial  part  of  the  value  of  the  stock  taken 
by  the  defendant  and  Lewisohn  depended  upon  the  cash  subscrip- 
tions to  be  made  by  the  public  for  the  remaining  shares  not  issued 
to  the  promoters. 

But  it  is  further  argued  that,  the  entire  capital  stock  outstanding 
at  the  time  being  in  the  hands  of  the  promoters,  the  sale  of  the  prop- 
erty to  the  corporation  was  merely  changing  the  form  of  title  of  the 
promoters  from  owners  of  real  estate  to  that  of  shares  of  stock,  and 
that,  there  being  then  no  other  shareholders,  no  wrong  was  done.  It 
has  been  decided  that  where  persons  own  the  entire  authorized  capi- 
tal stock  of  the  company  and  take  it  in  payment  for  the  conveyance 
of  their  property  at  a  grossly  exaggerated  price,  nobody  can  be  heard 
to  complain.  The  leading  English  cases  upon  this  point  are  In  re 
Gold  Co.,  11  Ch.D.  701,  In  re  Ambrose  Lake  Tin  &  Copper  Mining 
Co.,  14  Ch.D.  390,  In  re  British  Seamless  Paper  Box  Co.,  17  Ch.D. 


364  OLD    DOMINION    COPPER    CO.  I'.  BIGELOW.  [cHAP.   IV. 

467,  and  Salomon  v.  Salotnon  [1897],  A.C.  22.  But  these  and  many 
other  hke  cases  cited  on  pafi;es  185  and  180  ante  are  where  the  pro- 
moters owned  all  the  outstanding  capital  stock  and  intended  to  re- 
main the  sole  proprietors  and  did  not  purpose  that  there  .'■hould  be, 
as  a  part  of  the  promotion  plan,  a  substantial  i.ssue  of  stock  for  cash 
to  the  pui)lic.  This  is  pointed  out  in  London  Tnid  Co.  v.  Mackenzie, 
02  L.J.  Ch.  (N.S.)  870,  875.  The  ilistinction  is  clear  between  cases 
of  that  class  and  those  like  the  present,  where  the  promoters  took 
for  themselves  a  large  number  of  shares  of  stock  without  adeciuate 
consideration  and  without  disclosure  to  the  detriment  of  the  cor- 
poration and  all  its  future  shareholders,  at  the  same  time  planning 
that  there  should  be  immediate  puijlic  subscriptions.  It  is  one  thing 
to  take  all  the  shares  of  a  corporation  in  payment  for  physical  prop- 
erty conveyed.  It  does  not  much  matter  to  the  stockholders  in  such 
a  case  whether  the  total  is  one  hundred  and  thirty  thousand  shares 
or  one  hundred  and  fifty  thousand  shares.  But  it  is  a  very  different 
thing  to  take  jnioH  ^^  capital  stock  of  a  corporation  whose  assets 
consist  of  the  same  physical  property,  and  in  addition  .?5(K),000  in 
money  sub.scril)e(l  by  others.  The  latter  course  alTects  the  other 
stockholders  and  the  corjioration  itself,  and  it  gives  the  promoters 
something  appreciably  more  valuable  than  what  they  contribute. 
It  is  true  that  in  Salotnon  v.  Salomon  and  in  some  other  ca.ses  there 
was  a  part  of  the  authorized  capital  stock  which  was  not  issued,  but 
it  was  not  propo.sed  to  be  issued  as  a  part  of  the  scheme  of  promotion 
and  the  original  shareholders  inteiulcd  to  remain  the  only  share- 
holders. It  was  to  be  issued  or  not  in  the  remote  future,  as  the  exi- 
gencies of  the  corporation  in  the  actual  conduct  of  its  business  might 
require,  but,  in  any  event,  it  was  not  to  l)e  issued  for  the  purpose  of 
starting  the  corporation  on  its  course.  This  circumstance  materially 
affects  the  question  here  to  be  considered.  Most,  if  not  all,  corpora- 
tion laws  provitle  in  some  fonn  for  an  increase  of  capital  stock.  It 
is  of  no  consequence  upon  such  a  point  as  this,  whether  the  capital 
stock  originallj'  authorized  is  large  l)ut  not  all  issued  or  whether  it  is 
at  first  small  and  subsequently  an  increase  is  authorized.  This  seems 
to  be  the  view  taken  by  the  English  courts,  for  it  is  said  by  James, 
L.J.,  in  hi  re  British  Seamless  Paper  Box  Co.,  17  Ch.D.  467,  "  If  they 
[the  promoters]  were  intending,  although  then  constituting  the  whole 
company,  that  other  people  should  come  in  afterwards  to  whom 
what  had  been  done  would  be  injurious,  the  court  would  feel  no 
difficulty  in  saying  as  Lord  Langdale  did  in  Society  of  Practical 
Knoidedge  v.  Abbott,  2  Beav.  559,  that  they  intended  to  commit  a 
fraud." 

The  fundamental  reasoning  upon  which  these  cases  can  rest  is  not 
that  no  wrong  has  been  committed,  but  there  is  no  one  to  enforce 
the  remedy.  All  courts  recognize  the  soundness  of  the  doctrine  that 
no  man  can  be  on  both  sides  of  the  same  bargain  with  justice  to  all 


CHAP.  IV.]  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  365 

interests.  The  principle  that  one  cannot  rightfully  sell  property,  be- 
longing to  him  in  his  private  right,  to  himself  in  a  trust  capacity  is 
universal. 

If  this  aspect  alone  is  looked  at  and  the  corporation  is  regarded 
as  a  distinct  person,  it  cannot  be  said  that  the  corporation  is  not 
wronged  by  such  a  breach  of  duty  by  promoters.  It  is  only  when  the 
corporate  personality  is  disregarded  and  its  component  elements  as 
stockholders  alone  are  considered  that  it  can  be  said  that  no  harm 
is  done  on  the  ground  (as  was  said  in  Salomon  v.  Salomon  [1897], 
A.C.  at  p.  57)  that  "the  company  is  bound  in  a  matter  intra  vires  by 
the  unanimous  agreement  of  its  members."  But  looking  through  the 
form  of  the  corporation  to  the  stockholders  and  treating  them  as  the 
corporation  is  an  exception  to  the  otherwise  firmly  established  uni- 
versal rule  that  the  corporation  is  a  separate  legal  entity  for  all  pur- 
poses, even  though  all  its  stock  be  held  by  a  single  interest  and  it  be 
to  all  practical  intents  merely  the  instrument  of  the  stockholder. 
Conley  v.  Mathieson  Alkali  Works,  190  U.S.  406.  Peterson  v.  Chicago, 
Rock  Island  &  Pacific  Railway,  205  U.S.  364,  390.  We  perceive  no 
reason  for  extending  this  exception  to  a  case  like  the  present. 

The  real  ground  of  the  decisions  of  which  Salomon  v.  Salomon  is 
a  type  is  that  the  corporation  is  estopped  by  the  circumstance  that 
all  persons  with  financial  concern  in  the  matter  have  assented  with 
knowledge,  and  thus  the  lips  of  everybody  are  sealed.  It  is  not  that 
no  wrong  has  been  done,  but  that  whatever  wrong  has  been  done 
has  been  condoned.  The  maxim  ^^  Volenti  non  fit  injuria''  is  in- 
'voked.  This,  however,  is  setting  up  confession  and  avoidance  and 
not  a  bar  to  the  main  cause  of  action. 

The  theory  upon  which  corporations  are  founded  is  that  they  are 
artificial  persons,  distinct  and  separate  from  officers  and  stock- 
holders. Corporate  liabilities  do  not  attach  to  the  latter.  The  wrong 
which  the  defendant  and  his  associate  did  in  this  case  was  in  selling 
property  worth  intrinsically  $1,000,000  and  in  the  market  at  most 
$2,000,000  for  $3,250,000  without  revealing  that  they  were  making 
a  secret  profit.  The  wrong  was  done  to  the  corporation.  It  affected 
all  its  shareholders,  present  and  future  alike.  It  is  generally  admitted 
that  if  there  are  existing  stockholders  ignorant  of  the  wrong,  redress 
may  be  had.  But  it  is  had  through  the  corpqi*ation  or  for  the  benefit 
of  the  corporation  and  not  by  the  stockholder  in  his  own  right.  The 
wrong  is  not  done  to  the  shareholders  as  individuals,  nor  to  the  share- 
holders collectively,  it  is  done  to  the  corporation  as  an  independent 
being,  and  thus  indirectly  the  rights  of  those  who  are  or  who  may 
become  stockholders  are  affected.  In  buying  the  promoters'  mine, 
the  directors  of  the  corporation  acted  for  the  corporation,  as  such, 
without  regard  to  who  were  the  then  stockholders,  or  even  if  there 
were  no  stockholders.  Whoever  becomes  an  originally  contemplated 
shareholder  coming  in  afterwards  has  as  much  right  to  say  that  the 


366  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  [ciiAP.  IV. 

rights  of  the  corporation  were  not  protected  and  to  insist  that  it 
should  assert  its  remedy  for  the  wrong  done  it,  as  one  in  at  first  but 
not  informed.  Subsequent  subscriptions  to  original  stock  as  a  pai-t  of 
the  scheme  of  promotion  do  not  cliange  the  identity  of  the  coi'jK)ra- 
tion,  but  remove  an  impechment  to  the  enforcement  of  a  remedy  for  a 
wrong  previously  done  the  corporation.  The  wrong  is  not  done  when 
the  innocent  public  subscribes,  but  when  the  sale  was  made  to  the 
corporation  at  a  grossly  exaggerated  jiricc  with  secret  profit.  The 
occasion  for  complaining  of  this  wrong  comes  when  the  promoters 
issue  to  the  public  the  balance  of  the  stock  in  order  to  provide  the 
money  necessary  to  set  the  corporation  on  its  feet  and  to  give  thereby 
the  contemplated  value  to  the  stock  taken  by  themselves  in  payment 
for  their  mines.  The  exemption  of  the  promoter  from  liability  to  the 
corporation  for  a  sale  without  tlisclosure  when  he  takes  the  entire 
issue  of  capital  stock  is  an  exception  to  the  general  rule  imposing 
upon  him  the  liabilities  of  a  trustee.  If  this  exception  is  to  be  ex- 
tended to  a  case  like  the  present,  it  leaves  nothing  of  substantial 
value  in  the  original  rule.  It  might  still  reach  small  and  grosser  foi-ms 
of  want  of  fidelity  to  corporations,  but  would  leave  unharmed  the 
vastly  greater  and  more  refined  variety  illustrated  by  the  present 
case.    It  would  point  the  way  to  general  immunity  for  the  wary. 

It  is  also  urged  that  the  maintenance  of  this  suit  works  an  in- 
justice to  the  defendant  in  requiring  a  repayment  to  the  corporation, 
which  will  result  in  a  benefit  to  the  thirteen  fifteenths  of  the  capital 
stock  taken  by  the  defendant  and  Lewisohn  (who  condoned  the 
wrong)  as  well  as  to  the  two  fifteenths  suliscribed  for  b}'  the  innocent' 
public.  The  size  of  the  repajTncnt  which  may  be  required  of  the 
defendant  is  due  to  the  enormous  profit  taken  at  the  outset.  Apart 
from  the  unjust  profit  taken  bj'  the  promotei^,  their  interest  in  the 
plaintiff  was  only  eight  seventeenths,  or,  tested  by  the  cost  and  in- 
trinsic value  of  the  propertj'  conveyed,  four  seventeenths.  The  true 
answer,  however,  is  given  by  Jessel,  M.R.,  in  Neic  Sombrero  Phos- 
phate Co.  V.  Erlanger,  5  Ch.D.  73,  at  p.  114:  "It  is  said  that  is  not 
doing  justice,  and  that  the  suit  cannot  be  maintained  in  this  form, 
because  it  will  not  do  justice.  But  that  argument  goes  too  far,  be- 
cause it  would  apply  to  a  case  of  the  gi-osscst  fraud  in  every  instance 
in  which  one  or  more  o£  the  actual  shareholders  of  a  company  took 
part  in  that  fraud.  If  the  argument  were  once  allowed  to  prevail,  it 
would  only  be  necessary  to  corrupt  one  single  shareholder  in  order 
to  prevent  a  company  from  ever  setting  the  contract  aside.  It  may 
be  said  you  give  to  the  shareholder,  who  was  a  party  to  the  fraud, 
a  profit,  because  he  will  take  it  in  respect  of  his  shares,  and  since 
as  between  co-conspirators  there  is  no  contribution,  therefore  his 
brother  conspirators,  who  are  made  liable  for  the  fraud,  cannot  make 
him  repay  his  proportion.  But  the  doctrine  of  this  court  has  never 
been  to  hold  its  hand  and  avoid  doing  justice  in  favor  of  the  in- 


CHAP.  IV.]  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  367 

noccnt,  because  it  cannot  apportion  the  punishment  fully  amongst 
the  guilty.  A  dozen  parties  to  a  fraud  may  be  defendants,  and  one 
decree  or  judgment  go  against  all,  and  if  it  is  a  fraud  of  such  a  char- 
acter that  none  of  them  can  bring  an  action  for  contribution,  the 
plaintiff  may  at  his  will  and  pleasure  enforce  that  j  udgment  against 
any  one  of  them,  and  perhaps  pass  over  the  most  guilty  of  them ;  still 
there  is  no  remedy  as  between  those  who  commit  the  fraud.  It  is 
one  of  the  punishments  of  fraud  that  there  is  no  such  remedy,  and 
that  a  guilty  party,  though  not  the  most  guilty,  may  suffer  the  gi-eat- 
est  amount  of  punishment.  It  is  one  of  the  deterrents  to  men  to 
prevent  their  committing  fraud."  See  also  Stockton  v.  Anderson, 
13  Stew.  (N.J.)  486. 

It  is  said  further  that  the  result  reached  is  harsh  from  the  business 
man's  point  of  view.  A  discussion  of  this  aspect  of  the  case  involves 
ethical  considerations.  Courts  are  constantly  dealing  with  the  vari- 
ous relations  of  the  business  world.  Legal  principles  are  applied  to 
these  transactions,  but  such  principles  "have  almost  always  been 
the  fundamental  ethical  rules  of  right  and  wrong."  Robinson  v. 
Mollett,  L.R.  7  H.L.  802,  817.  Upon  its  distinctly  moral  side,  there 
is  little  to  the  credit  of  the  defendant  and  his  associate.  The  offering 
by  the  defendant  as  promoter  for  public  subscription  for  cash  at  par 
a  substantial  part  of  the  capital  stock  of  a  corporation,  the  rest  of 
whose  capital  stock  had  been  issued  for  property  conveyed  to  it  under 
a  law  which  permitted  such  stock  to  be  issued  only  for  the  real  value 
of  property,  was  equivalent  to  a  representation  that  no  fictitious 
value  had  been  placed  upon  the  property  so  acquired.  But  the  dis- 
tinct finding  of  the  single  justice  is  that  the  real  value  was  less  than 
one  third  the  price  for  which  the  defendant  and  Lewisohn  sold  it. 
Nothing  can  be  said  in  support  of  a  business  enterprise  carried  on  by 
promoters,  which  involves  the  purchase  by  them  of  mines,  costing 
and  intrinsically  worth  $1,000,000,  with  money  in  substantial  part 
solicited  from  associates  on  representations  that  a  corporation  is  to 
be  formed  with  a  capitalization  of  $2,500,000,  of  whose  stock  $2,000,- 
000  is  to  be  issued  for  the  conveyance  to  it  by  them  of  the  mines,  and 
the  rest  for  cash;  the  actual  organization  of  the  corporation  under 
the  laws  of  a  State  which  permitted  the  issuance  of  capital  stock  for 
property  conveyed  only  to  the  real  value  of  the  property,  with  a 
capital  stock  of  $3,750,000,  of  which  $3,250,000  is  issued  as  fully 
paid  for  the  conveyance  of  the  mines ;  the  settlement  with  a  very 
great  majority  of  the  associates  on  the  basis  of  a  sale  for  $2,000,000 
of  stock  as  at  first  represented,  the  promoters  retaining  $1,250,000 
of  shares  as  a  secret  profit,  intending  also  to  procure  from  the  public 
subscriptions  for  $500,000  of  stock  in  cash  at  par  and  actually  carry- 
ing out  this  purpose,  the  promoters  themselves  during  all  these 
manipulations  having  entire  control  of  all  executive  offices  of  the 
corporation.   In  the  absence  of  compelling  authority,  we  cannot  set 


368  OLD    DOMINION    COPPER    CO.  I".  BIGELOW.  [CHAP.   IV. 

the  seal  of  judicial  approval  upon  such  business  policies.  See  Bigclow 
V.  Old  Dominion  Copper  Mining  &  Smelting  Co.,  4  Buch.  (N.J.), 
71  Atl.  Rep.  at  pp.  176  and  177. 

Both  on  authority  outside  of  our  own  cases  and  on  principle,  it 
appears  to  us  that  the  defendant  should  be  held  liable.  But  in  this 
jurisdiction  the  matter  does  not  stand  quite  on  the  basis  of  an  original 
proposition.  In  two  thoroughly  considered  opinions  in  recent  years, 
Hayward  v.  Leeson,  176  Mass.  310,  and  Old  Dominion  Copper  Min- 
ing &  Smelting  Co.  v.  Bigelow,  188  Mass.  315,  this  court  has  held 
*^hat  liability  existed  in  a  case  like  this.  It  is  not  necessarj^  to  rej.eat 
the  arguments  of  these  decisions.  There  is  thus  added  to  considera- 
tions which  otherwise  exist,  the  force  of  the  doctrine  of  stare  decisis. 
One  or  both  of  these  cases  have  frequently  been  cited  by  courts  of 
other  jurisdictions  and  always  with  approval  until  Old  Dominion 
Copper  Mining  &  Smelting  Co.  v.  Leicisohn,  148  Fed.  Rep.  1020; 
s.c.  210  U.S.  206.  No  arguments  have  been  adduced  not  considered 
in  those  eases,  and  no  points  now  brought  forward  were  not  there 
discussed.  While  the  rule  of  stare  decisis  does  not  prevent  the  over- 
ruling of  those  cases,  they  should  not  be  disturl>e(l  unless  they  now 
appear  to  be  so  clearly  wrong  as  to  have  no  sound  support.  Ma- 
bardy  v.  McHugh,  202  Mass.  148.  It  must  appear  that  the  law  was 
"misunderstood  or  misapplied."  1  Kent  Com.  475.  There  was  no 
misconception  of  the  points  involved  when  these  ca-ses  were  decided, 
nor  any  lack  of  discernment  in  their  application  to  the  aflairs  of 
corporations.  It  does  not  appear  that  they  have  become  archaic  or 
inapplicable  by  reason  of  business  evolution  since  they  were  an- 
nounced. On  the  contrary,  the  tendency  of  custom  since  the  first 
case  was  decidctl  has  been  rather  in  the  direction  of  more  strict 
accountability  of  those  owing  duties  to  corporations  and  their  stock- 
holders. At  all  events,  we  perceive  no  occasion  to  relax  these  piin- 
ciples  of  accountability  for  breaches  of  trust.  The  mere  fact  that  the 
Supreme  Court  of  the  United  States  has  since  decided  the  question 
differently  is  not  alone  a  sufficient  consideration  for  reversing  our 
decisions.  It  is  only  when  the  reasoning  of  its  decision  is  of  convinc- 
ing power  and  compels  the  conclusion  that  our  cases  were  wrongly 
decided  that  it  must  command  our  support  in  other  branches  of  the 
law  than  those  where  it  is  supreme  under  the  Federal  Constitution. 
With  great  respect  to  the  decision  in  210  U.S.  206,  we  are  constrained 
to  adhere  to  the  law  as  laid  down  in  the  earlier  cases  in  this  Com- 
monwealth. 

We  have  discussed  the  question  as  if  the  same  legal  principles  are 
involved  now  as  were  presented  upon  the  demurrer.  There  are,  how- 
ever, certain  aspects  of  the  evidence  which  seem  to  us  to  make  it 
essentially  different  and  materially'-  stronger  for  the  plaintiff.  When 
the  votes  to  purchase  the  mines  of  the  promoters  were  passed  on 
July  11,  only  forty  shares  of  stock  had  been  subscribed  for  or  issued. 


CHAP.  IV.]  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  369 

The  votes  were  passed  by  the  du'ectors  alone  and  there  was  no  vote 
by  the  stockholders  at  this  time.  It  is  true  that  the  directors  com- 
prised all  the  stockholders,  but  on  that  date  they  were  acting  wholly 
in  their  capacity  as  directors,  that  is,  as  trustees.  They  did  not  at- 
tempt, so  far  as  any  records  show,  to  shift  their  character  as  trustees 
for  that  of  individual  stockholders.  They  did  not  pursue  the  careful 
course  of  separation  of  these  dual  capacities  by  calling  a  stock- 
holders' meeting,  which  was  followed  in  North-West  Transportation 
Co.  V.  Beatty,  12  App.  Cas.  589,  nor  did  they  assent  in  writing  as 
stockholders.  So  far  as  the  records  show  up  to  this  point,  there  was 
only  a  directors'  vote  for  the  purchase.  Moreover,  the  records  of  the 
plaintiff  show  that  at  the  opening  of  this  meeting  only  six  of  the 
seven  directors  were  present.  Four  of  these  six  directors  resigned  as 
did  also  the  absent  seventh  director,  their  resignations  were  accepted 
and  their  successors  were  chosen.  But  of  the  five  newly  chosen  di- 
rectors, only  two  were  present  and  took  their  seats.  Thus  there  were 
four  directors,  a  bare  quorum  and  majority,  present  when  the  offers 
for  the  sale  of  the  mines  were  presented  and  the  votes  for  their  pur- 
chase were  passed.  These  votes  to  purchase  were  not  consummated 
until  December,  1895,  and  January,  1896,  when  the  deeds  were  de- 
livered to  the  plaintiff.  The  vote  to  issue  the  certificates  of  stock  in 
payment  for  the  conveyances  of  mines  was  passed  on  September  18, 
1895.  Under  date  of  July  18,  1895,  the  only  subscription  list  of  the 
plaintiff  was  signed.  Upon  this  list  appear  the  names  of  those  out- 
side persons  who  subscribed  for  the  $500,000  of  working  capital  for 
the  plaintiff.  The  money  was  paid  by  some  of  the  outside  stockholders 
before  September  18,  and  at  least  as  early  as  September  10,  1895. 
Stock  certificates  were  made  out  for  the  number  of  shares  allotted 
to  each  under  date  of  September  18.  The  rights  of  all  these  persons 
as  subscribers  had  become  fixed  at  least  as  early  as  September  10, 
1895,  before  which  date  the  subscriptions  were  all  received,  and 
when  notices  of  their  acceptance  and  demands  for  payment  were  sent 
out.  These  circumstances  amply  support  the  finding  of  the  single 
justice  that  issuance  of  the  twenty  thousand  shares  to  the  public  was 
in  the  summer  or  fall  of  1895.  These  stockholders  were  entitled 
to  have  a  disclosure  made  to  the  corporation  through  independent 
officers.  There  is  no  pretense  that  any  disclosure  was  made  to  these 
subscribers.  On  September  18,  1895,  the  directors  of  the  plaintiff 
voted  to  issue  the  stock  as  before  stated  —  thirty  thousand  shares  to 
Bigelow  and  Lewisohn,  one  hundred  thousand  to  their  nominee 
Dumaresq,  and  there  was  made  out  the  certificate  for  the  remaining 
twenty  thousand  shares  to  "Thomas  Nelson,  Treasurer,"  and  these 
four,  professing  to  represent  all  the  stock  of  the  plaintiff,  signed  the 
written  approval  of  all  previous  acts  of  the  directors.  This  is  the 
first  attempt  of  the  stockholders  to  act  respecting  this  subject.  As 
before  pointed  out,  the  certificate  to  Nelson  was  wrongfully  issued; 


370  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  (ciIAP.   IV. 

except  as  it  belonged  to  outside  subscribers,  it  was  treitsury  stock. 
There  were  then  oilier  stockholders  of  the  plaintiff  who  had  paid  for 
their  stock,  although  they  had  not  received  their  certificates,  but  the 
plaintiff  hixd  their  money  and  they  were  entitletl  to  l)e  treated  as 
stockholders.  Chester  (ilass  Co.  v.  Dewey,  IG  Mass.  94.  Clioffin  v. 
Cummings,  37  Maine,  76.  Hawes  v.  Anglo-Haxon  Petroleum  Co.,  101 
Mass.  385,  395.  Their  certificates  were  dated  September  18,  1895, 
and  issued  directly.  These  circumstances  show  that  at  the  first  and 
only  time  when  there  was  an  effort  on  the  part  of  the  promoters  to 
secure  a  ratification  of  their  wrongful  acts,  there  were  certain  sharc- 
holdci"S  who  were  not  represented  and  who  did  not  themselves  sign 
in  assent  and  who  were  in  fact  ignorant  of  the  wrong  flone  the  cor- 
poration. Further,  they  do  not  show  that  at  any  time  from  the  or- 
ganization of  the  corporation  onward  was  there  a  moment  when  all 
the  stockholdei-s  or  directors  knew  of  the  material  facts  as  to  the  de- 
fendant's relation  to  the  corporation.  In  this  view  of  the  facts,  which 
is  supported  fully  by  the  evidence,  there  appears  to  be  no, assent  by 
the  corporation  with  knowledge  of  the  facts  by  all  those  who  at  any 
time  constituted  all  the  stockholders,  except  by  assuming  the  knowl- 
edge of  Bigelow  and  Lewisohn  on  July  11,  1895,  when  there  were 
only  forty  shares  of  stock  for  which  the  latter  had  paid,  to  be  the 
knowledge  of  all  the  stockhoklei-s,  although  there  were  then  seven 
shareholilcrs  as  to  whose  actual  knowledge  of  the  scheme  there  is  no 
evklence,  although  all  were  the  tools  of  the  defendant  and  Lewi.sohn. 
It  is  only  by  treating  these  subscriptions  as  a  sham  that  knowledge 
even  of  the  owners  of  the  forty  shares  can  l)e  found.  But  these  sub- 
scriptions were  necessary  to  the  organization  under  the  New  Jersey 
law.  Hence  the  rule  of  Salomon  v.  Salomon  [1897],  A.C.  22,  and  like 
cases  has  no  application  to  these  facts,  nor  does  the  difficulty  meet 
"the  petitioner  at  the  outset  that  it  has  assented  to  the  transaction 
with  the  full  knowledge  of  the  facts  "  (210  U.S.  211,  212),  unless  it 
is  said  that  in  fact  knowledge  by  the  plaintiff's  dominant  stockholders 
is  knowledge  by  the  corporation.  But  the  defendant  was  commit- 
ting a  breach  of  trust  on  his  principal,  the  plaintiff,  and  where  one  is 
committing  a  wrong  in  his  own  interest  his  knowledge  does  not  bind 
the  corporation,  which  might  in  an  innocent  transaction  be  affected 
by  his  knowledge.  Indian  Head  National  Bank  v.  Clark,  1G6  Mass. 
27.  Produce  Exchange  Trust  Co.  v.  Bieberbach,  176  Mass.  577,  588. 
These  considerations  mark  the  case  as  different  in  material  respects 
from  that  which  was  stated  in  Old  Dominion  Copper  Alining  & 
Smelting  Co.  v.  Lewisohn,  210  U.S.  206,  and  bring  it  clearly  within 
the  well  recognized  rule  of  promoters'  liability,  laid  down  in  the 
numerous  and  undisputed  cases,  before  cited.  The  Supreme  Court 
of  the  United  States  has  never  passed  upon  these  facts  nor  upon  such 
a  case  as  is  thus  presented.  We  know  of  no  authority  which  counte- 
nances a  different  decision  upon  them  than  that  here  reached.  The 


CHAP.  IV.]  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  371 

conflict  between  the  federal  courts  and  this  court  in  this  respect  ap- 
pears to  be  not  upon  the  merits  of  the  case  as  disclosed  upon  the 
present  record.  See  Bigelow  v.  Old  Dominion  Copper  Mining  & 
Smelting  Co.,  4  Buch.  (N.J.),  71  Atl.  Rep.  153,  175. 

But  there  is  still  another  aspect  in  which  the  case  differs  from  that 
presented  in  the  federal  court  and  in  our  previous  decision.  The  de- 
fendant held  out  to  subscribers  of  his  syndicate,  before  the  incorpora- 
tion of  the  plaintiff,  that  its  capital  stock  was  to  be  $2,500,000  and 
that  they  would  get  for  one  share  in  the  Baltimore  Company  two 
in  the  new  company  and  that  the  rest  would  be  sold  to  furnish  the 
working  capital.  The  right  of  these  parties  to  become  stockholders 
in  the  plaintiff  company  was  fixed  before  its  first  meeting  of  stock- 
holders was  held,  because  they  had  signed  the  syndicate  agreement 
and  had  made  two  payments  on  account  of  their  subscriptions.  They 
were  sharers  thus  in  the  profit  of  $1,000,000  above  the  costs  of  mines. 
But  they  were  also  entitled  to  disclosure  of  the  secret  profit  of 
$1,250,000  more  taken  by  the  defendant  and  Lewisohn  and  it  is 
found  that  most  of  them  were  ignorant  of  it.  Respecting  any  sale 
to  the  plaintiff  in  which  they  had  agreed  to  become  shareowners  on 
any  other  basis  than  that  of  two  for  one,  they  were  entitled  to  dis- 
closure. This  is  quite  aside  from  any  rights  they  may  have  had 
against  Bigelow  for  not  treating  them  fairly  on  the  division  of  prof- 
its. It  stands  on  different  ground.  In  that  relation  they  were  sharers 
in  promoters'  profits  and  they  received  what  they  expected.  But 
they  had  also  agreed  to  be  subscribers  to  stock  of  the  plaintiff.  In 
that  character  they  were  not  promoters,  but  stockholders  and  en- 
titled to  all  their  rights.  That  they  knew  there  was  to  be  a  sale  for 
$2,000,000  and  a  profit  of  two  for  one  was  no  reasonable  ground  for 
expectation  that  the  defendant  would  take  a  large  additional  secret 
profit.  As  to  this  secret  profit,  the  members  of  the  syndicate  had  the 
same  rights  as  the  outside  public,  that  is,  they  were  entitled  to  a 
disclosure  to  an  independent  and  impartial  board  of  officers  who 
should  be  in  a  position  to  act  for  the  interests  of  the  corporation  as 
opposed  to  those  of  the  promoters.  In  this  regard  the  case  is  like 
Arnold  v.'  Searing,  3  Buch.  (N.J.)  262,  where  the  defendants  were 
held  liable.  ... 

It  follows  from  what  has  been  said  as  to  the  nature  of  the  wrong 
done  by  the  defendant  that  he  is  liable  in  solido.  The  act  of  the  de- 
.fendant  and  Lewisohn  was  a  joint  act  for  the  benefit  of  both.  Their 
subdivision  of  the  profits  made  cannot  affect  the  right  of  the  plaintiff. 
The  breach  of  trust,  which  they  as  promoters  committed,  was  in 
the  nature  of  a  tort.  This  renders  them  liable  severally  as  well  as 
jointly  and  for  the  whole  damage.  Hayioard  v.  Leeson,  176  Mass. 
310,  324,  and  cases  cited  188  Mass.  at  p.  329.  Feneff  v.  Boston  & 
Maine  Railroad,  196  Mass.  575, 581.  Gluckstein  v.  Barnes  [1900],  A.C. 
240.  Bigelow  v.  Old  Dominion  Copper  Mining  &  Smelting  Co.,  4 
Buch.  (N.J.),  71  Atl.  Rep.  153,  176. 


372  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  fcHAP.  IV. 

As  to  the  character  of  relief  which  can  he  afforded,  it  i.s  suid  first 
that  rescission  i.s  the  only  remedy  oi)en  to  the  petitioner.  The  sinulo 
justice  ha-s  found  that  the  situation  of  the  parties  and  the  proixTtics 
is  not  such  as  to  make  it  just  at  this  time  to  order  a  rescission.  The 
evidence  justifies  this  tinilinn.  It  was  decidtnl  in  this  ca.st*  at  its 
earlier  stage,  188  Mass.  315,  329,  that  resci.s8ion  is  not  the  only 
remedy,  llaxjicard  v.  Lee^on,  170  Miuss.  310,  321.  Parker  v.  Sicker- 
son,  137  Ma.ss.  487.  We  are  not  dispostul  to  (juestion  the  correctness 
of  the  decision  upon  this  point.  When  one  has  committed  a  l»reach 
of  tru.st,  there  is  no  occasion  to  Ik'  over-solicitous  to  sii*  that  the 
faithless  fiduciary  should  not  make  reparation  for  the  wrong  done. 
In  re  Olympia  [1*898],  2  Ch.  ir)3.  169.  Lxjndneij  &  Wigjuml  Iron  Ore 
Co.  V.  liinl,  33  Ch.I).  8').  9-1.  The  essence  of  the  suit  is  that  a  .stH-ret 
profit  \v:us  taken  hy  the  promoters.  The  ohvious  remedy  is  a  return 
of  the  s<'cret  profit.  The  difficulty  of  asccrtaininn  the  amount  of 
that  profit,  which  troubled  the  court  in  In  re  Caj)e  Breton  Co.,  29 
C'h.n.  79.'),  does  not  exist  here.  See  Bentinck  v.  Fcnn,  12  /Vpp.  ('as. 
i\-)2;  (llucLstein  v.  Bnrnes  [1900],  A.C.  240;  In  re  Leeds  d  Ilanley 
rhentres  of  Varieties  [1902],  2  Ch.  809;  Yale  Gas  Stoi^e  Co.  v.  Wilcox, 
04  (.'onn.  101. 

The  plaintiff  hits  also  appealed  from  the  decrees  in  its  favor.  It 
presses  its  apix*als  on  the  pround  that  it  is  entitled  to  recover  the 
<litYerence  Ix'twecn  the  market  value  of  the  shares  received  hy  the 
defendant  and  Lewi.sohn  and  the  cost  to  them  of  the  property  con- 
veyed to  it.  This  is  the  measure  of  recoverv'  wln'n^  there  is  a  fidu- 
ciiu-y  relation  at  thc^  time  of  the  purch:us(\  Hut  there  is  no  finding 
here  that  such  relation  existed  at  the  time  the  defendant  and  Ix"wi- 
sohn  purclKUsed  the  property.  There  is  no  evidence  which  requires 
such  a  finding.  The  corporation  was  not  organized  until  a  consiiler- 
ahle  jiericxl  after  the  options  had  l)een  secured.  The  defendant  and 
Lewis;)liii  were,  during  all  this  time,  free  to  do  as  they  chose  with 
their  purchase  so  far  as  the  plaintiff  was  concerned.  This  has  l>een 
Ix'fore  decided.  188  Mass.  321.  The  plaintiff  contends  in  the  alter- 
native that  its  measure  of  damage  is  the  difference  l)etween  the 
intrinsic  value  of  the  property  conveyed  and  the  value  of  the  stock 
issued  therefor.  Market  value  Ls  the  standard  commonly  applied 
where  property  has  such  value.  It  is  only  in  cases  where  the  value 
of  property  cannot  l>e  fairly  ascertained  hy  the  application  of  this 
test  that  resort  is  had  to  any  other.  The  single  justice  appears  to 
have  cxi)erienced  no  difficulty  in  determining  that  value  of  these 
mines.  There  are  no  exceptional  circumstances  which  call  for  the 
application  of  any  other  than  the  ordinary  rule. 

Note.  —  Loring,  Braley.  and  Sheldon.  J.J.,  concurred 
Knowlton,  C.J.,  and  Morton  and  Hammond,  JJ.,  dissented. 


CHAP.  IV.]  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  373 

Hughes  v.  Cadena  Co.,  13  Ariz.  52.  A  corporation,  with  outstand- 
ing stock,  issued  stock  to  its  promoters,  without  consideration.  One 
of  the  existing  stockholders-  knew  nothing  about  the  transaction. 
The  court  ordered  these  shares  cancelled.  There  is  a  dictum  that,  if 
all  the  existing  shareholders  had  consented,  the  corporation  could 
not  have  been  heard  to  complain,  even  if  after  the  transaction  other 
stock  was  sold  to  the  public.  There  is  also  a  dictum  that  the  issue 
by  a  corporation,  having  no  assets,  of  its  shares  of  stock  without 
consideration  constitutes  the  obtaining  of  a  profit  by  the  promoters. 

Burbank  v.  Dennis,  101  Cal.  90.  If  promoters  represent  that  they 
are  conveying  property  to  the  corporation  at  cost,  and  cash  is  paid 
to  them  in  excess  of  their  expenditures,  the  corporation  is  entitled 
to  recover  the  difference. 

Yale  Gas  Stove  Co.  v.  Wilcox,  64  Conn.  101.  A  promoter  had  pro- 
cured subscriptions  to  the  stock  of  a  corporation  organized  to  buy 
certain  patents  owned  by  A.  These  patents  were  paid  for,  partly  in 
stock,  and  partly  in  cash.  A  then  gave  part  of  the  consideration  to 
the  promoter.  The  subscribers  had  no  knowledge  that  the  promoter 
was  making  this  profit.  He  was  required  to  account. 

Hinkley  v.  Oil  Co.,  132  Iowa,  396.  The  promoters  of  a  corporation 
caused  stock  to  be  issued  to  them  for  a  contract  right.  The  facts 
were  such  that  the  court  treated  this  as  substantially  an  issue  of 
stock  without  consideration.  Part  of  the  stock  so  issued  was  returned 
to  the  treasury  and  sold  to  the  public.  A  purchaser  brought  an  ac- 
tion for  the  amount  paid  for  the  stock,  and  to  cancel  said  stock.  The 
defendants  were  the  corporation  and  one  of  the  promoters.  Relief 
was  given  as  prayed. 

Higgins  v.  Lansingh,  154  111.  301,  332,  337.  By  the  issue  of  the 
stock  to  a  promoter  for  overvalued  property  the  company  is  not 
defrauded,  where  it  has  no  assets  except  the  property  so  received. 
Holders  of  preferred  stock,  issued  at  a  subsequent  date,  were  not,  on 
the  facts,  entitled  to  complain. 

Camden  Land  Co.  v.  Lewis,  101  Me.  78.  There  is  a  dictum  (p.  95) 
that  promoters  of  a  corporation  stand  in  a  fiduciary  relation  to  the 
corporation,  and  to  its  subscribers  for  stock,  and  to  those  who  it  is 
expected  will  afterward  buy  stock  from  the  corporation ;  that  if  they 
undertake  to  sell  their  own  property  to  the  corporation  they  are 
bound  to  disclose  the  whole  truth;  and  that  if  they  receive  secret 
profits,  either  in  cash  or  by  way  of  allotments  of  stock,  when  there 
are  other  stockholders,  or  it  is  expected  that  there  will  be  other 
holders  of  new  and  additional  stock,  the  corporation  may  elect  to 
avoid  the  purchase,  or  hold  the  promoters  accountable  for  the  secret 
profits,  if  in  cash,  or  may  require  a  return  of  the  stock  if  unsold; 
"or,  if  sold,  an  accounting  for  the  profits  of  its  sale." 

Mason  v.  Carrothers,  105  Me.  392.  The  owners  of  certain  patents 
contracted  with  promoters  of  a  corporation  to  be  formed  to  transfer 


374  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  [cHAP.  IV. 

the  patents  to  the  corporiitioii  for  a  specified  consideration,  inchid- 
ing  §100,000  par  value  of  the  preferred  stock  ami  S50,000  of  tiie 
common  stock.  The  promoters  caused  the  corporation  to  be  fonned. 
Six  shares  of  stock  were  sul)scribed  by  persons  dominated  by  the 
promoters.  The  directoi-s  also  were  dominated  by  the  promoters. 
The  promotei-s  thereupon,  tussuming  to  l)e  ownei-s  of  the  patents,  sold 
them  to  the  corporation  for  the  consideration  mentioned  in  tiie  con- 
tract with  the  owners  of  the  patents,  except  that  they  received 
$799,400  of  common  stock.  They  gave  .$50,000  of  the  common  stock 
to  the  owners  of  the  patents,  donated  .$200,000  to  the  corporation, 
and  retained  S.549,4(X).  Subsequently  persons  who  subscrilx'd  antl 
paid  for  preferred  stock  (the  authorized  issue  was  S2(X),000  and  only 
SlOO.OtK)  had  Ix^en  issued  to  the  promoters)  without  knowledge  of 
the  contract  between  the  promotei-s  and  the  owners  of  the  patents 
brought  a  bill  praying  that  the  S.')49,400  stock  should  be  cancelled. 
This  relief  was  granted  (except  as  promoters  were  found  to  be  en- 
titled to  stock  for  their  services  and  expenses).  The  court  held  that 
the  relief  could  not  be  grant^^d  on  the  ground  that  there  was  no  con- 
sitleration  for  the  issue  of  the  stock,  and  it  approved  a  finding  tliat 
the  promotei-s  were  the  equitable,  if  not  the  legal,  owners  of  the 
patents  when  they  assumed  to  transfer  them  to  the  corporation. 
But  the  court  held  that  the  relief  could  be  granted  on  the  ground 
that  the  promot^i*s  had  made  a  secret  profit.  "  Here  the  parties  sell- 
ing are  the  promoters,  and  the  parties  buying  are  not  the  existing 
dummy  stockholders  but  the  future  real  stockholders  whose  cash 
alone  will  go  into  the  treasur>'  of  the  corporation  and  enable  it  to 
hx'gin  and  carry  on  business"  (p.  .399).  The  court  said  its  decision 
was  not  inconsistent  with  Old  Dominion  Copper  Co.  v.  Leinsohn, 
210  U.S.  206,  Ixicause  the  preferred  stockholders,  and  not  the  cor- 
poration, were  suing;  but  it  then  proceeded  to  hold  that  it  was  proper 
for  the  plaintitTs  to  bring  the  suit,  becau.se  the  guilty  parties  were 
in  control  of  tiie  corporation.  It  is  to  ])C  noted  that  the  court  did 
not  proceeil  on  the  ground  that  the  patents  had  been  overvalued  and 
that  a  profit  had  thereby  l>een  made  at  the  ex7)ense  of  the  corporation. 
Tompkins  v.  Sperry,  Jones  d-  Co.,  96  Md.  560.  Promoters  pur- 
chased various  breweries,  the  purchase  price  to  be  paid  largely  in 
securities  of  a  corporation  to  be  formed.  They  conveyed  these  prop- 
erties, with  a  certain  amount  of  working  capital,  to  a  corporation, 
formed  and  controlled  by  them,  in  consideration  of  the  issue  to  them 
of  its  stock  and  bonds.  The  promoters  then  made  sales  of  the  securi- 
ties so  issued,  but  the  public  was  not  invited  by  the  corporation  to 
subscribe  to  its  stock.  It  was  held  that,  even  if  the  promoters 
secured  a  greater  amount  of  securities  for  themselves  than  was  con- 
templated in  tlieir  contracts  with  the  owners  of  the  various  breweries, 
this  gave  the  corporation  no  cause  of  action.  "Assuming  that  these 
contracts  called  for  the  delivery  by  them  to  the  respective  brewers  of 


'CHAP.  IV.]  OLD    DOMINION   COPPER    CO.  V.  BIGELOW.  375 

bonds  and  stock  of  the  company  capitalized  upon  a  certain  basis 
and  that  they  deUvered  securities  issued  upon  a  different  basis  of 
capitaUzation,  that  might  afford  to  each  individual  brewer  a  right  of 
action  against  Sperry  &  Jones  for  such  damage  as  he  suffered  under 
the  terms  of  his  particular  contract,  but  these  various  contract  rights 
of  the  different  brewers  caimot  be  asserted  collectively  in  this  suit 
by  the  receiver"  (p.  583).  And  see  Granite  Roofing  Co.  v.  Michael, 
54  Md.  65. 

United  Zinc  Companies  v.  Harwood,  216  Mass.  474.  The  right  of  a 
corporation  to  maintain  a  suit  in  equity  against  promoters  to  re- 
cover secret  profits  is  not  assignable  at  law  or  in  equity. 

South  Joplin  Land  Co.  v.  Case,  104  Mo.  572.  A  promoter  caused  a 
corporation  to  be  formed  and  its  stock  was  subscribed  by  members 
of  the  public.  The  cash  of  the  corporation  was  then  used  in  payment 
of  property  on  which  the  promoters  had  an  option.  But  the  vendor 
returned  to  him  $2000  of  the  purchase  price  and  gave  him  certain 
assets  which  he  did  not  transfer  to  the  corporation.  The  promoter 
concealed  these  facts.   He  was  required  to  disgorge. 

Arnold  v.  Searing,  78  N.J.  Eq.  146.  Wliere  promoters  buy  prop- 
erty and  transfer  it  to  a  corporation  formed  and  controlled  by  them 
in  consideration  of  the  issue  to  them  of  all  its  stock  and  bonds  then 
authorized,  they  owe  a  duty  of  full  disclosure  to  the  members  of  the 
syndicate  who  provided  the  funds  necessary  to  carry  through  the 
transaction,  and  who  were  to  receive  stock  and  bonds  in  considera- 
tion of  their  cash  payments,  such  persons  being  equitable  stock- 
holders. Such  disclosure  not  having  been  made,  the  promoters  are 
jointly  and  severally  liable,  in  a  suit  by  the  corporation,  to  account 
for  the  profits  made.  In  determining  these  profits  the  value  of  the 
securities  obtained  must  be  determined,  and  bonus  stock  must  be 
treated  as  having  no  value,  if  all  persons  interested  in  the  transac- 
tion so  treated  it, 

Tooker  v.  National  Sugar  Refining  Co.,  80  N.J.  Eq.  305.  The 
stockholders  of  three  sugar  refining  companies,  which  were  engaged 
in  destructive  competition  with  the  American  Sugar  Refining  Co., 
of  which  Havemeyer  was  president,  transferred  their  stock  to  a  new 
corporation  formed  and  controlled  by  an  agent  of  Havemeyer,  and 
took  in  payment  shares  of  its  preferred  stock.  The  common  stock 
was  issued  to  a  trustee  for  Havemeyer.  The  court  held  that  this 
stock  was  issued  without  consideration,  and  that  the  holders  were 
not  entitled  to  vote  or  receive  dividends  thereon.  The  court  gave 
the  holders  the  right  to  retire  such  stock  in  any  legal  manner. 

Parsons  v.  Hayes,  14  Abb.  N.C.  (N.Y.)  419.  All  the  stock  of  a  cor- 
poration is  issued  for  overvalued  property.  A  transferee,  without 
notice  of  this  fact,  of  some  of  the  stock  cannot  complain.  His  trans- 
feror participated,  and  therefore  could  not  complain,  and  he  stands 
no  better. 


376  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  [cHAP.  IV. 

Blum  V.  Wliitneij,  185  N.Y.  232.  The  Distilling  Coinpuny  of 
America  was  formed  to  acquire  certain  properties,  chiefly  by  issues 
of  its  stock.  The  persons  who  took  the  initiative  in  its  organization 
held  an  option  on  one  of  these  properties,  and  (apparently)  this 
property  \va.s  conveyed  to  the  corporation  at  a  price  higher  than  the 
price  named  in  such  option.  The  complaint  alleged  that  they  did 
not  disclose  to  the  owners  of  the  other  properties  that  they  held  such 
option,  and  that  they  did  not  state  the  amount  which  the  corporation 
was  to  pay  therefor.  Some  of  the  stock  of  the  Distilling  Company  was 
to  i>c  left  in  its  treasury  "  for  future  purposes."  The  report  of  the  case 
docs  not  show  that  any  of  this  stock  was  subsequently  issued,  and  it 
does  not  appear  how  the  plaintiff  acquired  his  stock  in  the  Distilling 
Company.  The  court  dealt  with  the  ciusc  as  though  all  the  stock  of 
the  cori)orati()n  had  been  issued  for  the  properties  in  question.  The 
court  wius  api)arently  of  opinion  that  if  any  fraud  had  been  practised 
by  the  defendant  upon  any  of  the  persons  who  took  the  original  issue 
of  stock,  that  would  not  give  rise  to  a  corporate  right  (pp.  241,  242). 
It  cites  with  approval  Tompkins  v.  Sperrij,  Jones  d'  Co.,  96  Mtl.  560. 

See  also  Hutchinson  v.  Simpson,  92  N.Y.  App.  Div.  382;  Insurance 
Press  V.  Montauk  Wire  Co.,  103  N.Y.  App.  Div.  472  (if  promoters 
receive  stock  for  overvalued  property,  the  corporation  cannot  retain 
the  property,  and  cancel  all  the  stock  except  that  equal  to  the  real 
value  of  the  property). 

Wills  V.  Nehalem  Coal  Co.,  52  Or.  70.  Part  of  the  stock  of  a  cor- 
poration is  issued  to  promoters  for  overvalued  property.  Then  other 
stock  was  issued  to  the  plaintiffs  for  cash  at  par.  A  demurrer  to  the 
complaint  was  overruled.  Relief  will  1k^  either  to  recjuire  the  pay- 
ment of  the  par  value  of  the  stock,  less  the  value  of  the  property,  or 
the  cancellation  of  the  stocks  "according  as  one  or  the  other  may 
seem  to  the  court  to  be  more  equitable  when  the  facts  are  before 
it"  (p.  91). 

Dcnsmore  Oil  Co.  v.  Dcnsmore,  64  Pa.  43.  Owners  of  property-  em- 
ployed promoters  to  procure  subscriptions  to  the  stock  of  a  corpora- 
tion formed  to  purchase  such  property,  and  paid  them  out  of  the 
proceeds.  The  court  said  the  owners  could  set  any  price  they  pleased 
on  their  property,  without  disclosing  its  cost,  and  that  the  pro- 
moters could  retain  whatever  they  were  paid  by  the  owners.  The 
subscribers  "supposed,  as  they  state,  that  these  gentlemen  were  to 
receive  compensation  for  their  services.  What  it  was  to  be  they  did 
not  inquire,  because  it  was  none  of  their  business." 

Richlands  Oil  Co.  v.  Morriss,  108  Va.  288.  The  promoters  of  a  cor- 
poration issued  a  majority  of  its  stock  to  themselves  for  rights  of 
exploration.  These  rights  cost  S52  and  stock  of  the  par  value  of 
$600,000  was  issued  in  paj-ment.  Then  other  stock  was  sold  to  the 
public.  The  stock  in  the  hands  of  a  promoter  w^as  cancelled. 

Richardson  v.  Graham,  45  W.Va.  134.    A  promoter,  having  an 


CHAP.  IV.]  OLD    DOMINION    COPPER    CO.  V.  BIGELOW.  377 

option  on  property  for  S6000,  sold  the  property  to  the  corporation  for 
$8500,  without  disclosing  the  profit.  The  court  said:  "It  could  not 
concern  the  company  or  any  of  its  stockholders  what  the  property 
originally  cost  Graham"  [the  promoter]  (p.  140).  But  the  court  also 
said:  "The  only  fraud  claimed  .  ,  .  was  in  concealing  the  price  paid 
for  the  property  by  Graham :  but  it  is  apparent  on  the  face  of  the 
record  that  after  the  facts  were  made  known,  and  the  company  char- 
tered and  organized,  it  contracted  to  purchase  the  property  for  eight 
thousand  five  hundred  dollars"  (p.  142). 

Pietsch  V.  Milhrath,  123  Wis.  647.  The  facts  are  obscure.  Ap- 
parently, the  promoters  represented  that  they  had  subscribed  for 
1472  shares  at  $34  a  share;  the  general  public  was  induced  to  sub- 
scribe "to  562  shares  at  $34  a  share;  the  promoters  conveyed  property 
to  the  corporation,  which  they  had  acquired  by  pajdng  some  cash, 
and  giving  purchase  money  mortgages;  they  reimbursed  themselves 
for  the  cash  out  of  the  amounts  paid  by  the  general  pubhc,  and 
therefore  obtained  the  1472  shares  without  any  consideration.  The 
defendants  were  required  to  pay  $50,048  (1472  X  $34),  with  interest, 
the  court  holding  that  the  corporation  had  been  defrauded  out  of 
that  amount. 

See  also  Dickerman  v.  Northern  Trust  Co.,  176  U.S.  181,  203; 
Foster  v.  Seymour,  23  Fed.  65;  Stratton^s  Independence,  Ltd.  v.  Dines, 
135  Fed.  449. 


BOOK  III. 
THE  POWERS  OF  CORPORATIONS. 


NOTE. 


The  stockholders  of  a  business  corporation  may  be  said  to  be  per- 
sons who  would  be  partners,  except  for  their  incorporation,  and  who 
arc,  by  their  incorporation,  enabled  to  carry  on  business  with  certain 
facilities  and  with  a  protection  against  liability  not  enjoyed  by 
partners. 

When  the  powers,  or  objects,  or  purposes  of  a  corporation  are 
stated  in  its  organization  papers,  the  statement  has  a  double  sig- 
nificance. On  the  one  hand,  it  evidences  the  compact  between  the 
members,  and,  hi  this  respect,  is  closely  analogous  to  articles  of 
partnership.  On  the  other  hand,  it  marks  the  limits  within  which  the 
State  consents  that  the  members  may  engage  in  bushiess  with  the 
corporate  facilities  and  protection. 

Many  acts  done  in  the  name  of  the  corporation  prove  to  be  un- 
authorized both  as  against  the  State,  and  as  lx?twcen  the  members. 

An  act,  however,  may  be  unauthorized  as  against  the  State,  al- 
though not  as  between  the  members.  Thus,  if  all  the  members  agreed 
that  an  act  should  be  done  which  the  State  had  not  authorized. 

An  act,  moreover,  may  be  unauthorized  as  between  the  members, 
although  it  is  no  usurpation  as  against  the  State.  Suppose  it  is  pro- 
vided that  no  money  is  to  be  borrowed,  and  no  mortgage  placed  on 
the  corporate  property  without  the  consent  of  the  holders  of,  say, 
two  thirds  of  the  capital  stock.  It  is  submitted  that  the  proper  con- 
struction of  such  a  provision  ought  usually  to  be  that  it  was  designed 
solely  as  a  protection  to  the  stockliolders. 

The  expression  "ultra  vires"  is  frequently  used  in  the  reports  to 
indicate  a  transaction  which  is  beyond  the  scope  of  corporate  ac- 
tivity authorized  by  the  State.  But  it  is  also  quite  frequently  used 
to  indicate  a  transaction  which  is  not  authorized  by  the  compact  of 
the  members  inter  se. 

The  question  as  to  the  proper  use  of  this  expression  is  merely  a 
question  as  to  the  desirable  use  of  language.  For  the  sake  of  clear- 
ness, this  work  will  be  constructed  on  the  conception  that  no  trans- 
action is  ultra  vires,  unless  such  transaction  is  beyond  the  scope  of 
corporate  activity  authorized  by  the  State. 

The  cases  given  in  Chapter  I,  infra,  are  designed  to  show  what 


NOTE.  379 

transactions  are  intra  vires,  as  contrasted  with  ultra  vires,  used  in  the 
sense  stated  in  the  preceding  paragraph.  That  is  to  say,  what  trans- 
actions are  within  the  scope  of  corporate  activity  authorized  by  the 
State. 

Acts  which  violate  the  compact  between  the  members  will  be  con- 
sidered in  the  chapter  on  Stockholders. 

Acts  which  are  ultra  vires  will  be  considered  in  the  book  on  Un- 
authorized Corporate  Action. 


380       DOWNING    V.  MOUNT   WASHINGTON    ROAD    COMPANY.      [CHAP.  I. 


CHAPTER   I. 
EXTENT  OF  THE  POWERS. 


SECTION  1. 
IN  GENERAL. 


DOWNING   t;.   MOUNT  WASHINGTON   ROAD 
COMPANY. 

40  N.H.  230.     1860. 

Assumpsit  to  recover  the  price  of  certain  articles,  among  them 
eight  omnibuses  and  a  baggage  wagon.  The  onniibuses  and  baggage 
wagon  were  intended  to  be  used  in  convej-ing  passengers  up  and 
down  the  mountain,  after  the  road  was  completed.  The  onniibuses 
were  constructed  in  a  peculiar  way,  and  were  not  fit  for  use  on  ordi- 
nary roads. 

By  their  act  of  incorporation,  passed  July  1,  1853,  the  corporation 
was  empowered  to  lay  out,  make  and  keep  in  repair,  a  road  from  such 
point  in  the  vicinity  of  Mount  Washington  as  they  may  deem  most 
favorable,  to  the  top  of  said  mountain,  etc.,  and  thence  to  some  point 
on  the  northwesterly  side  of  said  mountain,  etc.,  to  take  tolls  of  pas- 
sengers and  for  carriages,  to  build  and  own  toll-houses,  and  to  take 
land  for  their  road. 

It  appeared  that  by  an  additional  act,  passed  July  12,  1856,  the 
corporation  were  authorized  "  to  erect  and  maintain,  lease  and  dispose 
of  any  building  or  buildings,  which  may  be  found  convenient  for  the 
accommodation  of  their  business,  and  of  the  horses  and  carriages 
and  travelers  passing  over  said  road." 

One  question  presented  was  whether  the  purchase  of  such  omni- 
buses and  baggage  wagon  was  within  the  power  of  the  corporation. 

Bell,  C.J.  Corporations  are  creatures  of  the  legislature,  ha\'ing 
no  other  powers  than  such  as  are  given  to  them  by  their  charters,  or 
such  as  are  incidental,  or  necessary  to  carry  into  effect  the  purposes 
for  which  they  were  established.  Trustees  v.  Peaslee,  15  N.H.  330; 
Perrine  v.  Chesapeake  Canal  Co.,  9  How.  172.  In  giving  a  construc- 
tion to  the  powers  of  a  corporation,  the  language  of  the  charter  should 
in  general  neither  be  construed  strictly  nor  liberally,  but  according 
to  the  fair  and  natural  import  of  it,  with  reference  to  the  purposes 


SECT.  I.]       DOWNING    V.  MOUNT    WASHINGTON    ROAD    COMPANY,       381 

and  objects  of  the  corporation.  Enfield  Bridge  v.  Hartford  R.R.,  17 
Conn.  454;  Strauss  v.  Eagle  Co.,  5  Ohio  (N.S.)  39. 

If  the  powers  conferred  are  against  common  right,  and  trench  in 
any  way  upon  the  privileges  of  other  citizens,  they  are,  in  cases  of 
doubt,  to  be  construed  strictly,^  but  not  so  as  to  impair  or  defeat  the 
objects  of  the  incorporation. - 

In  the  present  case  the  power  to  take  the  lands  of  others,  and  to 
take  tolls  of  travelers,  must  be  strictly  construed,  if  doubts  should 
arise  on  those  points;  but  it  is  not  seen  that  the  other  grants  to  the 
defendant  corporation  should  not  receive  a  fair  and  natural  construc- 
tion. 

The  charter  of  the  Mount  Washington  road  empowers  them  to 
lay  out,  make  and  keep  in  repair,  a  road  from  Peabody  River  Val- 
ley to  the  top  of  Mount  Washington,  and  thence  to  some  point  on 
the  northwest  side  of  the  mountain.  It  grants  tolls  on  passengers 
and  carriages,  and  authorizes  them  to  take  lands  of  others  for  their 
road,  and  to  build  and  own  toll-houses,  and  erect  gates,  and  appoint 
toll-gatherers  to  collect  their  tolls.  The  remaining  provisions  contain 
the  ordinary  powers  of  corporations,  relating  to  directors,  stock, 
dividends,  meetings,  etc.   Laws  of  1853,  chapter  1486. 

This  charter  confers  the  usual  powers  heretofore  granted  to  turn- 
pike corporations,  and  no  others.  The  most  natural  and  satisfactory 
mode  of  ascertaining  what  are  the  powers  incidentally  granted  to  such 
companies,  is  to  inquire  what  powers  have  been  usually  exercised 
under  them,  without  question  by  the  pubUc  or  by  the  corporators. 
It  may  be  safely  assumed  that  the  powers  which  have  not  heretofore 
been  found  necessary,  and  have  not  been  claimed  or  exercised  under 
such  charters,  are  not  to  be  considered  generally  as  incidentally 
granted.  Such  charters  have  in  former  years  been  very  common  in 
this  and  other  States,  and  they  have  not,  so  far  as  we  are  aware,  been 
understood  as  authorizing  the  corporations  to  erect  hotels,  or  to  es- 
tablish stage  or  transportation  Unes,  to  purchase  horses  or  carriages, 
or  to  employ  drivers  in  transporting  passengers  or  freight  over  their 
roads;  and  no  such  powers  have  any  where  been  claimed  or  exercised 
under  them.  We  are,  therefore,  of  opinion  that  the  power  to  estabhsh 
stage  and  transportation  lines  to  and  from  the  mountain,  to  purchase 
carriages  and  horses  for  the  purpose  of  carrj-ing  on  such  a  business, 
was  not  incidentally  granted  to  the  defendant  corporation  by  their 
charter.  State  v.  Commissioners,  3  Zab.  510. 

But  it  is  contended  that  the  power  to  make  this  contract  is  con- 
ferred by  the  act  in  amendment  of  the  charter,  passed  July  12,  1856. 
By  this  act  the  corporation  may  ''erect  and  maintain,  lease  and  dis- 
pose of  any  building  or  buildings  which  may  be  found  convenient 
for  the  accommodation  of  their  business,  and  of  the  horses  and  car- 

1  See  Stourbridje  Canal  v.  Wheeley,  2  Barn.  &  Ad.  792. 
'  See  Whitaker  v.  Delaware  Canal  Co.,  S7  Pa.  34. 


382  PEOPLE    EX    REL.  TIFFANY    &    CO.  I'.  CAMPBELL.       [cHAP.  I. 

riages  and  travelers  passing  over  thcii'  said  road."  By  their  business, 
which  the  buildings  to  be  erected  were  designed  to  accommodate, 
it  is  said  the  legislature  must  have  intended  some  permanent  and 
continuing  business  beyond  that  of  merely  building  and  maintain- 
ing a  road;  and  that  it  could  hv  no  other  than  that  of  erecting  a  hotel 
on  the  mountain,  and  establishing  lines  of  carriages,  for  the  purpose 
of  carrying  visitors  up  and  down  the  mountain. 

But  the  foundation  of  this  implication  is  very  slight.  The  express 
grant  is  of  an  authority  to  erect,  etc.,  buildings,  not  of  all  kinds,  but 
such  as  ma\'  be  found  convenient  for  the  acconnnodation  of  their 
business,  and  of  travelers,  etc.  The  business  here  referred  to  must  be 
understood  to  be  such  as  they  are  by  their  charter  authorized  to  en- 
gage in.  If  nothing  had  been  said  of  horses  and  travelers,  there 
could  hardly  be  any  foundation  for  the  idea  that  a  hotel  could  have 
been  contemplated  l\v  the  legislature.  Buiklings  suitable  for  the 
accommodation  of  their  toll-gatherers  and  workmen  employed  on 
their  road,  would  probably  be  thought  every  thing  the  legislature 
intended  to  authorize  by  this  additional  act.  Connected  as  this  au- 
thority now  is  with  travelers,  horses  and  carriages,  there  is  scarce 
a  pretence  for  argument,  that  this  additional  act  goes  any  further 
than  the  original  act,  to  authorize  a  stage  and  transportation  com- 
pany. It  is  not  unlikely  that  some  of  the  projectors  of  this  enterprise 
intended  to  secure  much  more  extensive  rights  than  those  of  a  turn- 
pike and  hotel  company,  but  it  seems  certain  they  have  not  exliibited 
this  feature  of  their  case  to  the  legislature  so  distinctly  as  to  secure 
their  sanction,  and  the  charter  and  its  amendment  as  yet  justifies 
them  in  no  such  claim. 

[The  court  hekl  that  the  defendant  was  not  liable  on  the  contract 
for  the  omnibuses  and  baggage  wagon.] 

Note.  —  See,  accord,  Chewacha  Lime  Works  v.  Dismukes,  87  Ala. 
344  (a  corporation  whose  objects  are  to  mine  lime  rock  and  manu- 
facture the  same  has  no  implied  or  incidental  power  to  carry  on  a 
general  mercantile  business) ;  Cherokee  Iron  Co.  v.  Jones,  52  Ga. 
276  (a  corporation  organized  to  manufacture  pig  iron  has  no  power 
to  erect  a  corn  and  flour  mill) ;  Bangor  Boom  Corporation  v.  Whiting, 
29  Me.  123  (a  corporation  with  power  to  boom  lumber  has  no  power 
to  drive  lumber). 

PEOPLE  ex  rel.   TIFFANY  &  CO.   v.   CAMPBELL. 

144  N.Y.  166.     1894. 

One  question  was  whether  the  capital  of  Tiffany  &  Co.  employed 
in  the  purchase  and  sale  of  goods  not  manufactured  by  it  was  sub- 
ject to  taxation,  or  whether  it  was  exempted  from  taxation  under  a 
statute  exempting  manufacturing  corporations  from  taxation. 


SECT.   I.]       PEOPLE    EX    REL.    TIFFANY    &    CO.  V.  CAMPBELL.  383 

Andrews,  Ch.J.  Tliis  appeal  is  from  an  order  of  the  General 
Term  dismissing  a  writ  of  certiorari  to  review  a  decision  of  the  state 
comptroller  subjecting  to  taxation  a  portion  of  the  relator's  capital 
employed  in  this  state  in  the  years  1889,  1890  and  1891. 

The  relator  is  a  manufactm-ing  corporation  in  this  state,  organized 
under  the  general  law  for  the  incorporation  of  manufacturing  com- 
panies, for  the  manufacture  and  sale  of  gold  and  silverware  and 
other  articles  of  ornament  and  use.  Its  capital,  stated  in  the  certi- 
ficate, is  S2,400,000,  which  by  accretion  now  exceeds  $3,000,000. 
It  has  a  store  for  the  sale  of  its  products  in  the  cit}^  of  New  York.  It 
emploj^s  from  six  to  eight  hundred  men  in  its  manufacturing  business 
in  this  state  and  about  eighty  per  cent  of  its  capital.  All  of  this  cap- 
ital, except  a  portion  varying  in  different  years  from  twelve  to  fif- 
teen per  cent,  is  invested  in  its  manufacturing  business.  The  portion 
not  employed  in  that  way,  amounting  on  the  average  to  about  S300,- 
000  a  year,  is  employed  in  the  purchase  and  sale  of  goods,  principally 
of  foreign  manufacture,  of  the  same  general  character  as  the  goods 
manufactured  by  the  relator,  but  of  a  cheaper  description,  which  it 
cannot  itself  advantageously  manufacture,  but  which  are  neces- 
sary in  order  to  make  its  stock  complete,  and  to  meet  the  wants  of 
customers. 

It  is  claimed  that  the  purchase  and  sale  of  goods  not  manufac- 
tured by  the  relator,  merely  to  complete  its  stock,  and  Kmited  to 
articles  which  it  could  not  advantageously  manufacture  itself,  was 
incidental  and  subsidiary  to  the  exercise  of  its  corporate  power  as  a 
manufacturing  company,  and,  therefore,  within  the  power  granted. 
It  is  well  settled  that  a  corporation  possesses  not  only  powers  speci- 
fically granted  in  terms,  but  (as  expressed  in  the  Revised  Statutes) 
such  powers  "as  shall  be  necessary  to  the  exercise  of  the  powers  so 
enumerated  and  given."  (1  Rev.  St.  600,  §  3.)  The  unexpressed  and 
incidental  powers  possessed  by  a  corporation  are  not  limited  to  such 
as  are  absolutely  or  indispensabl}^  necessary  to  enable  it  to  exercise 
the  powers  specifically  granted,  "\\niatever  incidental  powers  are 
reasonably  necessary  to  enable  it  to  perform  its  corporate  functions 
are  implied  from  the  powers  affirmativelj'-  granted.  (Comstock,  J., 
Curtis  V.  Leauitt,  15  N.Y.  64.)  But  powers  merely  convenient  or  use- 
ful are  not  implied  if  they  are  not  essential,  ha\dng  in  view  the  na- 
ture and  object  of  the  incorporation^  The  power  assumed  by  the 
relator  in  this  case  to  supply  from  other  sources  goods  which  it  could 
not  itself  profitably  manufacture,  was  a  convenient  and  useful  one, 
and  doubtless  contributed  to  the  success  of  its  general  business,  but  it 
cannot,  we  think,  be  said  to  be  essential  to  its  business  as  a  manufac- 
turing corporation.  The  power  to  sell  its  products,  even  if  it  had  not 
as  in  this  case  been  expressly  included  among  the  enumerated  powers, 
would  be  necessarily  implied  in  the  charter  of  a  manufacturing  cor- 
poration. Without  the  power  of  sale  the  business  of  production  could 


384  U.  S.  BREWING    CO.  V.  DOLESE.  [cHAP.  I. 

not  be  carried  on.  The  power  to  sell  is  an  indispensable  adjunct  to 
a  manufacturing  business.  But  the  same  considerations  tlo  not  apply 
where  a  manufacturing  corporation  is  also  engaged  in  the  jjurchase 
and  sale  of  goods  manufactured  by  other  parties.  This  part  of  the 
relator's  business  was  not,  we  think,  within  its  chartered  powers. 
[The  court  held  that  a  tax  was  payable  on  the  capital  so  employed.] 

Note. — See  also  Nicollet  Bank  v.  Frisk-Turner  Co.,  71  Minn. 
413. 


U.   S.   BREWING   CO.   v.   DOLESE. 

259  111.  274.     1913. 

Mr.  Justice  Farmer  delivered  the  opinion  of  the  court: 
Plaintift"  in  error  (hereafter  called  plaintiff)  ijrought  this  action  of 
assumijsit  in  the  municipal  court  of  the  city  of  Chicago  against  de- 
fendant in  error  (hereafter  referred  to  as  defendant)  for  the  recovery 
of  $10,000  alleged  to  be  due  plaintiff  from  tlefendant.  Plaintiff  is  a 
corporation  organized  under  the  laws  of  Illinois  "to  manufacture 
and  sell  all  kinds  of  beer,  ale  and  porter,  to  buy  and  sell  all  kinds 
of  brewer's  materials  and  supplies,  and  to  carry  on  a  general  brewer's 
business  in  all  its  bi-anches."  Defendant  is*a  corporation  organized 
"to  quarry  stone,  sand,  clay,  earth  and  gi-avel;  to  manufacture  and 
deal  in  stone,  brick,  hme  and  cement,  and  deal  also  in  sand,  clay, 
earth,  gravel,  sewer  and  water  pipe,  stucco,  lumber  and  building 
materials  of  all  kinds,  coal  and  ice,  and  to  contract  for,  make  and 
construct  pul^lic  and  private  improvements  in  which  any  such  ma- 
terials are  employed,  including  roads  and  bridges."  Defendant's 
quarries  were  near  the  village  of  Gary  (or  Hodgkins),  in  Lyons 
township,  Cook  county,  about  fifteen  miles  from  the  business  dis- 
trict of  the  city  of  Chicago.  The  village  is  situated  on  the  Atchison, 
Topeka  and  Santa  Fe  railroad  and  is  about  three-quarters  of  a  mile 
from  the  quarries.  In  1905  there  were  but  few  houses  in  the  neigh)  )or- 
hood  where  employees  of  defendant  could  live  and  the  transportation 
facilities  for  conveying  workmen  to  and  from  the  quarries  were  in- 
adequate and  inconvenient.  Defendant  employed  between  one  hun- 
dred and  two  hundred  workmen,  and  in  1905  it  employed  an  archi- 
tect and  caused  plans  to  be  prepared  for  a  building  it  proposed  to 
erect  for  a  boarding  house  to  accommodate  its  employees.  Before 
any  work  was  done  by  defendant  on  the  building,  negotiations  were 
entered  into  by  it  with  plaintiff  for  the  construction  of  the  building 
by  plaintiff.  These  negotiations  resulted  in  an  agreement  being 
reached  by  which  plaintiff  was  to  erect  the  building,  part  of  it  to  be 
used  as  a  saloon.  On  November  5,  1905,  defendant  leased  to  plain- 


SECT.  I.]  U.  S.  BREWING    CO.  V.-  DOLESE.  385 

tiff,  for  a  term  commencing  January  1,  1906,  and  ending  December 
31,  1930,  a  tract  of  land  described,  one  hundred  feet  wide  by  two 
hundred  feet  deep,  upon  which  plaintiff  agreed  to  erect  at  its  own 
expense  and  maintain  for  the  term  of  the  lease,  unless  sooner  termi- 
nated under  the  provisions  thereof,  "a  certain  building,  and  to  use 
and  operate  the  same  continuously  for  the  entire  term  aforesaid,  as 
a  saloon  and  boarding  house,  said  buildmg  to  cost  the  sum  of  $6700." 
Plans  and  drawings  for  the  building  were  made  part  of  the  agree- 
ment. Plaintiff  erected  an  L-building  twenty-four  feet  wide  by  one 
hundred  and  seventy-seven  feet  long,  and  an  addition  twenty  feet  by 
thirty  feet.  The  portion  of  the  building  devoted  to  use  for  boarding- 
house  purposes  consisted  of  a  kitchen,  twenty-four  feet  by  twenty- 
four  feet ;  a  dining  room,  twenty-four  feet  by  eighty  feet ;  f orty-thi-ee 
double  bed-rooms,  and  an  apartment  for  the  tenant.  The  part  of 
the  building  devoted  to  saloon  purposes  was  twenty-four  feet  by 
thirty  feet.  The  lease  contained  provisions  concerning  its  termina- 
tion by  defendant  upon  notice,  and  for  the  appointment  of  appraisers 
to  value  the  building  and  make  an  award  for  the  payment  therefor 
by  defendant  if  it  elected  to  terminate  the  lease  before  its  expiration, 
but  those  provisions  are  not  here  involved.  The  lease  provided  that 
"should  the  district  within  which  the  premises  herein  demised  are 
located  become  a  prohibition  or  local  option  district,  so  that  on  ac- 
count thereof  it  shall  be  necessary  to  suspend  the  saloon  business 
on  said  premises  within  three  years  from  the  date  of  this  contract, 
then  no  such  appraisement  shall  be  made,  but  said  first  party  [de- 
fendant] shall  pay  to  the  said  second  party  [plaintiff]  the  cost  price 
of  the  building  and  improvements  on  said  premises  such  cost  price 
not  to  exceed,  however,  the  sum  of  S10,000."  The  lease  authorized 
plaintiff  to  sublet  the  building,  and  after  its  completion  plaintiff 
leased  it  at  a  monthly  rental  of  $200,  with  a  provision  that  if  the 
lessee  or  his  assigns  purchased  from  plaintiff  all  beer  sold  on  the 
premises,  a  deduction  or  rebate  would  be  allowed  of  $120  on  each 
month's  rent.  The  building  was  conducted  as  a  boarding  house  and 
saloon  from  the  time  of  its  completion.  At  the  township  election 
held  April  7,  1908,  the  township  of  Lyons  became  prohibition  or 
anti-saloon  territory,  and  on  April  9  plaintiff  notified  defendant,  in 
writing,  of  that  fact,  demanded  the  pajTnent  of  $10,000,  and  offered 
to  surrender  the  building  immediately  upon  payment.  Defendant 
did  not  make  the  payment  and  appears  to  have  ignored  the  demand. 
This  suit  was  begun  for  the  recovery  of  $10,000  on  August  4,  1908. 
The  declaration  consisted  of  a  special  count  on  the  contract  and  the 
common  counts.  Defendant  pleaded  the  general  issue  and  a  special 
plea  that  the  contract  declared  on  in  the  special  count  was  ultra  vires. 
The  cause  was  by  agreement  heard  before  the  court  without  a  jury. 
The  court  found  the  issues  for  the  plaintiff,  assessed  its  damages  at 
$8490.12  and  rendered  judgment  therefor.  Defendant  prosecuted  an 


3S6  U.  S.  BREWING    CO.  V.  DOLESE.  [ciIAP.  I. 

appeal  to  the  Appellate  Court  for  the  First  District,  and  that  court 
reversed  the  judgment  of  the  municipal  court.  The  Appellate  Court 
was  of  opinion  the  contract  wtus  ultra  I'ires  the  plaintilT  corporation; 
that  there  could  be  no  recovery  upon  the  common  counts,  under  the 
evidcn(!e,  upon  an  implied  contract,  and  the  cause  was  therefore  not 
remandtxi.   A  writ  of  certiorari  was  granted  by  this  court. 

The  view  of  the  municipal  court,  as  indicated  by  propositions  of 
law  held  and  refused,  was  that  the  contract  was  ultra  virca  but  that 
plaintiff  was  entitled  to  recover  the  reasonable  value  of  the  building 
under  an  implietl  contract.  While  plaintiff  insists  it  is  entitled  to 
recover  upon  an  implic<l  contract  if  the  written  contract  is  ultra  vires, 
it  contends  that  said  written  contract  was  not  ultra  vires,  and  this 
appears  to  have  been  the  principal  theory  upon  which  the  case  was 
trie<l  in  the  municipal  court.  We  agree  with  the  municipal  and  Ap- 
pellate Courts  that  it  was  beyond  the  power  of  plaintiff  to  make  the 
contract  and  that  the  contract  is  void. 

Phiintiff  relies  upon  the  rule  announced  in  a  number  of  cases  that 
it  is  within  the  power  of  a  corporation  to  adopt  any  proper  and  con- 
venient means  tending  directly  to  accomplish  the  purposes  for  which 
it  was  organized,  n(jt  amounting  to  the  transaction  of  a  separate,  un- 
authorized business.  Among  other  similar  cases,  reliance  is  placed 
upon  Heims  Brewing  Co.  v.  Flannery,  137  111.  309,  and  Kraft  v.  West 
Side  Brewery  Co.,  219  id.  205.  In  the  Ilcims  Brewing  Co.  case  the 
corporation  was  organized  with  power  "to  acquire,  own  and  use  all 
necessary  property  and  means  to  prosecute  anil  conduct  the  business 
of  brewing  and  disposing  of  beer,  with  all  such  powers  as  shall  be 
essential  and  incident  to  the  convenient  and  successful  operation  of 
a  brewery."  It  leased  a  building  for  a  period  of  five  years  for  saloon 
puri^oses.  Before  the  term  exjnred  it  abandoned  the  premises  and 
refused  to  pay  the  rent.  When  suit  was  brought  it  defended  on  the 
ground  that  the  contract  was  ultra  vires.  A  part  of  the  contract  with 
the  owner  of  the  building  was,  that  the  owner  would  not  engage  in 
the  saloon  ])usiness  during  the  period  of  the  lease  nor  rent  other 
property  owned  or  controlled  by  him  in  the  block  for  saloon  pur- 
poses. The  object  of  the  contract  and  lease  was  to  promote  the 
business  for  which  the  brewery  was  organized  by  increasing  the  sale 
and  consumption  of  beer  manufactured  by  it,  and  it  was  held  the 
contract  was  within  the  powers  of  the  corporation  and  was  valid 
and  binding.  In  the  Kraft  case  the  brewery  loaned  Kraft  money  to 
erect  a  building  for  a  saloon,  living  apartments  for  the  owner,  and 
for  a  hall  in  the  upper  story.  The  brewery  was  to  be  given  a  lease 
upon  the  premises  and  no  other  beer  than  that  manufactured  by  it 
was  to  be  sold  thereon  during  the  term  of  the  lease.  A  mortgage 
was  given  the  brewery  to  secure  the  pajonent  of  the  loan,  and  when 
it  instituted  proceedings  to  foreclose  the  mortgage  the  defense  of 
idtra  vires  was  interposed.   This  court  held  that  the  loan  was  made 


SECT.  I.]  U.  S.  BREWING    CO.  V.  DOLESE.  387 

for  a  purpose  not  too  remotely  connected  with  the  promotion  of  the 
business  of  the  brewery  and  that  it  was  within  the  imphed  powers 
of  the  corporation. 

We  do  not  think  the  above  cases,  and  others  rehed  upon,  sustain 
plaintiff's  contention.  It  is  probably  true  that  the  boarding  house 
would  be  of  benefit  to  the  saloon  because  of  increased  patronage  at 
the  bar,  but  because  a  corporation  like  plaintiff  might  do  some  things 
under  its  implied  powers  to  promote  its  business,  it  does  not  follow 
that  it  may  engage  in  any  line  of  business  or  occupation  not  au- 
thorized by  its  charter  powers  because  such  business  or  occupation 
would  promote  the  business  for  which  the  corporation  was  organized. 
It  would  be  rather  a  far  stretch  of  corporate  powers  to  say  that  a 
corporation  organized  to  manufacture  and. sell  beer,  ale  and  porter 
and  carry  on  a  general  brewer's  business  in  all  its  branches,  could 
establish  and  operate  boarding  houses  for  the  purpose  of  increasing 
the  sale  of  its  beer.  This  court  said  in  Fritze  v.  Equitable  Building 
and  Loan  Society,  186  111.  183:  "By  an  implied  power  is  meant  one 
that  is  directly  and  immediately  appropriate  to  the  execution  of  the 
specific  power  granted,  and  not  one  that  has  slight  or  remote  relation 
to  it."  In  Best  Brewing  Co.  v.  Klassen,  185  111.  37,  the  court  said: 
"Many  acts  can  be  suggested  which,  though  beneficial  to  the  busi- 
ness of  a  corporation,  are  too  remote  from  its  general  purposes  to  be 
deemed  reasonably  within  its  implied  powers.  What  is  and  what  is 
not  too  remote  must  be  determined  according  to  the  facts  of  each 
case.  The  rule  has  been  stated  to  be:  In  exercising  powers  conferred 
by  its  charter,  a  corporation  '  may  adopt  any  proper  and  convenient 
means  tending  directly  to  their  accomplishment,  and  not  amount- 
ing to  the  transaction  of  a  separate,  unauthorized  business.'"  Here, 
more  than  three-fourths  of  the  building  and  of  the  investment  for 
its  construction  was  for  boarding-house  purposes,  which  was  a  busi- 
ness plaintiff  had  no  power,  either  express  or  implied,  to  engage  in. 
If  it  did  have  such  power,  we  cannot  see  where  the  line  could  be 
drawn  against  its  engaging  in  any  business  in  connection  with  its 
manufacture  and  sale  of  beer  that  would  promote  that  object.  In 
our  view  of  the  case  no  action  could  be  sustained  upon  the  contract. 

[The  portion  of  the  opinion  relating  to  recovery  on  the  common 
counts  is  omitted.] 

Note.  —  See  also  Best  Brewing  Co.  v.  Klassen,  185  111.  37.  Cf. 
Central  Lumber  Co.  v.  Kelter,  201  111.  503. 

Davis  V.  Old  Colony  R.R.  Co.,  131  Mass.  258.  The  directors  of  two 
corporations,  one  a  railroad  corporation,  and  one  organized  to  manu- 
facture and  sell  musical  instruments,  undertook  in  the  names  of  the 
corporations  to  pay  part  of  the  expenses  of  holding  the  World's  Peace 
Jubilee  and  International  Music  Festival  in  Boston.  The  directors 
in  so  doing  acted  "with  the  reasonable  belief  that  the  holding  of  the 


388  MALONE    V.  LANCASTER    GAS    LIGHT    CO.  [CHAP.  I, 

festival  proposed  would  be  of  great  pecuniary  benefit  to  the  corpora- 
tion by  increasing  its  proper  business,"  and  that  then  so  undertaking 
would  promote  the  holding  of  the  festival.  The  coui-t  held  tl»at  no 
action  could  be  maintained  on  such  undertaking  against  either  cor- 
poration. 


IVIALONE  V.   LANCASTER  GAS  LIGHT  CO. 

182  Pa.  309.     1897. 

A  STOCKHOLDER  in  the  defendant  sought  to  enjoin  the  issue  by  it 
of  additional  stock  and  bonds  on  two  giounds.  One  giound  was  that 
the  new  debt  was  to  be  created  for  the  purchase  of  certain  patent 
appliances,  not  for  the  manufacture  or  distribution  of  gas,  but  for 
its  consumj^tion,  the  dealing  hi  which  appliances  was  not  witliin 
the  company's  charter  purposes. 

Mr.  Justice  Mitchell.  The  second  branch  of  the  case  raises  a 
mixed  question  of  law  and  fact,  namely,  the  authority  of  the  Lan- 
caster Gas  Company  to  purchase  the  right  to  use  and  deal  in  the 
steam  heater,  radiating  mantel  and  gas  consuming  apjiliances  cov- 
ered by  the  Backus  patents.  It  is  argued  for  plaintiff  that  the  charter 
purpose  of  the  Gas  Company  is  limited  by  the  words  "manufactur- 
ing and  supplying  illuminating  and  heating  gas,"  and  that  notiiing 
can  be  included  which  is  not  a  necessary  part  or  appliance  for  manu- 
facturing or  supplying.  This  is  too  narrow  and  literal  a  construc- 
tion, and  overlooks  the  fundamental  object  of  the  corporation,  the 
manufacture  and  supply  of  gas  to  customers  for  profit.  It  would  be 
of  no  use  to  manufacture  gas  if  there  were  not  customers  to  buy,  and 
hence  the  company  may  fairly  supply  not  only  the  gas  itself,  but 
incidentally  such  appliances  and  conveniences  as  will  induce  new 
customers  to  use  gas  or  old  ones  to  use  more.  This  is  a  legitimate 
mode  of  extending  the  company's  business,  in  direct  furtherance  of 
its  charter  object.  In  considering  such  ciuestions,  much  weight  must 
be  allowed  to  the  judgment  of  the  parties  most  interested,  the  officers 
and  stockholders  of  the  corporation  itself,  and  while  they  will  not 
be  permitted,  as  against  the  commonwealth  or  a  dissenting  stock- 
holder, to  go  outside  of  their  legitimate  corporate  business,  yet  where 
the  act  questioned  is  of  a  nature  to  be  fairly  considered  incidental  or 
auxiUary  to  such  business,  it  will  not  be  unlawful,  because  not  within 
the  literal  terms  of  the  corporate  grant. 

This  is  the  general  rule  even  where  corporate  pri\nleges  are  most 
strictly  construed.  "  Corporations  may  transact,  in  addition  to  their 
main  undertaking,  all  such  subordinate  and  connected  matters  as 
are,  if  not  essential,  at  least  very  convenient  to  the  due  prosecution 
of  the  former:"  Green's  Brice's  Ultra  Vires  (2d  ed.),  ch.  3,  §  2,  p.86. 


SECT.  I.]  MALONE    V.  LANCASTER    GAS    LIGHT    CO.  389 

The  illustration  given  by  Mr.  Brice  is  that  railway  companies  may 
erect  refreshment  rooms  or  book  stalls,  and  "adopt  other  similar 
measures  for  both  providing  for  the  comfort  of  their  customers  and 
adding  to  their  own  receipts."  The  American  illustrations  in  the 
same  line,  which  have  revolutionized  modern  travel,  will  occur  to 
everyone.  In  Brown  v.  Winnisimmet  Co.,  11  Allen,  326,  it  was  held 
that  the  contract  of  a  ferry  company  to  charter  one  of  its  boats  for 
temporary  use  in  another  business  was  valid.  Many  illustrations  are 
suggested  in  the  opinion  of  Bigelow,  C.J.,  who  said,  "We  know  of 
no  rule  or  principle  by  which  an  act  creating  a  corporation  for  cer- 
tain specific  objects,  or  to  carry  on  a  particular  trade  or  business,  is 
to  be  strictly  construed  as  prohibitory  of  all  other  dealings  or  trans- 
actions not  coming  within  the  exact  scope  of  those  designated.  Un- 
doubtedly the  main  business  of  a  corporation  is  to  be  confined  to  that 
class  of  operations  which  properly  appertain  to  the  general  purposes 
for  which  its  charter  was  granted.  But  it  may  also  enter  into  con- 
tracts and  engage  in  transactions  which  are  incidental  or  auxiliary 
to  its  main  business,  or  which  may  become  necessary,  expedient  or 
profitable  in  the  care  and  management  of  the  property  which  it  is 
authorized  to  hold."  See  also  Lyndeborough  Glass  Co.  v.  Mass.  Glass 
Co.,  Ill  Mass.  315.  And  in  our  own  case  of  Watts's  Appeal,  78  Pa. 
370,  a  land  company's  charter  purpose  was  to  sell  a  large  tract  of 
land,  but  it  was  authorized  inter  alia  "to  aid  in  the  development  of 
the  minerals  and  other  materials,"  and  also  "to  promote  the  clear- 
ing and  settlement  of  the  country."  The  directors,  among  other 
things,  built  sawmills  and  a  hotel.  It  was  held  that  their  acts  were 
not  ultra  vires,  Gordon,  J.,  saying  (page  392):  "We  know  of  no 
other  material  upon  these  lands  more  abundant  or  more  obviously 
requiring  development  than  the  timber.  Neither  can  we  conceive  of 
anything  better  calculated  to  develop  this  kind  of  materials  than 
sawmills.  So  we  regard  a  hotel  of  some  kind  in  so  large  a  territory 
of  wild  lands,  as  not  only  a  convenience  adding  greatly  to  the  settle- 
ment of  the  country,  but  a  necessity." 

In  the  present  case  the  stockholders  of  the  Gas  Company  by  an 
almost  unanimous  vote,  decided  that  the  purchase  of  the  Backus 
patents  was  to  the  advantage  of  the  company's  business  as  a  manu- 
facturer and  distributor  of  gas,  and  the  court  below  has  found  as  a 
matter  of  fact  that  they  were  right.  We  cannot  say  as  matter  of  law 
that  they  were  wrong. 

Note.  —  See  also  Central  Ohio  Co.  v.  Capital  City  Co.,  60  Ohio  St, 
96;  Searight  v.  Payne,  6  Lea  (Tenn.)  283. 


390  PEOPLE    V.  PULLMAN    CAR    CO.  [CHAP.   I. 

PEOPLE  V.   PULLMAN  CAR  CO. 

175  111.  125.     1898. 

Mr.  Justice  Boggs  delivered  the  opinion  of  the  court: 

Tliis  is  an  information  in  the  nature  of  a  quo  xvarranio,  filed  by  the 
Attorney  General  in  the  circuit  court  of  Cook  county,  in  the  name 
and  on  behalf  of  the  People  of  the  State  of  Illinois,  against  Pullman's 
Palace  Car  Company.  Said  company  is  a  corporation,  organized  in 
18G7  by  a  special  act  of  the  legislature  of  Illinois,  entitled  "An  act 
to  incorporate  Pullman's  Palace  Car  Company."  (2  Private  Laws  of 
1867,  p.  337.) 

Sections  4  and  6  of  this  act  were  as  follows: 

"Sec.  4.  The  said  corporation  shall  have  power  to  manufacture, 
construct  and  purchase  railway  cars,  with  all  convenient  append- 
ages, and  supjjlies  for  persons  traveling  therein,  and  the  same  may 
sell  or  use,  or  permit  to  be  used,  in  such  manner  and  upon  such  terms 
as  the  said  company  may  think  fit  and  jH'opor." 

"Sec.  6.  It  may  be  lawful  for  the  company  hereby  incorporated 
to  purchase,  acquire  and  hold  such  real  estate  as  may  be  deemed 
necessary  for  the  successful  prosecution  of  their  business,  and  may 
have  power  to  sell  and  convey  the  same." 

The  information  sets  out  the  charter  of  the  defendant,  and  then 
alleges  certain  acts  which  are  alleged  to  be  usurpations  by  the  de- 
fendant of  powers  not  conferred  by  its  charter,  and  concludes  with 
a  prayer  for  the  forfeiture  of  the  charter  of  the  corporation. 

The  allegations  contained  in  the  information  of  the  usurpations  of 
power  on  the  part  of  the  defendant  are,  in  substance,  as  follows: 

First  —  That  it  owns  and  controls  a  large  ten-story  business  block, 
together  with  the  ground  on  wliich  it  stands,  worth  two  million  dol- 
lars, in  the  business  center  of  the  city  of  Chicago;  that  it  rents  three- 
fourths  of  said  block  to  persons,  firms  antl  corporations,  and  derives 
a  large  income  therefrom;  that  this  business  block  is  located  many 
miles  from  its  works,  or  what  is  called  the  "Town  of  Pullman,"  and 
a  small  portion  of  it  only  is  occupied  by  the  company's  employees ; 
that  this  business  block  was  built  as  an  investment,  and  not  because 
it  had  any  real  necessity  therefor. 

A  corporation  in  our  State  has  its  existence  by  virtue  of  the  enact- 
ment, general  or  special,  of  the  law-making  power.  The  appellee 
corporation  was  created  by  a  special  act  of  the  General  Assembly. 
The  only  difference  between  a  corporation  organized  under  a  general 
law  and  one  created  by  a  special  statute  is,  "that  in  the  former  we 
look  to  the  certificate  of  the  promoters,  while  in  the  latter  we  look 
to  the  special  statute  to  ascertain  the  scope  of  the  powers  of  the  cor- 
poration." The  rule  for  construing  the  instruments  must  neces- 
sarily be  the  same,  viz.,  the  powers  specifically  enumerated,  and 


SECT.  I.]  PEOPLE  V.   PULLMAN  CAR  CO.  391 

such  other  powers  as  are  incidental  or  necessary  to  carry  those  powers 
into  effect,  but  none  others  may  be  exercised  by  the  corporation. 
Rockhold  V.  Canton  Masonic  Benevolent  Society,  129  111.  440. 

The  enactment  creating  the  appellee  corporation  is  the  full  meas- 
ure of  its  power.  In  order  to  enable  it  to  carry  into  execution  the 
powers  thus  conferred  it  may  exercise  other  powers,  known  to  the 
law  as  incidental  or  implied  powers.  Implied  powers  exist  only  to 
enable  a  corporation  to  carry  out  the  express  powers  granted,  — 
that  is,  to  accomplish  the  purpose  of  its  existence,  —  and  can  in  no 
case  avail  to  enlarge  the  express  powers,  and  thereby  warrant  it  to 
devote  its  efforts  and  capital  to  other  purposes  than  such  as  its 
charter  expressly  authorizes,  or  to  engage  in  collateral  enterprises 
not  directly  but  only  remotely  connected  with  its  specific  corporate 
purposes.  A  power  which  the  law  will  regard  as  existing  by  impUca- 
tion  must  be  one  in  a  sense  necessary,  —  that  is,  needful,  suitable 
and  proper  to  accomplish  the  object  of  the  grant,  and  one  that  is 
dii-ectly  and  immediately  appropriate  to  the  execution  of  the  specific 
powers,  and  not  one  that  has  but  a  slight,  indirect  or  remote  relation 
to  the  specific  purposes  of  the  corporation.  Illinois  Conference 
Female  College  v.  Cooper,  25  111.  133;  Caldivell  v.  City  of  Alton,  33  id. 
416;  Chicago,  Pekin  and  Southwestern  Railroad  Co.  v.  Town  of  Mar- 
seilles, 84  id.  643;  Chicago  Gas  Light  Co.  v.  People's  Gas  Light  Co., 
121  id.  530;  Mott  v.  Danville  Seminary,  129  id.  403;  People  v.  Chicago 
Gas  Trust  Co.,  130  id.  268;  North  Side  Railroad  Co.  v.  Worthington 
(Tex.),30S.W.Rep.  1055;  Field  on  Corporations,  §§  53,54;4Thomp- 
son's  Law  of  Corp.  §  5838;  2  Beach  on  Private  Corp.  §  385;  Green's 
Brice's  Ultra  Vires,  88,  89. 

Keeping  these  definitions  as  to  implied  pov/ers  in  view,  we  may 
proceed  to  determine  whether  the  acts  set  forth  in  the  pleas  are  within 
or  beyond  the  measure  of  power  possessed  by  the  appellee  company. 

The  information  charges  that  the  defendant  owns  and  controls 
within  the  city  of  Chicago  a  large  ten-story  business  block,  together 
with  the  ground  on  which  said  building  stands,  worth  $2,000,000; 
that  the  defendant  occupies  a  portion,  only,  of  said  building  for 
purposes  of  its  own  corporation  business,  and  that  it  leases  about 
three-fourths  of  the  building  to  other  persons,  firms  or  corporations, 
and  receives  a  large  consideration  from  the  occupants  thereof  as 
rentals;  that  said  block  was  built  by  the  defendant  as  an  investment, 
and  charges  that  the  said  building  was  erected  without  warrant  or 
authority  of  law.  The  defendant  sets  up  by  way  of  inducement  in 
its  plea,  that  it  has  had,  ever  since  its  organization,  its  general  offices 
near  the  business  center  of  the  city  of  Chicago,  and  that  it  is  neces- 
sary and  proper  to  do  so;  that  it  became  impossible  to  rent  proper 
general  offices,  and  that  the  rentals  charged  for  poor  offices  were 
high  and  exorbitant;  that  thereupon,  in  1880,  it  purchased  a  lot  of 
land,  75  by  170  feet,  at  the  corner  of  Michigan  avenue  and  Adams 


392  PEOPLE    V.  PULLMAN    CAR    CO.  [cHAP.   I. 

street,  and  erected  thereon  a  building,  in  which  it  ever  since  has 
kept  its  general  offices  and  some  store  rooms;  that  the  said  land  was 
valuable,  and  could  not,  v/ithout  great  loss,  be  utilized  for  erecting 
a  building  other  than  a  high  building,  and  such  as  is  in  keeping  with 
and  equal  to  the  surrounding  buildings;  that  thereupon  defendant 
erected  thereon  a  nine-story  building,  of  which  it  now  uses  nearly 
one-half,  and  that  if  its  business  continues  to  increase  as  it  has  in  the 
past,  it  will  soon  also  use  it  all  for  its  general  offices;  that  in  the  mean- 
time it  rents  to  different  parties  such  offices  as  it  is  not  at  present 
using;  that  erecting  such  l)uildings  is  in  keeping  with  the  usual 
practice  of  other  large  corporations  doing  kindred  business,  and  that 
it  could  not  now  rent  such  general  offices  as  it  requires,  in  the  business 
center  of  Chicago,  for  a  rental  as  low  as  five  per  centum  per  annum 
on  the  amount  which  said  building  and  the  land  on  which  it  stands 
cost  defendant. 

The  defendant  is  authorized  by  §  6  of  its  charter  to  purchase, 
acquire  and  hold  such  real  estate  as  may  be  necessary  for  the  success- 
ful prosecution  of  its  business;  but  it  is  contended  that  the  building  in 
question  is  much  larger  and  contains  many  more  rooms  and  offices 
than  the  business  or  wants  of  the  corporation  demand ;  that  only  a 
small  portion  of  it  is  occupied  by  the  company's  employees;  that  it 
was  erected  as  an  investment  by  the  company,  and  therefore  that 
the  company  owns  and  maintains  the  building  without  authority  of 
law.  We  are  concerned,  however,  with  the  averments  of  the  plea  the 
truth  of  which  are  admitted  by  the  demurrer.  The  plea  avers  it  was 
necessary  and  proper  the  general  offices  of  the  appellee" should  be 
maintained  near  the  business  center  of  the  city  of  Chicago,  and  that 
such  offices  have  always  been  maintained  in  that  localitj^;  that  it 
became  impossible  to  rent  suitable  general  offices  there,  and  even 
insufficient  and  undesirable  offices  could  only  be  obtained  at  high 
and  exorbitant  rentals;  that  the  business  of  the  company  was  large 
and  rapidly  increasing,  and  that  good  business  judgment  dictated 
the  company  should  provide  its  own  offices,  and  that  in  view  of  the 
fact  that  desirable  ground  was  very  valuable,  and  that  more  office 
room  would  be  needed  in  the  future  to  accommodate  the  growing 
business  of  the  company,  it  was  determined  to  construct  a  larger 
building  than  was  at  the  time  actually  needed  and  necessary  and  to 
rent  such  offices  as  were  not  at  the  present  needed,  and  that,  moved 
by  such  consideration,  the  building  was  erected;  that  if  the  business 
of  the  corporation  continues  to  increase  as  it  has  in  the  past,  the 
entire  building  will  soon  be  devoted  to  the  uses  of  the  company. 

We  think  the  plea  presented  a  good  defense  to  the  charges  pre- 
ferred in  the  information  with  reference  to  this  building.  The  right  of 
the  appellee  to  construct  an  office  building  is  indisputable,  as  so, 
also,  is  the  right  to  select  the  most  eligible  and  desirable  site.  It 
would  be  but  a  narrow  and  wholly  unjustifiable  \'iew  of  this  power 


SECT.  I.]  BROWN    V.  WINNISIMMET    CO.  393 

to  insist  that  in  planning  and  constructing  the  building  the  corpora- 
tion should  leave  out  of  consideration  its  probable  prospective  re- 
quirements, and  should  erect  a  building  containing  only  as  many 
rooms  and  offices  as  its  present  business  might  demand.  The  cor- 
poration had  the  right,  as  we  think,  to  look  to  and  prepare  for  the 
future.  It  was  but  true  economy  to  do  so,  and  if  it  proceeded  in 
good  faith,  as  we  are  to  assume  from  the  conceded  averments  of  the 
plea  it  did,  no  reason  is  perceived  why  it  should  be  deemed  bound 
by  law  to  permit  such  parts  of  the  building  as  are  not  for  the  present 
required  for  the  accommodation  of  its  business,  to  remain  vacant, 
but,  on  the  contrary,  that  it  might  lawfully  obtain  such  income  from 
the  rents  of  such  rooms  as  might  be  possible  until  the  growth  or  in- 
crease of  its  business  demanded  the  additional  rooms  or  offices. 
A  corporation  could  not  be  permitted,  under  mere  color  and  pre- 
tense of  furnishing  accommodations  for  the  transaction  of  its  own 
affairs,  to  construct  houses  or  rooms  for  the  purpose  of  renting  the 
same,  and  engage  in  renting  such  houses  or  rooms  as  a  business,  if 
such  pursuit  was,  as  it  here  clearly  is,  beyond  and  distinct  from  that 
it  was  created  to  pursue  and  accomplish.  But  the  averments  of  the 
plea  do  not  justify  the  imputation  that  the  acts  of  the  company  under 
consideration  are  but  colorable,  and  in  this  investigation  the  aver- 
ments stand  confessed  by  the  State. 

Note.  —  See,  accord,  Simpson  v.  Westminster  Palace  Hotel  Co., 
8  H.L.  Cas.  712.  Cf.  First  Methodist  Church  v.  Dixon,  178  111.  260. 


BROWN  V.   WINNISIMMET  CO. 

11  All.  (Mass.)  326.     1865. 

A  VESSEL  belonging  to  the  defendant  had,  by  authority  of  its 
directors,  been  chartered  to  the  United  States  for  use  in  the  war. 
It  had  been  sent  to  Fortress  Munroe.  The  plaintiff  claimed  that 
certain  commissions  were  due  him  for  effecting  this  chartering  by 
the  United  States.  One  ground  of  defence  by  the  defendant  was 
that  it  was  idtra  vires  for  it  so  to  charter  the  vessel. 

BiGELOW,  C.J.  The  main  defence  to  this  action  appears  to  have 
been  that  the  contracts  or  agreements  on  which  the  plaintiffs  rely  in 
support  of  their  claim  against  the  defendants  were  such  that  the  lat- 
ter had  no  power  or  authority  to  make  them  under  the  act  of  the 
legislature  by  which  they  were  incorporated,  and  that  they  cannot 
for  that  reason  be  enforced  in  a  court  of  law.  The  later  English  au- 
thorities seem  to  sanction  the  doctrine  that  such  a  ground  of  defence, 
although  it  may  be  "  unbecoming  and  ungracious,"  or,  in  the  stronger 
language  of  Lord  St.  Leonards,  "indecent,"  is  nevertheless  legal  and 


394  BROWN    V.  WIXNISIMMET    CO.  [cHAP.   I. 

valid,  if  it  be  made  to  appear,  either  b}'  the  express  provisions  of  an 
act  of  incorporation  or  by  necessary  and  reasonable  implication  there- 
from, that  a  contract  which  is  sought  to  be  enforced  in  an  action  at 
law  against  a  corporation  is  beyond  the  scope  of  the  powers  grant eil 
by  its  charter;  or,  in  other  worils,  that  the  legislature  did  not  intend 
that  the  body  created  by  them  should  enter  into  contracts  of  a 
character  like  that  which  a  plaintiff  makes  the  foundation  of  a  claim 
against  it.  South  Yorkshire  Railway,  etc.  v.  Great  Northern  Raihray, 
9  Exch.  55,85.  Bateman  v.  Ashton-under-Lyne,  3  Hurlst.  &  Norm. 
323.  Norwich  v.  Norfolk  Railway,  4  El.  &  Bl.  397,  and  cases  cited. 
Hawkes  v.  Eastern  Counties  Railway,  1  DeG.,  Macn.  &  Gord.  737, 
760.  A  similar  doctrine  has  been  recognized  and  applied  by  courts 
in  this  country.  Pennsylvaiiia,  etc.  Steam  Navigation  Co.  v.  Dand- 
ridge,  8  Gill  &  J.  248.  Hood  v.  New  York  &  New  Haven  Railroad,  22 
Conn.  502.  Pearce  v.  Madison,  etc.  Railroad,  21  How.  441.  Angell 
&  Ames  on  Corp.  §  256,  and  cases  cited.  It  is  on  the  principle  which 
seems  to  be  adopted  by  these  authorities  that  the  defendants  rely 
to  lief  eat  the  present  action. 

We  have  no  occasion  now  to  examine  at  length  into  the  correct- 
ness of  this  doctrine,  or  to  ascertain  with  precision  its  proper  limita- 
tions or  operation,  because  we  are  of  opinion  that  the  defendants  do 
not  bring  the  case  at  bar  within  any  recognized  application  of  the 
rule.  Looking  only  at  the  words  of  the  act  by  which  the  defendants 
were  incorporated,  St.  1833,  c.  197,  we  are  unable  to  say  that 
the  contracts  on  which  the  plaintiffs  rely  are  so  far  foreign  to  the 
object  for  which  a  charter  was  granted  to  the  defendants  as  to  re- 
quire us  to  declare  them  to  have  been  ultra  vires  and  illegal,  and  that 
no  action  upon  them  can  be  maintained  in  a  court  of  law.  In  the 
absence  of  all  evidence  of  extraneous  facts,  and  taking  the  case  as  it 
was  presented  at  the  trial,  on  a  comparison  of  the  contracts  set  up 
by  the  ])laintiffs  with  the  act  incorporating  the  defendants,  it  ap- 
pears to  us  that  the  scrupulous  care  and  anxiety  to  keep  within  the 
limit  of  their  corporate  powers,  which  the  defendants  now  manifest 
will  not  avail  them  in  defence  of  this  action,  although  it  may  induce 
them  to  exercise  a  greater  caution  in  entering  into  contracts  which 
they  cannot  fulfil  without  violating  their  charter.  They  were  incor- 
porated with  power  to  establish,  continue  and  maintain  a  ferry  be- 
tween the  city  of  Boston  and  the  town  of  Chelsea,  and  were  au- 
thorized to  own,  hold  and  possess  vessels,  steamboats  and  such  other 
personal  propert}^  not  exceeding  in  value  one  hundred  thousand  dol- 
lars, as  might  be  necessary  and  convenient  for  the  better  manage- 
ment of  such  ferry  and  of  the  affairs  of  said  corporation.  There  can 
be  no  doubt  that  under  this  charter  the  main  purpose  for  which  the 
defendants  were  incorporated  was  to  carry  on  the  transportation  of 
persons,  vehicles,  merchandise  and  other  articles  by  means  of  a  ferry 
across  Charles  River  between  the  points  designated  in  the  act.   All 


SECT.  I.]  BROWN   V.  WINNISIMMET   CO.  395 

else  was  to  be  subordinate  and  incidental  to  this  main  design.  So  far, 
the  argument  urged  in  behalf  of  the  defendants  is  sound  and  irre- 
fragable. 

But  the  next  step  is  not  so  easily  taken,  nor  does  it  lead  to  the 
point  at  which  the  defendants  seek  to  arrive.  It  was  not  shown  at  the 
trial  that  the  steamboat  which  was  the  subject  of  the  contracts  with 
the  plaintiffs  was  not  a  necessary  and  proper  vessel  to  be  used  by 
the  defendants  in  the  prosecution  of  the  business  of  their  ferry,  nor 
that  by  reason  of  its  ownership  they  had  exceeded  the  limit  of  per- 
sonal property  which  they  were  empowered  by  their  charter  to  hold. 
Nor  could  it  be  properly  inferred  that  it  was  not  reasonably  required 
for  the  legitimate  business  of  the  corporation,  because  it  was  not  in 
actual  use  by  them  on  the  ferry  at  the  time  the  contract  for  letting 
it  was  entered  into  with  the  plaintiffs,  and  because  it  was  chartered 
under  that  contract  for  the  use  of  the  government  of  the  United 
States.  Such  an  inference  could  be  made  only  on  the  theory  that  the 
defendants  were  so  restricted  by  their  charter  that  they  could  not 
hold  any  greater  number  of  vessels  or  steamboats  than  were  ab- 
solutely required  for  present  or  immediate  and  constant  use  on  their 
ferry,  or,  if  they  could  be  allowed  to  possess  a  larger  number,  that 
they  could  not  use  or  employ  them  in  any  other  business  or  for  any 
other  purpose  whatever,  but  must  suffer  them  to  remain  at  their 
wharf  to  decay  or  deteriorate  for  the  want  of  use,  or,  at  least,  in  a 
condition  in  which  they  could  be  of  no  advantage  to  themselves 
or  others.  But  we  think  such  a  narrow  and  restricted  construction 
of  the  powers  granted  to  the  defendants  is  inconsistent  with  any 
reasonable  view  of  the  intention  of  the  legislature  in  conferring  on 
them  a  corporate  franchise,  and  is  not  required  by  any  considera- 
tions of  justice  or  sound  policy.  On  the  contrary,  we  cannot  doubt 
that  under  their  charter  they  are  authorized  to  hold  any  amount 
or  kind  of  personal  property,  within  the  limit  of  value  fixed  by  the 
act,  which  they  may  deem  necessary  or  expedient  for  the  proper 
conduct  and  management  of  the  business  of  the  ferry;  that  it  is  no 
excess  of  their  corporate  powers  to  own  steamboats  which  are  not 
required  for  immediate  or  constant  use  in  the  daily  prosecution  of 
their  ordinary  business,  but  which  may  be  convenient  or  useful  in 
case  of  sudden  emergency  or  accident,  or  when  those  which  are 
employed  in  the  regular  service  of  the  ferry  might  be  withdrawn 
for  repairs;  that  it  is  not  necessary  that  such  extra  or  additional 
steamboats  should  be  kept  unemployed  when  not  required  for  the 
business  of  the  ferry,  but  that  it  is  competent  for  the  defendants 
to  use  them  or  to  let  them  to  others  to  be  used  in  carrying  on  any 
legitimate  business  for  which  they  are  suitable,  such  as  the  towage 
of  vessels  and  the  transportation  of  passengers  or  merchandise,  so 
long  as  such  use  is  only  temporary  and  incidental  to  the  main 
purpose  for  which  they  are  owned  by  the  defendants. 

We  know  of  no  rule  or  principle  by  which  an  act  creating  a  cor- 


396  BROWN    V.  WINNISIMMET   CO.  [ciIAP.  I, 

poration  for  certain  specific  objects  or  to  carry  on  a  particular  trade 
or  business  is  to  be  strictly  construed,  as  prohibitory  of  all  other 
dealings  or  transactions,  not  coming  within  the  exact  scope  of  those 
designated.  Undoubtedly  the  main  business  of  a  corporation  is  to 
be  confined  to  that  class  of  operations  which  properly  appertain  to 
the  general  purposes  for  which  its  charter  was  gi-anted.  But  it  may 
also  enter  into  contracts  and  engage  in  transactions  which  are  in- 
cidental or  auxiliary  to  its  main  business,  or  which  may  become  nec- 
essary, expedient  or  profitable  in  the  care  and  management  of  the 
property  which  it  is  authorized  to  hold  under  the  act  by  which  it 
was  created.  For  example,  it  might  perhaps  be  held  that  a  corpora- 
tion established  for  the  purpose  of  manufacturing  cotton  and  woollen 
cloth  could  not  properly  invest  all  its  capital  in  mill  powers  and 
privileges,  and  engage  exclusively  in  the  business  of  leasing  them  to 
others  to  be  used  for  manufacturing  purposes,  or  that  it  could  not 
lawfully  confine  its  operations  to  the  making  of  steam-engines  and 
machines  for  sale.  But  no  one  could  doubt  that  it  would  l)c  within 
the  scope  of  its  powers  to  allow  another  person  or  corporation,  for  a 
reasonable  compensation,  to  draw  surplus  water  from  its  mill-pond, 
or  to  employ  that  portion  of  its  steam  power  which  was  not  required 
for  its  own  use.  So  a  stage-coach  company  or  a  street  railway  cor- 
poration would  exceed  its  corporate  powers  if  it  engaged  extensively 
in  the  transportation  of  passengers  and  merchandise  on  land  or  sea 
by  steam;  but  it  would  be  acting  strictly  within  the  limits  of  its 
capacity,  if  it  should  occasionally  let  a  horse  or  a  coach  or  car,  not 
required  for  its  own  immediate  purposes,  to  another  person  or  cor- 
poration, or  should  enter  into  a  contract  for  the  emplojTnent  of  its 
horses  in  another  occupation  during  a  portion  of  the  year  when  the 
business  of  the  corporation  did  not  require  their  use.  We  can  see  no 
substantial  difference  between  transactions  of  this  character  and 
that  which  the  defendants  entered  into  when  they  made  the  con- 
tracts with  the  plaintiffs. 

These  views  of  the  extent  of  the  authority  granted  to  the  defend- 
ants by  the  legislature  are  a  decisive  answer  to  the  defence  relied  on 
by  them  at  the  trial.  The  steamboat,  under  the  contract  with  the 
plaintiffs,  was  let  to  the  United  States  in  a  season  of  great  public 
exigency,  for  military  purposes;  the  defendants  did  not  part  with 
her  control  for  any  definite  period  of  time,  but  only  from  day  to  day, 
nor  did  they  send  her  to  a  great  distance,  where  she  could  not  be 
speedily  recalled.  The  defendants  retained  the  right  and  power  to 
resume  the  possession  and  use  of  her  at  any  moment.  In  this  state 
of  facts,  we  are  of  opinion  that  the  court  below  took  a  correct  view 
of  the  law,  and  was  right  in  refusing  to  rule,  as  requested  by  the 
defendants,  that  the  contracts  entered  into  with  the  plaintiffs  were 
not  authorized  by  the  defendants'  charter,  and  were  therefore  void. 

Note.  —  See,  accord,  Forrest  v.  Manchester  Ry.  Co.,  30  Beav.  40. 


SECT.  I.]  WILLIAMS   V.  JOHNSON.  397 

WILLIAMS  V.   JOHNSON. 

208  Mass.  544.     1911. 

Knowlton,  C.J.  This  is  an  appeal  from  a  decree  of  the  Land 
Court  granting  a  petition  for  the  registration  of  the  title  to  a  tract  of 
land  in  Boston,  a  part  of  which  was  formerly  occupied  as  the  station 
of  the  Boston  and  Providence  Railroad  Company,  at  Park  Square. 
The  diversion  and  extension  of  the  railroad  and  the  erection  of  the 
terminal  passenger  station  in  Boston  under  the  St.  1896,  chap.  516, 
rendered  the  property  no  longer  available  for  railroad  purposes,  and 
it  was  conveyed  by  this  corporation  to  the  New  York,  New  Haven, 
and  Hartford  Railroad  Company  in  consideration  of  improvements 
made  by  the  grantee  upon  the  property  of  the  grantor,  m  connection 
with  the  location  and  erection  of  the  new  station.  The  validity  of 
this  conveyance  was  confirmed  in  Little  v.  Old  Colony  Railroad,  202 
Mass.  277.  The  petitioners  claim  title  under  a  deed  from  the  New 
York,  New  Haven,  and  Hartford  Railroad  Company,  bearing  date 
September  15,  1909.  The  respondents,  who  are  stockholders  in  the 
last  mentioned  corporation,  deny  the  validity  of  the  deed,  on  the 
ground  that  it  was  ultra  vires  of  the  corporation  and  that  the  directors 
had  no  authority  to  make  it. 

The  deed  runs  to  the  petitioners  as  trustees  under  a  declaration 
of  trust.  The  consideration  expressed  in  it  is  $1  and  other  valuable 
considerations.  The  conveyance  is  "subject  to  and  upon  the  terms, 
provisions  and  trusts  mentioned  and  set  forth  in  the  aforesaid  dec- 
laration of  trust."  This  declaration  is  of  a  peculiar  kind.  It  pro- 
vides that  the  trustees  shall  forthwith  issue  to  the  grantor  certifi- 
cates, in  a  form  prescribed,  for  fifty-two  thousand  shares,  of  a 
nominal  par  value  of  $100  each,  in  payment  for  this  real  estate.  The 
entire  interest  of  the  cestuis  que  trust,  or  shareholders  in  the  property, 
was  to  be  represented,  immediately  after  the  conveyance,  by  these 
shares.  The  trustees  were  authorized  to  issue  not  exceedmg  forty 
thousand  additional  shares  of  the  same  nominal  par  value,  in  ex- 
change for  convertible  notes  or  bonds  that  the  trustees  may  issue 
to  obtain  money  to  be  used  in  conducting  the  enterprise.  The  shares 
are  transferable  on  the  books  of  the  trustees.  The  shareholders  are 
not  to  have  any  legal  title  to  the  trust  property  itself,  real  or  personal, 
and  especially  they  are  not  to  have  a  right  to  call  for  any  partition. 
It  is  declared  that  they  shall  have  no  equitable  estate  in  the  lands 
and  appurtenances  constituting  the  trust  property,  but  their  in- 
terest shall  consist  only  of  an  interest  in  the  money  to  arise  from  the 
sale  or  other  disposition  thereof  by  the  trustees,  and,  previously  to 
such  sale,  in  all  the  rights  mentioned  in  the  declaration,  which  are 
rights  "of  division  of  proceeds  and  profits  and  the  other  rights  and 
matters  concerning  the  trust  property." 


398  WILLIAMS    V.  JOHNSON.  [CHAP.  I. 

The  death  of  a  shareholder  is  not  to  determme  the  trust,  nor  en- 
title his  legal  representatives  to  an  accounting,  but  his  rights  are 
to  pass  to  his  executors,  administrators  or  assigns,  upon  the  sur- 
render of  the  certificate  of  the  shares.  The  trustees  may  from  time 
to  time  invite  and  receive  subscriptions  to  additional  shares,  for  the 
purpose  of  increasing  the  capital  of  the  trust,  giving  preference, 
upon  such  terms  and  conditions  as  they  shall  deem  best,  to  existing 
shareholders,  and  to  the  holders  of  convertible  notes  or  bonds.  The 
trustees  have  no  power  to  bind  the  shareholders  personally  for  any 
debt,  nor  are  the  trustees  to  be  personally  liable  for  claims  or  debts 
against  the  trust,  but  all  persons  extending  crcflit  to  the  trustees 
are  to  look  only  to  the  property  of  the  trust  for  their  payment.  The 
trustees  have  no  pecuniary  interest  in  the  property  of  the  trust,  or 
in  the  business  carried  on  under  the  trust,  except  for  the  pajinent  of 
prescribed  commissions  upon  receipts  and  expenditures,  as  com- 
pensation for  their  services. 

The  trustees  are  to  have  absolute  control  over  and  disposal  of  all 
real  estate  and  other  property  held  under  the  trust,  including  the 
power  to  improve  it  by  building  thereon  or  otherwise;  to  sell,  for  cash 
or  credit,  at  public  or  private  sale,  any  part  of  the  property;  "to 
lease  or  hire  for  improvement  or  otherwise,  for  a  term  bej^ond  the 
possible  termination  of  this  trust,  or  for  any  less  term,  to  let,  to  ex- 
change, to  release  and  to  partition."  They  have  power  to  borrow 
money  to  carry  out  the  purposes  of  the  trust,  to  issue  notes  or  l)onds, 
and  to  secure  the  repayment  of  them  by  a  pledge,  mortgage  or  hy- 
pothecation of  the  property  of  the  trust,  or  any  part  of  it.  The  only 
limitation  upon  the  power  to  borrow  is  that  the  total  indebtedness 
at  any  one  time  shall  not  exceed  S4,000,000.  Notes  or  bonds  issued 
for  such  indebtedness  may  be  made  convertible  into  shares  of  the 
trust. 

The  trustees  may  acquire,  by  purchase  or  otherwise,  any  real 
estate  or  any  interest  therein  in  the  vicinity  of  that  conveyed  by  the 
deed  in  question,  "and  any  notes,  bonds,  shares  or  other  securities 
of  any  corporation,  association  or  real  estate  trust,  organized  or 
adapted  for  the  purpose  of  acquiring,  holding,  managing  or  im- 
proving real  estate,  or  for  the  purpose  of  conducting  a  lighting,  heat- 
ing, power  or  other  business  directly  related  to  the  management  of 
real  estate,  if  in  their  judgment  such  acquisition  will  in  any  manner 
tend  to  facilitate  the  laying  out,  development,  management  or  im- 
provement of  the  real  estate"  conveyed  to  them  by  the  deed  in 
question.  They  may  lay  out  and  construct  or  discontinue  streets  or 
ways,  upon  any  property  at  any  time  held  by  them.  They  may  dedi- 
cate to  public  use,  or  convej'  to  the  city  of  Boston,  with  or  without 
compensation,  any  part  of  the  property,  with  a  view  to  the  enhance- 
ment of  the  value  of  the  remaining  propert3\  For  a  like  purpose 
they  may  contribute  money  or  other  property  to  the  cost  of  any 


SECT.  I.]  WILLIAMS    V.  JOHNSON.  399 

public  or  quasi  public  undertaking.  In  all  these  matters  the  judg- 
ment and  determination  of  the  trustees  is  to  be  final  and  conclusive. 

They  may  from  time  to  time  determine  what  of  their  receipts  and 
expenditures  shall  be  treated  as  capital  and  what  as  income,  and 
their  determination  shall  be  final.  They  may  divide  net  income 
among  the  shareholders,  under  certain  limitations,  and  may  set  aside 
a  part  of  the  net  income  as  a  reserve  or  contingent  fund.  Their 
determination  of  what  is  net  income  is  to  be  conclusive.  The  trust 
is  to  continue  until  the  expiration  of  twenty  years  from  the  death  of 
the  last  survivor  of  nine  persons  named,  some  of  whom,  presumably, 
are  quite  young,  unless  three  fourths  in  value  of  the  shareholders 
shall  appoint  an  earlier  time  for  its  termination,  not  earher  than  the 
second  day  of  July,  in  the  year  1919,  by  an  instrument  in  writing 
duly  signed  and  acknowledged.  After  the  termination  of  the  trust  by 
its  own  limitation,  or  by  such  an  appointment  of  three  fourths  of  the 
shareholders,  the  proceeds  are  to  be  divided  among  the  shareholders. 
The  trustees,  when  vacancies  occur  in  their  number,  may  appoint 
their  own  successors. 

By  this  conveyance  and  the  accompanying  declaration  of  trust, 
the  New  York,  New  Haven,  and  Hartford  Railroad  Company  set 
on  foot  a  scheme  to  put  property,  of  an  estimated  value  of  more  than 
$5,000,000,  into  the  hands  of  trustees  as  managing  agents,  who  were 
appointed  irrevocably,  to  conduct  a  business  for  a  term  that  might 
last  nearly  a  century,  with  practically  all  the  powers  of  an  absolute 
owner,  not  only  over  the  property  conveyed,  but  for  the  acquisition 
of  other  real  estate  in  the  neighborhood,  and  of  shares  in  corporations 
which  have  relation  to  the  use,  management  and  improvement  of 
real  estate.  The  scheme  contemplates  the  borrowing  'of  money  to 
create  an  indebtedness  not  exceeding  $4,000,000  at  any  one  time. 
It  contemplates  an  unlimited  extension  and  enlargement  of  the 
enterprise,  in  the  discretion  of  the  trustees,  by  the  issue  of  additional 
shares  to  persons  who  subscribe  for  them.  It  contemplates  a  real 
estate  business,  if  not  a  speculation,  that  may  continue  a  long  time 
and  become  gigantic,  of  which  the  railroad  corporation  is  now  the 
sole  owner.  It  needs  no  argument  to  show  that,  ordinarily,  the  pro- 
prietorship of  such  a  business,  by  a  railroad  company  as  a  beneficiary, 
is  not  within  its  corporate  powers. 

As  was  said  in  Davis  v.  Old  Colony  Railroad,  131  Mass.  258,  259, 
"A  corporation  has  power  to  do  such  business  only  as  it  is  authorized 
by  its  act  of  incorporation  to  do,  and  no  other.  It  is  not  held  out  by 
the  government,  nor  by  the  stockholders,  as  authorized  to  make 
contracts  which  are  beyond  the  purposes  and  scope  of  its  charter. 
It  is  not  vested  with  all  the  capacities  of  a  natural  person,  or  of  an 
ordinary  partnership,  but  with  such  only  as  its  charter  confers." 
In  Waldo  v.  Chicago,  St.  Paul  &  Fond  du  Lac  Railroad,  14  Wis. 
575,  581,  we  find  this  language:  "When  a  corporation,  created  for 


400  WILLIAMS    V.  JOHNSON.  [cHAP.  I. 

the  purpose  of  building  and  operating  a  railroad,  goes  into  the  busi- 
ness of  banldng,  or  manufacturing  and  selling  goods,  or  deahng  and 
speculating  in  real  estate,  because  its  corporators  or  board  of  tli- 
rectors  think  such  adventures  may  be  profitable,  or  if  a  bank  should 
go  to  building  and  operating  a  raihoad  for  like  reason,  it  is  easy  to 
see  that  in  each  instance  the  corporation  is  attempting  to  transact 
business  which,  under  its  organic  act,  it  has  no  right  or  power  to  do. 
And  if  the  corporation  might  embark  in  a  separate  and  distinct 
business,  not  contemplated  by  its  charter,  merely  because  it  was 
supposed  it  would  be  profitable  and  increase  its  means  and  resources, 
there  would  be  no  safety  to  the  pul)lic  in  gi-anting  any  special  charters, 
and  none  to  individuals  who  might  invest  in  the  stock  of  the  com- 
pany." The  following  are  a  few  among  the  many  other  cases  that 
apply  the  same  doctrine:  Attorney  General  v.  Great  Northern  Hail- 
way,  1  Dr.  &  Sm.  154;  Case  v.  Kelly,  133  U.S.  21;  Pacific  Railroad 
V.  Seely,  45  Mo.  212;  State  v.  Southern  Pacific  Co.,  52  La.  Ann. 
1822;  Chicago  v.  Cameron,  120  111.  447;  People  v.  Pullman's  Palace 
Car  Co.,  175  111.  125;  Slater  Woolen  Co.  v.  Lamb,  143  Mass.  420. 

If  the  railroad  company  had  taken  its  money  and  purchased  land, 
and  had  applied  it  to  a  use  like  that  contemplated  by  this  scheme, 
no  one  would  contend  that  it  was  acting  within  the  law.  We  arc  left 
with  only  the  question  whether  its  ownership  of  this  real  estate 
justifies  its  creation  of  such  an  enterprise. 

Its  ownership  of  the  land,  which  came  to  it  legitimately,  left  it 
with  the  property  on  hand,  to  be  sold  or  disposed  of,  so  that  its  pro- 
ceeds could  be  properly  used  for  the  purposes  for  which  the  corpora- 
tion was  created.  It  did  not  give  it  the  right  to  hold  the  land  per- 
manently, or  for  an  unreasonably  long  time,  as  an  investment  for  the 
production  of  income;  much  less  did  it  give  it  the  right  to  carry  on, 
for  a  long  term  of  years,  the  business  of  speculating  in  land,  or  de- 
veloping this  and  other  land  in  the  vicinity,  and  changing  its  general 
character,  for  the  purpose  of  gain.  If  the  corporation  could  not  do 
this  directly,  it  could  not  do  it  indirectly  through  the  appointment 
of  trustees  or  agents  who  should  continue  the  business  for  its  benefit. 
Attorney  General  v.  New  York,  New  Haven,  &  Hartford  Railroad,  198 
Mass.  413. 

The  objection  to  such  a  venture  on  the  part  of  a  corporation  is 
tw^ofold.  On  the  part  of  the  State  it  is  that  the  corporation  is  usurp- 
ing powers  which  were  never  conferred  upon  it,  and  is  engaging  in 
a  business  which  the  Legislature  has  not  authorized  it  to  do,  and  to 
which  there  may  be  grave  objections  on  grounds  of  public  policy.  The 
trustees  are  managing  for  this  corporation,  as  the  beneficiary,  a 
large  amount  of  valuable  real  estate  in  the  heart  of  Boston,  and  are 
authorized,  in  the  interest  of  the  beneficiary,  to  make  donations  of 
land  or  other  property  for  public  purposes,  or  to  convey  it  to  the 
city  of  Boston  with  or  without  compensation,  to  lay  out  and  con- 


SECT.  I.]  WILLIAMS    V.  JOHNSON.  401 

struct  or  to  discontinue  streets,  and  become  the  owners  of  corpora- 
tions engaged  in  other  kinds  of  business  relating  to  real  estate,  even 
in  remote  parts  of  the  city.  There  may  be  grave  reasons  connected 
with  the  public  interest  why  such  powers  should  not  be  exercised 
in  a  city,  and,  incidentally,  an  influence  possibly  be  exerted  in  behalf 
of  a  great  railroad  corporation.  At  all  events,  the  Legislature  has 
never  seen  fit  to  authorize  their  exercise.  Corporations  for  the  holding 
of  real  estate  for  purposes  of  profit  have  always  been  deemed  ob- 
jectionable, and  the  general  laws  of  this  Commonwealth  do  not 
permit  the  organization  of  such  corporations. 

The  other  objection  is  from  the  side  of  the  stockholder  in  the  cor- 
poration. He  invests  his  money  by  subscribing  for  the  shares  of 
stock,  with  a  knowledge  of  the  purpose  for  which  the  corporation  is 
organized,  and  with  a  view  to  the  probable  gain,  and  a  thought  of 
the  possible  loss,  that  may  result  from  the  transaction  of  the  business 
of  the  corporation.  He  does  not  invest  in  any  other  land  of  enter- 
prise than  that  which  is  within  the  authority  conferred  upon  the 
corporation.  His  protection  requires  that  the  company  be  confined 
strictly  to  the  business  and  functions  for  which  it  was  organized. 
It  would  leave  him  without  compass  or  rudder  in  making  his  invest- 
ment, if  the  managing  officers,  or  a  majority  of  the  stockholders, 
could  use  the  corporate  property  in  a  business  foreign  to  that  for 
which  the  company  was  established. 

In  turning  this  real  estate  into  money,  the  railroad  company 
should  not  be  held  too  strictly  to  sales  to  be  made  at  once  and  with- 
out expenditure  for  changes  and  improvements  that  would  increase 
its  marketable  qualities.  A  reasonable  latitude  in  that  respect  is 
fairly  incidental  to  ownership  with  a  right  to  sell.  Dupee  v.  Boston 
Water  Power  Co.,  114  Mass.  37.  But  nothing  more  than  what  is  fairly 
incidental  to  a  reasonable  disposition  of  the  property  for  its  fair 
market  value,  within  a  reasonable  time,  is  permissible. 

The  only  debatable  question  in  this  case  is  whether  such  a  scheme 
as  has  been  devised  is  incidental  to  the  right  to  sell,  and  reasonably 
necessary  to  enable  the  corporation  to  obtain  the  fair  market  value 
of  the  property.  We  are  of  opinion  that  it  is  not. 

The  reasons  relied  on  by  the  petitioners  for  adopting  the  scheme, 
as  given  in  the  statement  of  agreed  facts,  are  that  "earnest  efforts 
during  several  years  were  made,  without  success,  to  sell  the  same 
and  convert  it  into  cash,  but  the  risks  and  uncertainties  attending 
the  development  and  use  of  so  large  a  tract  of  land,  without  streets 
or  other  facilities  for  its  development,  were  such  that  no  purchaser 
was  in  fact  found,  and  no  purchaser  seemed  likely  to  be  found,  will- 
ing and  able  to  purchase  said  property,  except  at  a  price  so  low  as  to 
indemnify  him  against  all  such  risks  and  uncertainties  and  much 
below  the  estimated  real  value  of  said  land."  This  is,  in  substance, 
that  the  directors  have  not  been  able  to  sell  the  land  for  its  estimated 


402  FRANKLIN    NATIONAL    BANK    V.  WHITEHEAD.  [cHAP.  I. 

value,  and  that  there  are  risks  and  uncertainties  attending  the 
development  and  use  of  the  land,  which  a  purchaser  would  take  into 
account  in  determining  what  price  he  would  pay  for  it.  The  directors 
decided  to  put  these  risks  and  uncertainties  upon  the  stock-holders 
of  the  corporation,  by  providing  for  a  business  of  developing  and 
using  this  property  for  many  years,  in  the  belief,  doubtless,  that  the 
business  would  be  more  profitable  than  a  sale  to  others  who  would 
assume  the  risks  of  such  a  business.  This  is  not  very  different  from 
taking  S5,000,000  in  money  of  the  corporation,  if  that  amount  hap- 
pened to  be  on  hand,  and  if  land  could  be  bought  for  its  fair  market 
value,  and  investing  the  money  in  such  an  enterprise,  in  the  expecta- 
tion that  the  assumption  of  these  risks  and  uncertainties,  in  buying 
at  a  price  diminished  on  account  of  them,  would  open  a  large  field 
for  profit  in  the  business  of  developing  and  using  the  property. 

The  conveyance  to  the  trustees  merely  changed  the  form  of  the 
property.  It  did  not  bring  a  dollar  to  the  treasury  of  the  corporation. 
If  the  trust  were  sustained,  it  might  or  might  not  be  possible,  at  some 
time,  to  sell  shares  at  their  estimated  value  instead  of  selling  portions 
of  the  land.  But,  presumably,  there  will  be  no  satisfactory  market 
for  any  of  these  shares,  unless  it  is  demonstrated,  after  a  considerable 
time,  that  the  business  is  likely  to  prove  profitable. 

Petition  dismissed. 


FRANKLIN  NATIONAL  BANK  v.  WHITEHEAD. 

149  Ind.  5G0.     1S98. 

Monks,  J.  The  first  question  to  be  determined  is  whether  the 
Greenfield  Iron  and  Nail  Company  was  authorized  to  engage  in  the 
business  of  public  warehouseman,  and  as  such  issue  warehouse 
receipts. 

The  special  finding  shows  that  said  Greenfield  Iron  and  Nail 
Company  was  organized  under  the  laws  for  the  incorporation  of 
manufacturing  and  mining  companies,  and  that  its  object,  as  stated 
in  the  articles  of  association,  was  to  manufacture  and  sell  nails  and 
other  products  of  steel  and  iron.  A  corporation  possesses  only  such 
powers  as  are  expressly  given  by  law,  and  such  implied  powers  as 
are  necessary  to  enable  them  to  exercise  the  power  expressly  given. 
State  Board  of  Agriculture  v.  Citizens  Street  R.W.  Co.,  47  Ind.  407, 
409;  Clark  on  Corp.,  120.  The  business  of  public  warehouseman  was 
not  necessary  or  incidental  to  the  business  of  said  company  in  manu- 
facturing or  selling  nails  or  other  products  of  steel  or  iron.  It  is 
evident  that  such  company  was  not  authorized,  by  the  laws  under 
which  it  was  organized,  to  engage  in  the  business  of  public  ware- 
houseman or  to  issue  warehouse  receipts. 


SECT.  I.]  NOTE.  403 

It  is  insisted,  however,  by  appellants,  that  as  said  company  made 
a  written  application  to  the  auditor  of  Hancock  county  and  ob- 
tained a  permit  from  him  to  carry  on  the  business  of  public  ware- 
houseman under  the  provisions  of  §  8704,  Burns'  R.S.  1894  (6525, 
Horner's  R.S.  1897),  it  was  fully  authorized,  by  said  section, 
to  carry  on  that  business  and  issue  warehouse  receipts. 

The  section  referred  to  is  the  first  section  of  the  public  warehouse 
act  of  1875,  as  amended  in  1879,  and  the  part  rehed  upon  by  ap- 
pellants is  as  follows:  "Any  person  or  incorporated  company  desir- 
ing to  keep  any  such  public  warehouse  shall  be  entitled  to  do  so 
upon  receiving  a  permit  therefor  from  the  auditor  of  the  county  in 
which  such  warehouse  shall  be  kept."  §  8704,  Burns'  R.S.  1894.  If 
appellants'  construction  of  said  section  is  the  correct  one,  then  all 
the  corporations  in  the  State,  whether  educational,  charitable,  re- 
ligious, commercial,  or  otherwise,  whatever  may  be  the  provisions 
of  the  law  under  which  organized,  are  given  the  right  of  going  into 
and  carrying  on  the  business  of  public  warehousemen.  While  the 
language  quoted  from  said  section  is  very  broad,  it  was  certainly  not 
the  intention  of  the  legislature  to  confer  on  all  the  corporations  in 
the  State,  without  regard  to  the  law  under  which  they  were  organized, 
and  the  purposes  and  objects  of  their  organization,  the  privileges 
of  public  warehousemen.  As  well  hold  that  persons  without  capac- 
ity to  contract  on  account  of  infancy,  insanity,  or  other  disquah- 
fications  were,  by  said  statute,  authorized  to  engage  in  the  business 
of  public  warehousemen  and  execute  valid  warehouse  receipts. 

A  warehouseman  is  defined  to  be  the  owner  of  a  warehouse;  one 
who,  as  a  business  and  for  hire,  keeps  and  stores  the  goods  of  others. 
(Black's  Law  Dictionary.)  A  person  who  receives  goods  and  mer- 
chandise to  be  stored  in  his  warehouse  for  hire.  (Bouvier.'s  Law 
Dictionary) ;  28  Am.  and  Eng.  Ency .  of  Law,  636,  637 ;  Edwards  on 
Bailments,  §  332;  Hale  on  Bailments,  238. 

Only  such  corporations  as  are  authorized  by  the  law  under  which 
they  are  organized  to  carry  on  the  business  of  warehouseman  can 
avail  themselves  of  the  provisions  of  said  act  of  1875  (Acts  1875, 
p.  172),  as  amended  by  the  act  of  1879  (Acts  1879,  p.  230),  being 
§§  8704,  8719,  Burns'  R.S.  1894  (6525,  6540,  Horner's  R.S.  1897). 
It  follows  that  said  nail  company  was  not  authorized  to  operate  as 
a  public  warehouseman,  or  issue  any  warehouse  receipts  under  the 
provision  of  said  act  of  1875,  as  amended  by  the  act  of  1879. 


NOTE. 


Section  4  of  chap.  437  of  the  Acts  of  1903  of  Massachusetts  (the 
Business  Corporation  Law)  is  set  forth  below. 

"Section  4.  Every  corporation  which  is  subject  to  the  provisions 


404  NOTE.  [chap.  I. 

of  this  act  shall  have  the  following  powers  and  privileges  and  shall 
be  subject  to  the  following  liabiUties:  — 

"  (a)  To  have  perpetual  succession  in  its  corporate  name,  unless 
a  period  for  its  duration  is  limited  by  special  law. 

"  (6)  To  sue  or  be  sued  in  its  corporate  name,  and  to  prosecute  or 
defend  to  final  judgment  an  execution  or  decree  in  any  court  of  law 
or  equity. 

"  (c)  To  have  a  capital  stock  to  such  an  amount  as  may  be  fixed 
in  its  agreement  of  association  or  articles  of  organization  or  of  amend- 
ment as  hereinafter  provided. 

"  (d)  To  have  a  corporate  seal,  which  it  may  alter  at  pleasure. 

"(e)  To  elect  all  necessary  officers,  fix  their  compensation  and 
define  their  duties. 

"  (/)  To  hold,  purchase,  convey,  mortgage  or  lease  within  or  with- 
out this  commonwealth  such  real  or  personal  property  as  the  purposes 
of  the  corporation  may  require. 

"  (g)  To  make  contracts,  incur  liabilities  and  borrow  money  on  its 
credit  and  for  its  use. 

"  (h)  To  make  by-laws  not  inconsistent  with  the  laws  of  this  com- 
monwealth for  regulating  its  government  and  for  the  administration 
of  its  affairs  as  hereinafter  provided. 

"  (i)  To  be  dissolved  or  to  have  its  affairs  wound  up  in  the  man- 
ner hereinafter  provided." 

A  corporation  has  power  to  take  a  fee  in  land,  although  its  cor- 
porate existence  is  limited  to  a  definite  number  of  j'ears.  Kicoll  v. 
New  York  &  Erie  R.R.  Co.,  12  N.Y.  121.  Similarly  of  a  franchise  for 
a  number  of  years  longer  than  that  limiting  the  corporate  existence. 
Oivenshoro  v.  Cumberland  Tel.  Co.,  230  U.S.  58. 

It  may  issue  negotiable  instruments  for  a  proper  consideration. 
Bradbury  v.  Boston  Canoe  Club,  153  Mass.  77.  (In  England,  a  more 
cautious  statement  would  have  to  be  made,  as  some  corporations 
have  no  power  to  issue  negotiable  instruments.)  But  hot  for  accom- 
modation. Owen  &  Co.  v.  Storms  &  Co.,  78  N.J.L.  154. 


SECT.  II.]  WHITTENTON    MILLS   V.  UPTON.  405 

SECTION  2. 
TO  ENTER  INTO  A  PARTNERSHIP. 


WHITTENTON  MILLS  v.   UPTON. 

10  Gray  (Mass.)  582.     1858. 

Petition  by  the  Whittenton  Mills,  a  manufacturing  corporation, 
to  set  aside  proceedings  in  insolvency,  instituted  against  it  and 
William  Mason,  as  partners,  upon  Mason's  petition.  The  directors 
of  the  corporation,  and  Mason,  had  assumed  to  form  a  partnership 
between  the  corporation  and  Mason,  and  business  had  been  con- 
ducted and  liabilities  occurred  which  were  in  form  the  habihties  of 
such  partnership. 

Thomas,  J.  Was  this  corporation  capable  of  forming  a  partner- 
ship, of  entering  into  the  contract?  This  question  presents  itself  in 
two  forms.  The  more  general  one  is :  Has  a  corporation,  as  one  of  its 
usual  inherent  powers,  the  capacity  to  form  a  contract  of  copartner- 
ship? The  narrower  question,  but  for  this  case  the  practical  and 
pertinent  one,  is.  Can  a  manufacturing  corporation  in  this  common- 
wealth, incorporated  since  February  1831,  and  subject  to  the  provi- 
sions of  the  thirty-eighth  and  forty-fourth  chapters  of  the  revised 
statutes,  enter  into  a  contract  or  society  of  copartnership? 

This  corporation  was  created  in  March  1836  as  a  manufacturing 
corporation,  for  the  purpose  of  manufacturing  cotton  goods  in  the 
town  of  Taunton,  and  for  that  purpose  was  invested  with  all  the 
powers  and  privileges  and  made  subject  to  all  the  duties,  restrictions 
and  liabilities  set  forth  in  the  thirty-eighth  and  forty-fourth  chapters 
of  the  revised  statutes,  passed  on  the  fourth  of  November  preceding, 
but  not  to  take  effect  till  the  first  of  May  eighteen  hundred  and  thirty- 
six.  St.  1836,  chap.  19.  This  charter,  with  the  provisions  of  the  chapters 
referred  to  and  made  part  of  it,  is  the  origin  and  source  of  the  powers 
and  functions  of  the  corporation.  What  powers  are  granted  expressly, 
or  by  implication,  because  necessary  or  usual  for  the  purposes  which 
this  charter  was  given  to  effect,  the  corporation  has,  and  no  more. 

There  is  one  obvious  and  important  distinction  between  such  a 
society  as  this  charter  creates  and  that  of  a  partnership.  An  act  of 
the  corporation,  done  either  by  direct  vote  or  by  agents  authorized 
for  the  purpose,  is  the  manifestation  of  the  collected  will  of  the 
society.  No  member  of  the  corporation,  as  such,  can  bind  the  so- 
ciety. In  a  partnership  each  member  binds  the  society  as  a  principal. 


406  WHITTENTON    MILLS    V.  UPTON.  (cHAP.   I. 

If  then  this  corporation  may  enter  into  partnership  vvitli  an  indi- 
vidual, there  would  be  two  principals,  the  legal  person  and  the  nat- 
ural person,  each  having,  within  the  scope  of  the  society's  business, 
full  authority  to  manage  its  concerns,  including  even  the  disposition 
of  its  property. 

The  second  section  of  chap.  38  of  the  Rev.  Sts.  provides  that  the 
business  of  every  such  manufacturing  corporation  shall  be  managed 
and  conducted  by  the  president  and  directors  thereof  and  such  other 
officers,  agents  and  factors  lus  the  company  shall  think,  proper  to  au- 
thorize for  that  purpose.  It  is  plain  that  the  provisions  of  this  section 
cannot  be  carried  into  effect  where  a  partnership  exists.  The  partner 
may  manage  and  conduct  the  business  of  the  corporation,  and  bind 
it  by  his  acts.  In  so  doing  he  does  not  act  as  an  officer  or  agent  of  the 
corporation  by  authority  received  from  it,  but  as  a  principal  in  a 
society  in  which  all  are  equals,  and  each  capable  of  binding  the 
society  by  the  act  of  its  individual  will. 

Indeed,  in  examining  this  chapter,  it  will  be  found  that  there  is 
scarcely  a  provision  for  the  conduct  of  the  business  of  a  manufac- 
turing corporation  that  is  not  inconsistent  with  the  existence  of  a 
contract  by  which  the  power  to  manage  the  business  of  the  company 
and  to  bind  the  corporation  by  his  acts  is  vested  in  one  not  a  member 
of  the  corporation  nor  its  officer  or  agent.  Such  are  the  third,  fourth 
and  fifth  sections,  providing  how  the  president  and  directors,  and 
other  officers,  agents  and  factors  of  the  corporation  shall  be  chosen. 
Such  too  is  the  sixth  section,  which  authorizes  every  such  company 
to  make  by-laws  for  its  own  regulation  and  government.  Such  are  the 
several  provisions  authorizing  the  stockholders  to  fix  the  amount  of 
the  capital  stock,  to  increase  the  same  within  the  limit  fixed  l)y  law 
or  to  reduce  it.  §§  9,  11,  19.  And  such  is  the  provision  requiring  the 
president  and  directors  to  give  annual  notice  of  the  amount  of  the 
debts  of  the  corporation;  the  means  of  stating  which  would  not  be 
in  their  power  if  another  principal  had  the  power  of  creating  the 
debts.  §  22.  Of  the  same  character  is  the  twenty-fifth  section,  by 
which  it  is  declared  that  the  whole  amount  of  the  debts  which  the 
corporation  shall  at  any  time  owe  shall  not  exceed  the  amount  of  the 
capital  stock  actually  paid  in,  and  which  renders  the  directors,  under 
whose  administration  an  excess  shall  occur,  liable  personally  to  the 
extent  of  such  excess;  a  provision  evidently  based  upon  the  ground 
that  the  exclusive  power  to  contract  *debts  is  vested  in  such  di- 
rectors, and  that  they  cannot  be  divested  of  it,  and  which  is  wholly 
inconsistent  with  the  existence  of  a  power  in  the  corporation  to  enter 
into  a  contract  of  partnership,  by  which  another  principal  would  be 
created,  having  equal  power  to  contract  debts  and  to  bind  the  part- 
nership and  the  corporation  in  solido. 

Indeed  the  effect  of  all  our  statutes,  the  settled  policy  of  our  legis- 
lature, for  the  regulation  of  manufacturing  corporations  is  that  the 


SECT.  II.]         BATES  V.   CORONADO  BEACH  CO.  407 

corporation  is  to  manage  its  affairs  separately  and  exclusively;  cer- 
tain powers  to  be  exercised  by  the  stockholders,  and  others  by  of- 
ficers who  are  the  servants  of  the  corporation  and  act  in  its  name  and 
behalf.  And  the  formation  of  a  contract,  or  the  entering  into  a  rela- 
tion, by  which  the  corporation  or  the  officers  of  its  appointment 
should  be  divested  of  that  power,  or  by  which  its  franchises  should 
be  vested  in  a  partner  with  equal  power  to  direct  and  control  its 
business,  is  entirely  inconsistent  with  that  policy. 

The  power  to  form  a  partnership  is  not  only  not  among  the  powers 
granted  expressly  or  by  reasonable  implication,  but  is  wholly  incon- 
sistent with  the  scope  and  tenor  of  the  powers  expressly  conferred, 
and  the  duties  expressly  imposed,  upon  a  manufacturing  corporation 
under  the  legislation  of  the  commonwealth. 

[The  prayer  of  the  petition  was  granted.] 

Note.  —  See,  accord,  Gunn  v.  Central  R.R.,  74  Ga.  509;  Bishop  v. 
American  Preservers'  Co.,  157  111.  284;  White  Star  Line  v.  Star  Line, 
141  Mich.  604;  Burke  v.  Concord  R.R.,  61  N.H.  160;  People  v.  North 
River  Sugar  Refining  Co.,  121  N.Y.  582,  supra;  Boyd  v.  American 
Carbon  Black  Co.,  182  Pa.  206;  Huguenot  Mills  v.  Jempson,  68  S.C. 
363;  Mallory  v.  Hanaur  Oil  Works,  86  Tenn.  598;  Pearce  v.  Madison 
R.R.  Co.,  21  How.  (U.S.)  441. 

Cf.  Allen  V.  Woonsocket  Co.,  11  R.I.  288. 

But  such  powder  may  be  given  by  the  legislature.  Butler  v.  Ameri- 
can Toy  Co.,  46  Conn.  136. 


BATES  V.  CORONADO  BEACH  CO. 

109  Cal.  160.     1895. 

Action  for  an  accounting  upon  a  partnership  agreement. 

The  plaintiff  alleged  that  a  contract  had  been  made  between  the 
defendant  and  himself  by  which  it  was  agreed  that  they  should 
purchase  certain  lands  and  other  property,  sell  the  same,  pay  certain 
debts  and  encumbrances  thereon,  and  divide  the  profits  and  losses 
arising  therefrom  equally  between  them.  The  plaintiff  paid  and 
conveyed  to  the  defendant  his  contribution  in  money  and  land.  The 
defendant  used  the  money  in  discharging  obligations  upon  the  land, 
and  afterwards  disposed  of  the  land. 

Harrison,  J.  It  was  not  ultra  vires  for  the  appellant  to  enter  into 
the  agi'eement  wdth  the  plaintiff.  The  power  of  a  corporation  to 
enter  into  a  general  partnership  with  an  individual,  or  with  another 
corporation,  is  not  here  involved.  The  ground  upon  which  this  power 
is  sometimes  denied  is  that  a  partnership  implies  the  power  of  each 
partner,  under  his  authority  as  a  general  agent  for  all  the  purposes  of 


408  BATES  V.   CORONADO  BEACH  CO.         [CHAP.  I. 

the  partnership,  to  bind  the  others  by  his  individual  acts,  whereas 
the  statutes  under  which  a  corporation  exists  require  its  powers  to 
be  exercised  by  a  board  of  directors,  and  preclude  it  from  becoming 
bound  by  the  act  of  the  one  who  may  be  only  its  partnei-.  There  is, 
however,  in  the  present  case  no  question  of  agency  in  the  manage- 
ment of  the  affairs  of  the  corporation.  The  plaintiff  paid  the  money 
to  the  appellant,  and  transferred  to  its  appointee  the  title  to  the 
land,  so  that  the  entire  management  of  the  business  contemplated 
by  the  contract  was  intrusted  to  the  corporation  itself.  There  is  no 
rule  of  law  that  will  preclude  a  corporation^  from  entering  into  a 
contract  with  an  individual,  which  will  have  the  effect  to  carry  out 
directly  or  indirectly  the  object  of  its  incorporation,  and  to  provide  in 
that  agreement  that  the  gains  or  losses  of  the  venture  shall  be  borne 
equally  by  both  parties.  Section  354  of  the  Civil  Code  provides: 
"Every  corporation,  as  such,  has  the  power:  ...  8.  To  enter  into 
any  obligations  or  contracts  essential  to  the  transaction  of  its  ordi- 
nary affairs,  or  for  the  purposes  of  the  corporation." 

Note.  —  Traffic  agreements  between  railroad  corporations  to 
handle  through  business  are  not  objectionable  as  making  a  partner- 
ship between  the  railroads.  See  Chicago  &  Alton  R.R.  Co.  v.  Midford, 
162  111.  522,  533;  Najac  v.  Boston  &  Lowell  R.R.  Co.,  7  All.  (Mass.) 
329. 

See  also  Hackeit  v.  Multnomah  Ry.  Co.,  12  Or.  124. 


SECT.  III. J  DENNY    HOTEL    CO.  V.  SCHRAM.  409 


SECTION  3. 
TO  HOLD  STOCK  IN  OTHER  CORPORATIONS. 


DENNY  HOTEL  CO.   v.   SCHRAM. 

6  Wash.  134.     1893. 

Dunbar,  C.J.  Can  a  corporation  under  the  laws  of  this  State 
become  an  incorporator  by  subscribing  for  shares  in  another  cor- 
poration? 

A  corporation  can  only  be  formed  in  the  manner  provided  by  law 
and  has  only  such  powers  as  the  law  specifically  confers  upon  it.  We 
do  not  think  that  a  corporation  was  within  the  contemplation  of  the 
legislature  when  they  used  the  expression  "two  or  more  persons," 
in  §  1498,  Gen.  Stat.  It  is  true  that  §  1709,  Code  Proc,  provides 
that  the  term  "person"  may  be  construed  to  include  the  LTnited 
States,  this  state,  or  any  state  or  territory,  or  any  public  or  private 
corporation,  as  well  as  an  individual.  But  it  does  not  follow,  by  any 
means,  that  the  term  "person"  is  always  to  be  construed  as  a  private 
corporation  any  more  than  it  is  always  to  be  construed  as  the  United 
States. 

Morawetz  on  Private  Corporations,  §  433,  says:  "A  corporation 
cannot,  in  the  absence  of  express  statutory  authority,  become  an 
incorporator  by  subscribing  for  shares  in  a  new  corporation;  nor  can 
it  do  this  indirectly  through  persons  acting  as  its  agents  or  tools;" 
citing  Central  R.R.  Co.  v.  Pennsylvania  R.R.  Co.,  31  N.J.  Eq.  475. 
The  author,  continuing,  says:  "The  right  of  forming  a  corporation  is 
conferred  by  the  incorporation  laws  only  upon  persons  acting  in- 
dividually, and  not  upon  associations." 

This,  it  seems  to  us,  for  manifest  and  manifold  reasons,  is  in  ac- 
cordance with  public  policy;  and  we  therefore  decide  that  under 
the  existing  laws  of  this  state  one  corporation  cannot  subscribe  to  the 
capital  stock  of  another  corporation. 

Note.  —  See,  accord,  Knowles  v.  Sandercock,  107  Cal.  629,  642; 
Mechanics  Association  v.  Meriden  Agency  Co.,  24  Conn.  159; 
Franklin  Co.  v.  Lewiston  Institution  for  Savings,  68  Me.  43;  Central 
R.R.  Co.  V.  Pennsylvania  R.R.  Co.,  31  N.J.  Eq.,  475,  494;  Railway 
Co.  V.  Iron  Co.,  46  Ohio  St.  44;  McCampbell  v.  Fountain  Head  R.R. 
Co.,  Ill  Tenn.  55,  67. 


410  CENTRAL    RAILROAD    COMPANY    V.  COLLINS.  [CHAP.  I. 

CENTRAL  RAILROAD  COMPANY  v.   COLLINS. 

40Ga.  582.      1869. 

The  Central  Railroad  and  Banking  Company  was  chartered  to 
build  and  maintain  a  railroad  from  Savannah  to  Macon.  Its  officers 
proposed  to  purchase  with  its  funds  and  for  its  benefit  12,38.'^  shares 
in  the  Atlantic  and  Gulf  Railroad  Company,  a  company  chartered  to 
build  a  railroad  from  Savannah  to  Bainbridge,  with  intent  to  use  the 
stock  to  affect  the  management  of  the  Atlantic  and  Gulf  Road.  Cer- 
tain stockholders  of  the  Central  Railroad  and  Banking  Company 
sought  to  restrain  this,  and  alleged  that  sucii  a  purchase  would  be 
ultra  vires.  The  defense  was  that  the  Atlantic  and  Gulf  Road  was 
so  managing  its  affairs,  in  carrying  freights  at  various  rates  from 
Bainbridge,  as  materially  to  injure  the  Central  Railroad  Company, 
and  that  the  intent  of  the  purchase  was  merely  to  enable  the  Central 
Raih-oad  Company  to  protect  itself;  that  it  was,  in  truth,  necessary 
for  self-preservation,  and  that  the  power  to  make  it  was  derivable 
from  the  expressly  granted  power  to  maintain  its  own  road. 

McCay,  J.  But  it  is  said  that  the  power  to  purchase  this  stock  is 
derivable  from  the  power  expres.sly  given  to  "maintain  the  road;" 
that  it  is  necessary  for  the  self-preservation  of  the  road,  and  arises 
by  implication  from  the  very  purposes  and  objects  for  which  the 
charter  was  granted.  The  basis  of  this  argument  is  that  it  is  neces- 
sary for  the  "maintaining"  of  the  Central  Railroad,  that  it  shall 
take  a  decided  part  in  the  "management  and  maintaining"  of  the 
Atlantic  and  Gulf  Railroad,  and  as  by  the  admitted  rules  of  the  com- 
mon law,  a  corporation  may  make  all  contracts  necessary,  either 
directly  or  incidentally,  to  enable  it  to  effect  the  purposes  of  its 
creation,  therefore  it  has  the  power  to  purchase  enough  of  the  stock 
of  the  Atlantic  and  Gulf  Railroad  to  enable  it  to  protect  itself  by 
controlling  the  unwise  management  of  the  Atlantic  and  Gulf  Rail- 
road. . 

The  purposes  of  the  charter  of  the  Central  Railroad  are  the  "lay- 
ing, building  and  making"  the  road.  The  words  of  the  charter  do 
not  in  express  terms  include  the  "maintaining  and  sustaining"  it, 
but  we  do  not  doubt  they  are  included,  since  the  "maintaining  and 
sustaining  "  are  necessary  to  the  very  objects  of  the  grant.  But  what 
does  a  grant  to  maintain  and  sustain  a  railroad  include?  Can  it  in 
any  fair  sense  be  construed  to  authorise  the  engaging  in  any  enter- 
prise which  will  extend  the  business  or  lessen  the  rivalries  of  the 
company?  If  this  be  so,  the  whole  doctrine  so  frequently  and  so 
emphatically  stated  in  the  books  and  decisions  is  a  sham.  The 
"maintaining  and  sustaining"  of  the  road,  has  reference  to  keeping 
it  in  repairs,  suppl^ang  it  with  machinery,  and  such  like  acts,  and 
not  to  projects  for  extending  its  business,  by  schemes  and  enter- 


SECT.  III.]        CENTRAL    RAILROAD    COMPANY    V.  COLLINS.  411 

prises  not  contemplated  and  expressed  in  clear,  unambiguous  terms, 
by  the  charter  itself. 

Every  charter  of  a  private  corporation  is  a  contract,  first  between 
the  State  and  the  corporation  —  to  which  each  is  solemnly  bound  — 
the  State  that  it  will  not  impair  the  obligation  —  the  corporation 
that  it  will  perform  the  objects  of  its  incorporation  and  keep  within 
the  powers  granted  to  it:  4th  Wheaton,  518;  secondly,  between  the 
stockholders  themselves.  The  stockholders  are  bound  to  consent  to 
the  management  of  the  affairs  of  the  corporation  by  the  majority, 
and  by  the  by-laws  which  that  majority  makes.  And  the  whole,  on 
the  other  hand,  agree  with  each  other,  that  they  will  apply  the  funds 
of  the  company  to  the  objects  and  purposes  of  the  charter,  and  not 
otherwise:  Young  v.  Harrison,  6  Ga.  130.  Both  as  to  the  State  and 
between  the  corporators,  the  law  of  this  contract  is  the  charter.  The 
State  has  granted  to  it  no  rights,  and  the  individual  stockholders 
have  clothed  it  with  no  rights,  except  such  as  are  clearly  and  ex- 
pressly set  down  in  the  charter:  13  Penn.  133;  28  Penn.  352;  18 
Howard,  341. 

Corporators  are  too  apt  to  forget  this  fundamental  law  of  their 
being.  In  the  daily  habit  of  transacting  business,  in  the  name  of  the 
company  as  though  it  were  an  individual,  they  are  apt  to  slide  into 
the  notion  that  a  corporation  is  an  individual  in  all  respects,  so  far 
as  business  matters  are  concerned. 

But  a  corporation  is  a  mere  creature  of  the  law,  and  only  exists  at 
all,  for  the  purposes  declared  in  its  charter,  and  has  absolutely  no 
powers  but  those  which  the  law  confers  upon  it.  It  is  a  creation  of  the 
law,  and  in  the  very  nature  of  things  is  just  what  the  law  makes  it, 
no  more,  no  less;  and  by  the  word  law  here,  I  do  not  mean  the  gen- 
eral law  which  regulates  the  powers  of  persons,  but  the  act  of  in- 
corporation, the  charter,  the  constitution. 

There  are  certain  general  rules  which  have,  time  out  of  mind, 
been  adopted  by  the  courts  in  their  investigation  of  the  powers  of 
incorporations,  that  it  may  be  well  to  notice.  1st.  As  a  corporation 
is  the  mere  creature  of  the  act  of  incorporation,  it  has  no  other  powers 
except  such  as  are  in  said  act  expressly  granted,  or  are  necessary  to 
effect  the  ends  and  objects  of  its  existence.  2d.  Charters  being  priv- 
ate acts,  or  rather  contracts  between  the  public  and  individuals,  the 
charter  is  to  be  strictly  construed,  nothing  is  to  be  taken  by  intend- 
ment or  inference.  Being  a  creature  of  the  law,  it  is  made  up  of  j  ust 
such  rights  as  its  charter  gives  it;  not  that  every  power  which  it 
possesses  must  be  granted  in  detail,  but  it  is  confined  in  its  operations, 
to  the  objects  and  purposes  expressly  set  forth  in  its  charter,  and  it 
can  undertake  no  other  enterprise  than  is  there  expressly  mentioned : 
Frederick  et  al.  v.  City  Council  of  Augusta,  5  Ga.  561;  Mayor,  etc.  v. 
Macon  &  W.  R.R.  Co.,  7  Ga.  221;  8  Ga.  23;  9  Ga.  213;  Winter  v. 
Mus.  R.R.,  11  Ga.  438. 


412  CENTRAL    RAILROAD    COMPANY    V.  COLLINS.  [CHAP.  1. 

The  books  are  full  of  decisions  in  illustration  of  these  positions. 
In  the  case  of  the  East  Anglian  Railroad  Company  v.  Eastern  Counties 
Railroad  Company,  7  English  Law  and  Ecjuity  Reports,  505,  the 
charter  was  for  the  "  purpose  of  making  and  maintaining"  a  particu- 
lar railway.  The  company  had  leased  another  railway,  and  had 
covenanted  to  pay  the  costs  of  soliciting  bills  then  pending  in  Parlia- 
ment, by  which  the  other  railway  should  have  power  to  make  exten- 
sions and  branches,  and  the  action  was  for  a  breach  of  the  covenant 
to  pay  said  costs.  Jervis,  Chief  Justice,  in  deciding  the  case,  says: 
"It  is  clear  the  defendants  have  a  limited  authority  only,  and  are 
a  corporation  only  for  the  purpose  'of  making  and  maintaining'  the 
railway  sanctioned  by  the  Act,  and  that  their  funds  cannot  be  ap- 
plied for  any  other  purpose  than  that  directed  by  the  act.  Indeed,  it 
is  not  contended  that  a  comixxny  so  constituted  can  engage  in  new 
trades  not  contemplated  by  their  act,  but  it  is  said  they  may  embark 
in  other  undertakings,  however  various,  provided  the  object  of  the 
directors  be  to  increase  the  profit  of  their  own  railway.  This  is  in 
truth  the  same  proposition  in  another  form;  if  the  company  cannot 
carry  on  a  new  trade,  because  it  is  not  contemplated  by  the  act,  they 
cannot  embark  in  other  undertakings  not  sanctioned  by  the  act, 
merelj^  because  they  hope  the  speculation  may  ultimately  benefit 
the  stockholders." 

In  Wood  V.  Greenville  and  Raleigh  Plank  Road  Company,  3  Jones' 
Equity  (North  Carolina  Reports)  183,  when  a  company  was  char- 
tered "to  build  a  plank  road  from  Greenville  to  Raleigh," the  court 
at  the  suit  of  a  stockholder  restrained  the  company  from  using  the 
funds  of  the  company  to  bu}'  stages  and  horses,  to  establish  a  mail 
route  over  the  road. 

In  Coleman  v.  Eastern  Counties  Railway,  6  English  Railroad 
Cases,  573,  it  was  held  that  the  directors  of  a  company  have  no  right 
to  pledge  the  funds  of  the  company  in  support  of  any  project  not 
pointed  out  by  their  charter,  although  such  project  may  tend  to 
increase  the  traffic  upon  the  railway  though  a  majority  of  the  stock- 
holders may  have  consented  and  the  object  be  not  contrary  to  pub- 
lic policy. 

In  the  case  of  Solomons  v.  Lang,  14th  Jurist  for  December,  1840, 
the  company  had  power  by  its  charter  to  "build  and  maintain"  a 
railway.  In  a  certain  legal  and  legitimate  way,  under  the  charter, 
the  company  became  possessed  of  certain  shares  in  another  railway. 
Subsequently,  it  undertook  to  purchase  other  shares  in  the  same  com- 
pany. Lord  Langdale,  M.R.,  held  that  this  was  an  unauthorized 
application  of  the  funds  of  the  company. 

This  court  in  Mayor,  etc.  v.  Macon  and  Western  Railroad,  7  Ga. 
221,  held  that  it  was  not  in  the  power  of  the  ]\Iacon  and  Western 
Railroad,  chartered  to  carry  passengers,  etc.,  from  Macon  to  Atlanta, 
to  undertake  to  transport  produce  through  Macon,  across  the  bridge, 
to  the  Central  Railroad  depot. 


SECT.  III.]         CENTRAL    RAILROAD    COMPANY    V.  COLLINS.  413 

In  Merritt  v.  The  Shrewsbury/  &  Chester  Railway,  the  company 
undertook  to  improve  the  navigation  of  the  river  Dee,  upon  which, 
by  their  charter,  they  had  wharves  and  warehouses,  and  upon  which 
also  came  much  of  the  freight  carried  upon  the  road,  but  the  court 
held  such  an  undertaking  ultra  vires:  3  Eng.  L.  &.  E.R.  149.  In  16th 
English  Law  &  Equity  Reports,  180,  it  was  held  that  a  railroad 
company  could  not  contract  to  pay  the  expenses  of  a  managing  com- 
mittee of  a  new  railway  company  in  application  to  Parliament  for  a 
charter.  See  alsoE.  A.  R.R.  Co.  v.  The  Eastern  Counties  Railway  Co., 
21  L.  Rep.  (N.S.)  and  the  court  say  they  are  a  corporation  only  for 
the  purpose  of  making  and  maintaining  the  Eastern  Counties  Rail- 
way, and  they  cannot  engage  in  o  new  trade.  See,  also,  10  Beavan, 
1;  6  Railway  Cases,  152;  43  N.H.  5115. 

These  cases  all  proceed  upon  the  well-established  principle  that  a 
corporation  has  no  powers  except  those  expressly  granted  by  its 
charter,  and  such  as  are  necessary  to  the  declared  objects  of  the  grant, 
that  the  charter  is  to  be  strictly  construed,  and  that  the  capital 
stock,  credit  and  property  of  every  Idnd,  is  to  be  used  solely  for  the 
purposes  and  objects  of  the  charter.  So  long  as  a  company  confines 
itself  within  the  ''purposes  and  objects  declared  by  the  charter," 
the  courts  will  sustain  it,  but  when  it  undertakes  new  and  distinct 
enterprises  not  declared  in  the  charter,  under  a  pretence  that  they  are 
in  furtherance  of  the  declared  design,  the  courts  will  restrain  them. 
The  power  to  do  acts  and  make  contracts  necessary  to  enable  a  cor- 
poration to  answer  the  ends  of  its  creation,  like  the  express  grants  of 
power,  is  also  to  be  strictly  construed,  and  is  limited  by  all  the  cases 
and  by  the  general  principles  of  all  the  books,  with  this  qualification, 
that  even  for  this  purpose  it  cannot  engage  in  any  new  and  distinct 
enterprise,  involving  new  risks  to  its  stockholders,  and  not  fairly 
within  the  terms  of  the  original  grant:  18th  How.  341,  485;  2  Russ. 
&  My.  480,  470;  4  Railway  Cases,  492;  7  Hare  Chan.  R.  114;  4  My. 
&  Craig,  134;  1  Edwards,  84;  22  N.Y.  274;  13  Eng.  Law  and  Equity, 
513;  4  Russ.  562;  1  Black  (U.S.)  449.  The  purchase  of  stock  in  an- 
other railroad  company  with  intent  to  hold  it,  and  especially,  as  is 
admitted  by  the  answer  in  this  case,  with  intent  to  use  the  power 
thus  acquired  to  secure  an  interest  in  the  management,  either  for 
good  or  evil,  of  the  road,  seems  to  come  exactly  within  the  principles 
which  we  have  deduced  from  an  unbroken  series  of  decisions  both  in 
England  and  this  country. 

If  the  Central  Railroad  Company  may  lawfully  buy  twelve  thou- 
sand three  hundred  and  eighty-three  shares  in  this  road,  it  may  law- 
fully, buy  all  the  shares,  become  the  owner  of  the  road,  and  thus, 
without  any  grant  from  the  State  of  Georgia,  this  company  may  have 
power  to  manage  and  maintain  two  railroads  from  Savannah  to  the 
interior  of  the  State.  Nay,  the  same  principles  precisely  which 
would  derive  from  its  charter  this  power,  would  authorize  it  to  be- 


414  CENTRAL    RAILROAD    COMPANY    t'.   COLLINS,  [(HAP.   I. 

come  the  owner  of  every  railroad  in  the  State,  and  of  everj^  other 
corporation  and  enterprise  in  the  State,  the  management  of  which 
may  in  any  way  affect  the  interest  of  the  Central  Railroad  Com- 
pany. We  do  not  think  the  stockholders  of  the  Central  Railroad 
Company,  by  their  subscription,  bound  themselves  to  any  such  in- 
definite and  unlimited  enterprise.  They  contracted  to  give  to  the 
majority  of  the  stockholders  a  control  over  their  funds,  for  the  pur- 
pose of  making  and  keeping  up  and  using  a  railroad  from  Savannah 
to  Macon,  and  the  appropriations  of  the  capital,  or  credit,  or  funds 
of  the  company  in  any  other  enterprise,  against  the  consent  of  any 
of  the  stockholders,  is  a  violation  of  the  rights  of  those  stockholders, 
and  a  Court  of  Equity  will  restrain  the  company  from  such  an  act. 

Note. —  PeopZe  v.  Chicago  Gas  Trust  Co.,  130  111.  268.  A  cor- 
poration formed  under  a  general  law  for  the  manufacture  and  sale  of 
gas  cannot  clothe  itself  with  power  to  purchase  and  hold  stock  in 
similar  corporations  by  naming  this  as  one  of  its  objects  in  the  arti- 
cles filed  with  the  Secretary  of  State.  See  also  People  v.  Union  Gas 
Co.,  254  111.  395. 

Dunbar  v.  American  Telephone  Co.,  224  111.  9.  A  domestic  tele- 
phone company  would  not  have  had  power  to  purchase  a  majority 
of  the  stock  of  a  corporation,  organized  to  manufacture  and  sell 
electric  telephone  and  telegraph  instruments,  for  the  purpose  of 
control;  a  foreign  telephone  company  therefore  has  no  power  to 
make  such  a  purchase  in  Illinois;  and  a  purchase  by  trustees  for  the 
foreign  corporation  is  as  objectionable  as  a  purchase  by  the  foreign 
corporation  itself.   See  same  case,  238  Ilh  456. 

Elkins  v.  Camden  R.R.  Co.,  36  N.J.  Eq.  5.  It  is  nltra  vires  for  a 
railroad  to  purchase  a  majority  of  the  stock  of  a  rival  railroad. 

Pearson  v.  Concord  Railroad,  62  N.H.  537.  It  is  ultra  vires  for  a 
railroad  to  purchase  stock  in  another  railroad  for  the  purpose  of 
control. 

Marble  Co.  v.  Harvey,  92  Tenn.  115.  A  corporation  engaged  in  the 
marble  business  has  no  power  to  purchase  stock  of  another  marble 
company,  for  the  purpose  of  control. 

See  also  Louisville  &  Nashville  R.R.  Co.  v.  Kentucky,  161  U.S.  677, 
698;  De  la  Vergne  Co.  v.  German  Savings  Institution,  175  U.S.  40,  51. 

In  Attorney-General  v.  New  York,  New  Haven,  &  Hartford  R.R. 
Co.,  198  Mass.  413,  there  was  an  express  statutory  provision  that  a 
railroad  corporation  should  not  (with  specified  exceptions)  directly 
or  indirectly  subscribe  for,  take  or  hold  the  stock  of  any  other  cor- 
poration. 


SECT.  III.]  CALIFORNIA    BANK    V.  KENNEDY.  415 

CALIFORNIA  BANK  v.   KENNEDY. 

167  U.S.  362.     1897. 

One  question  presented  was  whether  a  national  bank  has  power 
to  own  the  stock  of  a  savings  bank. 

Mr.  Justice  White.  It  is  settled  that  the  United  States  statutes 
relative  to  national  banks  constitute  the  measure  of  the  authority 
of  such  corporations,  and  that  they  cannot  rightfully  exercise  any 
powers  except  those  expressly  granted,  or  which  are  incidental  to 
carrying  on  the  business  for  which  they  are  established.  Logan 
County  Bank  v.  Townsend,  139  U.S.  67,  73.  No  express  power  to 
acquire  the  stock  of  another  corporation  is  conferred  upon  a  national 
bank,  but  it  has  been  held  that,  as  incidental  to  the  power  to  loan 
money  on  personal  security,  a  bank  may  in  the  usual  course  of  doing 
such  business  accept  stock  of  another  corporation  as  collateral,  and 
by  the  enforcement  of  its  rights  as  pledgee  it  may  become  the  owner 
of  the  collateral  and  be  subject  to  liability  as  other  stockholders. 
National  Bank  v.  Case,  99  U.S.  628.  So,  also,  a  national  bank  may  be 
conceded  to  possess  the  incidental  power  of  accepting  in  good  faith 
stock  of  another  corporation  as  security  for  a  previous  indebtedness. 
It  is  clear,  however,  that  a  national  bank  does  not  possess  the  power 
to  deal  in  stocks.  The  prohibition  is  implied  from  the  failure  to 
grant  the  power.  First  National  Bank  v.  National  Exchange  Bank, 
92  U.S.  122,  128. 

On  behalf  of  the  plaintiff  below  it  was  admitted  at  the  trial  that 
the  stock  of  the  savings  bank  was  not  "taken  as  security  or  anything 
of  the  kind,"  and  it  is  not  disputed  in  the  argument  at  bar  that  the 
transaction  by  which  this  stock  was  placed  in  the  name  of  the  bank 
was  one  not  in  the  course  of  the  business  of  banking  for  which  the 
bank  was  organized. 

Note.  —  A  national  bank  has  no  power  to  own  the  stock  of  an- 
other national  bank.  Concord  Bank  v.  Hawkins,  174  U.S.  364.  Or 
of  a  mercantile  corporation.  Metropolitan  Stock  Exchange  v.  Lyn- 
donville  Bank,  76  Vt.  303. 

If  a  corporation  has  power  to  lend  money,  it  has  power  to  take 
stock  of  other  corporations  as  security.  Calumet  Paper  Co.  v.  Stotts 
Investment  Co.,  96  Iowa,  1^1 ;  Baldwin  v.  Canfield,  26  Minn.  43;  TFesf- 
minster  Bank  v.  Electrical  Works,  73  N.H.  465;  In  re  Asiatic  Bank- 
ing Corporation,  L.R.  4  Ch.  App.  252.  Cf.  Franklin  Bank  v.  Com- 
mercial Bank,  36  Ohio,  350  (restrictive  provision  in  act  under  which 
the  banking  corporation  was  organized) . 


416  JOINT    STOCK    DISCOUNT    CO.  I.  BROWN.  [cHAP.  I. 

JOINT  STOCK  DISCOUNT  CO.   v.   BROWN. 

L.R.  3  Eq.  139.     1866. 

The  memorandum  relative  to  the  incorporation  of  the  Joint  Stock 
Discount  Company  stated  certain  specific  objects  for  which  the  com- 
pany was  estabhshed,  includins  the  discounting  of  bills  and  notes; 
and  then  added:  "and  the  doing  of  all  such  things  as  the  directors 
shall  consider  incidental  or  conducive  to  the  attainment  of  the  above 
objects."  The  directors  invested  funds  of  the  company  in  the  shares 
of  a  new  banking  company. 

Page  Wood,  V.C.  [After  holding  that  such  an  investment  diil  not 
come  within  the  objects  specifically  stated  in  the  memorantlum]. 

Then  as  regards  the  second  branch  of  the  argument,  which  is  this: 
that  assuming  this  not  to  be  within  the  clause  for  making  advances 
and  investing  in  securities,  the  directors  are  to  do  "all  such  things 
as  they  shall  consider  incidental  or  conducive  to  the  attainment  of 
the  above  objects"  —  it  appears  to  me  to  be  much  too  wide  a  con- 
struction of  that  clause  to  say,  that  if  the  transaction  in  question  is 
not  within  the  scope  of  the  original  terms  there  stated,  it  can  be 
brought  within  the  scope  of  doing  that  which  is  considered  to  be 
incidental  to  the  attainment  of  the  objects,  the  objects  being  to  use 
money,  by  making  it  available  in  the  shape  of  a  return  of  interest, 
or  of  discount.  How  do  they  justify  it  in  this  resolution?  They  say, 
if  we  take  all  these  shares  in  the  bank,  it  will  increase  our  connec- 
tions. What  a  prodigious  extension  I  must  give  to  those  words  in 
order  to  bring  it  within  the  power  of  the  directors  to  do  anj'thing 
which  they  may  consider  conducive  to  the  interests  of  the  company 
by  increasing  its  connections,  however  unconnected  with  the  objects 
stated!  I  apprehend  those  powers  must  be  exercised  only  for  the 
purpose  of  doing  something  bond  fide  connected  with  the  objects  to 
be  attained,  and  in  the  ordinary  course  of  business  adapted  to  their 
attainment.  This  was  the  only  gi'ound  on  which  I  proceeded  in  the 
case  of  Taunton  v.  Royal  Insurance  Company,  2  H.  &  M.  135.  There 
I  found  that  the  transaction  impeached  was  in  the  ordinary  course  of 
business,  and  in  the  way  in  which  other  people  conducted  their  busi- 
ness. In  that  case,  if  a  large  amount  of  advertisement,  or  of  expendi- 
ture of  money,  had  been  found  necessary,  it  would  have  been  laid  out 
properl}^;  but  to  carry  the  principle  on  to  any  remote  extension  of 
the  objects,  on  the  ground  that  if  shares  were  bought  in  this  bank 
there  would  be  some  control  over  the  business  of  the  discounting, 
would  be,  I  apprehend,  wholly  unwarranted  by  the  plainest  rules  of 
construction,  which  must  limit  the  company's  powers  to  those  trans- 
actions which  are  naturally  conducive  to  the  objects  specified.  If  the 
principle  were  thus  extended,  it  would  apply  to  the  bujdng  shares  in 
every  sort  of  undertaking  —  a  brewery,  for  instance,  or  any  other 


SECT.  III. J         PEOPLE  V.   PULLMAN  CAR  CO.  417 

business  where  discounts  might  be  of  use.  The  company  might  be- 
come ship-builders,  or  might  be  engaged  in  any  other  business;  they 
might  buy  a  share  in  any  general  merchant's  business,  because  there 
would  be  bills  in  that  business  which  would  want  discounting,  and  so 
they  might  get  more  business. 

Perhaps  the  case  of  Simpson  v.  Westminster  Hotel  Company, 
8  H.L.C.  712,  which  was  taken  to  the  House  of  Lords,  may  be  con- 
sidered a  strong  application  of  the  principle  as  to  the  extension  of  a 
company's  powers.  But  that  case  proceeded  on  this  ground,  that 
the  company  did  bond  fide  intend  to  use  the  building  as  an  hotel,  but 
they  said:  ''One  of  the  greatest  expenses  of  our  hotel  is  the  fur- 
nishing of  it.  With  our  capital  we  have  not  the  means  of  furnishing 
the  whole  building,  but  we  have  the  means  of  furnishing  it  in  part, 
and  of  thus  starting  it  directly.  Our  only  alternative,  consequently, 
is  either  to  leave  the  building  which  we  have  erected  wholly  unpro- 
ductive, or  to  let  it  until  we  have  got  such  a  fund  as  will  enable  us  to 
complete  the  furnishing."  Therefore  it  was  let,  and  that  the  letting 
was  not  so  very  far  from  the  objects  of  the  company  was  shewn  by 
this,  that  they  inserted  a  stipulation  for  furnishing  luncheons  to  the 
different  clerks  in  the  office.  Everything  tended  to  shew  extreme 
bona  fides  in  making  use  of  that  as  a  clear  and  definite  means  of  get- 
ting at  their  object,  and  as  the  only  means  they  had  of  making  the 
hotel  available,  because  it  came  to  the  alternative  of  leaving  the 
property  wholly  unproductive,  or  of  getting  £5000  a-year  for  it,  with 
the  additional  chance  of  supplying  a  certain  amount  of  eating  and 
drinking  on  the  premises. 

In  this  case  the  proceeding  is  simply  an  embarking  in  a  totally 
different  business;  it  is  not  the  buyiag  shares  for  the  purpose  of  sell- 
ing them  again,  or  for  investment,  or  anj-thing  of  that  kind,  but  it 
is  buying  shares  for  the  purpose  of  enlarging  the  particular  business 
which  the  company  have  to  conduct.  I  think  that  it  is  clear  that  the 
bill  must  be  answered,  and  the  demurrer  must  be  overruled,  with 
costs. 

Note.  —  See,  accord,  New  Orleans  Steamship  Co.  v.  Ocean  Dry 
Dock  Co.,  28  La.  Ann.  173;  Railway  Co.  v.  Iron  Co.,  46  Ohio,  44; 
McCampbell  v.  Fountain  Head  R.R.  Co.,  Ill  Tenn.  55. 


PEOPLE  V.  PULLMAN  CAR  CO. 

175  111.  125.     1898. 

Section  4  of  the  act  in  corporating  the  Pullman  Car  Co.  was  as 
follows:  "The  said  corporation  shall  have  power  to  manufacture, 
construct  and  purchase  railway  cars,  with  all  convenient  appendages, 


418  STATE    V.  MISSOURI    PACIFIC    RY.  CO.  [CHAP.  I. 

and  supplies  for  persons  travelling  therein,  and  the  same  may  sell  or 
use,  or  permit  to  be  used,  in  such  manner  and  upon  such  terms  as  the 
said  company  may  think  fit  ant!  proper." 

Mr.  Justice  Boggs.  The  pleas  admit  the  appellee  company  has 
purchased  and  holds  a  majority  of  the  shares  of  the  capital  stock  of 
the  Pullman  Iron  and  Steel  Company,  and  avers  further  that  said 
Pullman  Iron  and  Steel  Company  was  never  a  competitor  in  business 
with  defendant;  that  its  products  constitute  a  necessary  part  of  the 
material  required  in  the  construction  of  the  cars  manufactured  by 
defendant;  that  all  its  product  is  used  and  consumed  by  said  defend- 
ant, and  that  the  said  corporation  is,  in  effect,  a  mere  department  of 
defendant  in  its  car  manufacturinjj;  business,  although  existing  nom- 
inally as  an  independent  corporation.  The  right  and  power  of  a  cor- 
poration to  become  a  stockholder  in  another  corporation  was  pre- 
sented to  this  court  for  determination  in  the  case  of  People  v.  Chicago 
Gas  Trust  Co.,  130  111.  2G8,  and  the  conclusion  arrived  at  was,  that 
a  corporation  cannot  become  a  stockholder  in  another  corporation 
unless  power  to  do  so  is  specifically  granted  in  its  charter  or  neces- 
sarily implied  from  it.  The  conclusion  there  announced  is  the  pre- 
vailing doctrine  in  America,  and  we  see  no  reason  to  depart  from  it. 
Such  power  is  not  specifically  granted  to  the  appellee  corporation, 
and  there  is  no  room  for  the  contention  that  it  is  possessed  as  an 
implied  power.  The  decision  of  the  circuit  court  ousting  the  ap- 
pellee from  the  right  to  hold  capital  stock  in  the  Pullman  Iron  and 
Steel  Company  was  correct,  and  is  affirmed. 


STATE  V.  MISSOURI  PACIFIC  RY.  CO. 

237  Mo.  338.     1911. 

Valliant,  C.J.  The  information  is  in  quo  warranto.  The  respond- 
ents are  Missouri  corporations;  the  business  for  which  each  was  in- 
corporated is  indicated  by  its  corporate  name,  a  railroad  company, 
two  coal  mining  companies,  and  an  elevator  company. 

The  charge  in  the  information  is  that  the  railroad  company  has 
acquired  the  capital  stock  of  the  three  other  corporations  and  is  en- 
gaged in  conducting  the  business  for  which  they  were  incorporated. 
More  specifically  stated,  the  charge  is  that  the  Western  Coal  & 
Mining  Company  was  organized  under  the  laws  of  this  State  in  1879, 
with  a  capital  stock  of  $500,000,  for  the  purpose  of  carrying  on  a 
general  coal  and  mining  business  in  Missouri,  Kansas  and  elsewhere, 
with  power  to  purchase,  lease  or  otherwise  accjuire  mineral  and  other 
lands  for  the  purpose  of  mining  coal  and  other  minerals,  bujdng  and 
selling  coal,  etc.,  and  owning  and  operating  macliinery  and  appur- 
tenances necessary  to  carry  on  that  business;  and  that  after  its  or- 


SECT.  III.]  STATE    V.  MISSOURI    PACIFIC    RY.   CO.  419 

ganization  the  corporation  entered  upon  the  business  for  which  it  was 
chartered  and  continued  to  conduct  the  same  until  the  acquisition 
of  its  capital  stock  by  the  Missouri  Pacific  Railway  Company,  where- 
upon it  ceased  to  perform  its  functions  and  the  business  has  since 
and  is  still  being  conducted  alone  by  the  railroad  company,  to  the 
injury  of  the  interests  and  welfare  of  the  people  of  the  State. 

Like  specifications  are  made  in  relation  to  the  Rich  Hill  Coal  Min- 
ing Company,  and,  varying  only  in  reference  to  the  character  of  the 
business,  relating  also  to  the  Kansas-Missoui-i  Elevator  Company. 
The  conclusion  from  those  facts  drawn  in  the  information  is  that  the 
two  coal  companies  and  the  elevator  companj'^  have  lost  their  in- 
tegiity  and  individuality  and  are  rendered  incapable  of  exercising 
the  franchises  granted  by  their  respective  charters,  that  each  had 
become  a  mere  cover  for  the  unlawful  exercise  of  power  by  the  rail- 
road company,  and  their  further  existence  is  of  injmy  to  the  people 
of  the  State. 

The  prayer  is  that  the  two  coal  companies  and  the  elevator  com- 
pany be  ousted  of  their  charters,  that  the  railroad  company  be  or- 
dered to  cease  operating  the  business  of  those  three  companies,  and 
faiHng  to  heed  such  order,  that  it  be  ousted  of  the  corporate  rights 
granted  by  its  charter. 

The  respondents  filed  a  joint  answer  to  the  following  effect:  They 
admit  the  origination  of  each  of  the  corporations  as  stated  in  the  in- 
formation and  the  purpose  for  which  it  was  organized,  and  they  admit 
that  a  majority  of  the  capital  stock  of  the  three  other  companies  is 
owned  by  a  trustee  who  holds  the  legal  title  thereto  for  the  use  and 
benefit  of  the  railroad  company,  but  aver  that  there  are  four  other 
persons  who  each  own  at  least  one  share  of  the  stock.  Referring  to 
the  averment  in  the  information  to  the  effect  that  the  railroad  com- 
pany holds  its  charter  from  the  State  and  has  only  the  powers  gi-anted 
to  it  as  a  railroad  company  by  the  laws  of  the  State,  which  are  only 
such  powers  as  are  necessary,  convenient  and  incident  to  the  con- 
struction, maintenance  and  operation  of  a  railroad  as  a  public  high- 
way, and  that  under  the  Constitution  it  can  engage  in  no  business 
other  than  that  expressly  authorized  by  the  charter  or  the  law  under 
which  it  may  have  been  organized,  the  answer  avers  that  the  rail- 
road company  has  offended  in  no  respect  the  provisions  of  the  law 
referred  to  and  has  not  gone  bej^ond  the  lawful  power  conferred  by 
its  charter ;  that  the  acquiring  of  the  stock  in  the  coal  companies  was 
for  the  purpose  only  of  securing  for  its  use  in  operating  its  railroad 
the  necessary  supply  of  coal  for  fuel,  and  the  acquiring  of  the  stock 
in  the  elevator  was  to  facilitate  the  shipping  and  transportation  of 
grain  over  the  railroad.  They  deny  that  since  the  acquisition  of  the 
stock  by  the  railroad  company  the  coal  companies  and  the  elevator 
company  have  ceased  to  do  business  under  their  respective  charters 
or  that  such  business  is  or  has  been  conducted  by  the  railroad  com- 


420  STATE    V.  MISSOURI    PACIFIC    RY.  CO.  [CHAP.  I. 

pany;  on  the  contrary,  they  aver  that  since  the  acquisition  of  the 
stock,  as  before,  the  business  of  the  coal  companies  and  the  elevator 
company  have  been  conducted  exclusively  by  their  respective  boards 
of  directors  duly  elected  by  the  stockholders.  They  deny  that  there 
has  been  any  abuse  of  their  charter  powers  or  any  conduct  on  the 
part  of  the  directors  injurious  to  the  interest  or  welfare  of  the  people 
of  the  State,  or  that  the  interests  or  welfare  of  the  people  would  be 
promoted  by  a  dissolution  of  the  corporations  named  or  a  forfeiture 
by  the  railroad  company  of  its  beneficial  interest  in  the  stock  of  the 
other  companies. 

To  that  answer  the  Attorney-General  filed  a  reply  in  which,  after 
denying  that  any  persons  other  than  the  trustee  for  the  railroad  com- 
pany owned  any  of  the  stock  and  denying  that  the  stock  was  ac- 
quired for  the  purposes  stated  in  the  answer,  went  on  to  aver  that, 
since  the  accjuisition  of  the  stock  in  the  coal  companies,  the  railroad 
company  "through  the  management,  conduct  and  control  of  the  said 
coal  companies,  engaged  in  the  business  of  selling  coal  to  the  general 
public  and  did  sell  large  amounts  through  and  under  the  name  of 
said  coal  and  mining  companies  to  the  general  public  in  Missouri 
and  elsewhere."  An  averment  of  like  character  was  made  in  refer- 
ence to  the  business  of  the  elevator  company.  These  averments 
differ  from  those  in  the  information  in  tliis,  to  wit:  in  the  informa- 
tion it  was  stated  that  the  railroad  company  itself  was,  under  cover 
of  the  charters  of  these  other  companies,  carrj'ing  on  the  business  of 
mining  and  marketing  coal  and  a  general  warehouse  and  elevator 
business,  whereas  the  averments  in  the  reply  are  that  the  railroad 
company  was  doing  those  acts  through  the  management  of  the  coal 
and  elevator  companies,  by  virtue  of  its  ownership  of  the  stock  in 
those  companies.  On  motion  of  the  respondents  the  court  struck  out 
those  averments  in  the  reply,  construing  them  to  be  the  pleader's 
inference  from  the  fact  of  the  ownership  of  the  stock,  and  since  the 
ownership  of  the  stock  was  admitted  in  the  answer,  or  return,  the 
inference  to  be  drawn  was  but  a  legal  conclusion. 

The  State  then  moved  for  judgment  on  the  pleadings  and  that  is 
the  form  in  which  the  cause  is  now  submitted  for  final  judgment. 

For  the  purposes  of  this  motion  the  statements  in  the  answer  (or 
return)  of  respondents  must  be  taken  as  true,  and  the  statements  in 
the  information  admitted  by  the  answer  will  also  be  taken  as  true; 
the  legal  conclusions  that  either  party  draws  from  those  facts  are 
open  for  discussion. 

The  organization  of  the  corporations  as  stated  in  the  information, 
and  the  several  purposes  for  which  they  were  respectively  organized, 
are  admitted,  and  it  is  also  admitted  that  the  majority  of  the  stock 
in  the  coal  companies  and  in  the  elevator  company  is  held  by  a 
trustee  for  the  railroad  company. 
■    The  language  of  the  answer  perhaps  justifies  the  inference  also 


SECT.  III.]  STATE    V.  MISSOURI    PACIFIC    RY.  CO.  421 

that  all  the  stock  in  those  companies  except  four  shares  in  each  is 
held  bj''  a  trustee  for  the  railroad  company,  and  that  those  four  shares 
are  held  by  individuals  to  enable  them  to  qualify  as  directors  as  the 
law  requires.  Against  those  admissions  we  have  the  statements  in 
the  answer  that  the  purpose  of  the  railroad  company  in  acquiring  the 
stock  in  the  coal  companies  was  to  secui'e  to  itself  a  supply  of  coal  to 
be  used  as  fuel  in  running  its  trains,  and  the  purpose  in  acquiring 
the  stock  in  the  elevator  company  was  to  facilitate  the  handling  and 
sliipping  of  gi-ain  to  be  carried  over  its  road ;  also  the  statements  that 
the  railroad  company  does  not  operate  or  control  the  operation  of 
either  of  the  coal  companies  or  the  elevator  company,  but  on  the 
contrary  each  is  controlled  and  operated  by  its  own  board  of  di- 
rectors and  officers  appointed  by  the  board,  and  that  each  company 
is  performing  the  duties  required  by  its  charter  and  serving  the  pub- 
lic impartially  as  the  law  requires.  Those  statements  must  be  taken 
as  true  with  only  this  qualification,  to-wit,  the  law  presumes  that 
the  railroad  company  has  exerted  its  power  as  a  stockholder  in  elect- 
ing the  directors  and  to  that  extent  influences  the  pohcy  of  each 
company. 

Under  the  state  of  facts  above  mentioned  the  only  question  of  law 
in  this  case  is,  may  a  railroad  company  own  the  majority  of  stock  in 
a  coal  company  adjoining  or  near  its  line  of  road,  or  in  an  elevator 
company  offering  a  convenient  means  to  aid  it  in  the  handling  and 
shipping  of  grain?  The  question  is  not,  can  a  railroad  companj^  be 
held  to  account  in  a  proceeding  in  quo  warranto  for  an  abuse  of  the 
power  which  the  ownersliip  of  a  majority  of  such  stock  gives?  for 
perhaps  no  one  would  doubt  that  it  would  be  amenable  to  such  an 
inquiry,  but  where  there  has  been  no  abuse  of  power,  where  the 
business  of  the  corporation  is  being  conducted  in  the  usual  way  of 
such  business  concerns,  is  it  unlawful  for  the  railroad  company  to 
own  the  stock? 

The  only  written  law  to  which  w^e  are  referred  as  sustaining  the 
contention  that  it  is  unlawful  for  a  railroad  company  to  own  stock 
under  such  conditions  is  §  7  of  article  12  of  the  Constitution,  in 
which  is  the  following:  "No  corporation  shall  engage  in  business 
other  than  that  expressly  authorized  in  its  charter  or  the  law  under 
which  it  may  have  been  or  hereafter  may  be  organized."  That 
clause  in  the  Constitution  does  not  refer  to  the  ownership  of  stock 
in  another  company;  the  thing  forbidden  is  the  engaging  in  business 
not  authorized  by  its  charter.  It  would  doubtless  be  a  violation  of 
that  clause  of  the  Constitution  if  a  railroad  corporation  should  ac- 
quire and  use  the  stock  of  another  corporation  in  whose  business  a 
railroad  company  could  not  lawfully  engage,  as  a  cover  behind  which 
to  carry  on  such  business,  that  is,  as  a  mere  means  of  evading  the 
letter  of  the  law,  still,  in  such  case,  the  offense  would  be  the  carrying 
on  of  the  business,  not  the  owning  of  the  stock. 


422  STATE    V.  MISSOURI    PACIFIC    RY.  CO.  [ciIAP.  I. 

It  would  perhaps  not  be  contended  that  a  railroad  company  could 
not  lawfully  own  a  coal  mine  and  operate  it  if  necessary  for  the  sole 
purpose  of  obtaining  fuel  for  its  own  use,  or  that  it  could  not  own 
and  operate  an  elevator  in  the  handling  of  grain  to  be  transported 
over  its  railroad.  The  business  thorefoi-e  of  mining  coal  or  operating 
an  elevator  is  not  business  of  such  a  character  as  the  clause  in  the 
Constitution  above  quoted  forbids.  If  the  railroad  company  could 
do  that  business  with  its  own  means,  why  could  it  not  secure  itself 
in  the  matter  of  obtaining  coal  for  fuel  or  a  convenience  in  handling 
grain  by  acquiring  stock  in  a  coal  or  elevator  company,  if  it  would 
be  more  convenient,  and  if  the  public  was  not  injured  thereby?  The 
more  stock  a  corporation  owns  in  another  concern  the  more  power 
it  has  in  the  election  of  directors  and  through  them  in  influencing 
the  policy  of  the  other  corporations,  but  that  is  not  in  fact  taking  the 
management  of  the  business  in  its  own  hands.  We  are  not  overlook- 
ing the  fact  that  where  a  corporation  owns  practically  all  the  stock  in 
another  concern  it  may,  if  so  minded,  dictate  through  the  board  of 
directors  the  method  of  the  business,  which  would  be  equivalent  to 
indirectly  conducting  the  business;  but  that  consequence  does  not 
necessarily  follow;  the  directors  may  be  chosen  with  an  eye  to  their 
ability  and  honesty  and  left  to  conduct  the  business  according  to 
their  best  judgment,  and  the  law  will  presume  that  such  is  the  case 
until  the  contrary  is  shown;  if  it  should  be  shown  that  directors  are 
conducting  the  business  in  the  interest  alone  of  a  stockholder  who 
elected  them  and  to  the  injury  of  the  other  stockholders  or  to  that  of 
the  public  in  general,  a  case  of  fraudulent  mismanagement  would 
appear,  calling  for  the  arm  of  a  court  of  equity;  but  such  is  not  this 
case.  We  therefore  conclude  that  §  7  of  article  12  of  the  Constitu- 
tion does  not  forbid  a  railroad  company  to  own  stock  in  a  coal  com- 
pany or  an  elevator  company,  and  we  hold  that  the  mere  fact  that 
the  railroad  company  does  own  a  majority  or  all  but  a  few  shares  of 
the  stock  in  those  companies,  does  not  authorize  a  j  udgment  of  dis- 
solution of  the  corporations  and  ouster  of  their  franchises. 

It  is  charged  in  the  information  that  the  charters  of  the  coal  com- 
panies and  the  elevator  company  have  become  a  mere  cover  for  the 
railroad  company  under  which  to  liide  its  unlawful  usurpation  of  the 
corporate  franchises,  that  those  companies  by  such  unlawful  usurpa- 
tion by  the  railroad  company  have  been  rendered  incapable  of  con- 
ducting their  business,  and  that  their  businesses  are  being  conducted 
by  the  railroad  company.  But  those  statements  are  denied  in  the 
answer  of  respondents.  It  is  there  stated  that  the  business  of  each  of 
those  companies  is  and  has  been  from  the  beginning  conducted 
under  the  direction  and  control  of  its  own  board  of  directors.  Those 
statements  are  to  be  taken  as  true  and,  taking  them  as  true,  it  leaves 
the  State's  case  nothing  to  rest  on  but  the  bare  fact  that  the  railroad 
company  owns  the  majority  of  stock  in  those  other  companies. 


SECT.  III.]      FIRST    NAT.  BANK    V.  NAT.  EXCHANGE    BANK.  423 

There  is  no  use  for  us  to  go  further  and  decide  whether  or  not  a 
railroad  company  may  lawfully  acquire  and  hold  any  or  all  the  capital 
stock  of  another  corporation  whose  business  has  no  influence  in 
aiding  it  in  operating  its  railroad,  because  there  is  no  such  question 
before  us.  The  court  will  take  judicial  knowledge  of  the  fact  that 
coal  for  fuel  is  a  necessity  in  the  operation  of  a  steam  railroad  and 
that  an  elevator,  although  not  an  absolute  necessity,  is  an  assistance 
in  the  handling  and  shipping  of  grain,  and  we  hold  that  a  railroad 
company  may  acquire  stock  in  coal  and  elevator  companies  when 
the  purpose  is,  as  in  this  case  it  is,  to  faciUtate  the  business  for  which 
it  was  chartered. 

Our  judgment  is  that  the  ouster  demanded  in  the  information 
should  be  denied  and  the  respondents  discharged.  It  is  so  ordered. 
All  concur,  except  Kennish,  J.,  not  sitting,  having  been  of  counsel. 

Note.  —  See  also  State  v.  Missouri  Pacific  Ry.  Co.,  241  Mo.  1.    ' 


FIRST  NATIONAL  BANK  v.   NATIONAL  EXCHANGE 

BANK. 

92  U.S.  122.     1875. 

Error  to  the  Court  of  Appeals  of  the  State  of  Maryland. 

The  plaintiff,  a  national  bank  organized  under  the  laws  of  the 
United  States,  and  doing  business  at  Charlotte,  N.C.,  desiring  to 
increase  its  capital  stock,  and  for  that  purpose  to  deposit  with  the 
treasurer  of  the  United  States  of  Washington  $50,000  in  bonds  of 
the  United  States,  employed  Bayne  &  Co.,  of  Baltimore,  as  its  agent, 
to  procure  and  deliver  them  at  the  treasury.  Not  having  money  to 
pay  for  them  at  the  time,  the  plaintiff  sent  its  president,  Wilkes,  to 
Baltimore,  with  a  certificate  previously  prepared  in  Charlotte,  as 
follows :  — 

"First  National  Bank  of  Charlotte,  N.C, 
"Charlotte,  Dec.  15,  1865. 
"Received  on  deposit,  from  Bayne  &  Co.,  fifty-five  thousand 
United  States  5-20  bonds,  third  issue,  payable  to  the  order  of  them- 
selves on  return  of  this  certificate. 

"John  Wilkes, 
"Pres.  First  Nat.  Bk.,  Charlotte,  N.C." 

This  certificate  was  delivered  by  Wilkes  to  Bayne  &  Co.  in  Balti- 
more; and  on  the  18th  of  December,  1865,  they,  having  indorsed  the 
same,  deposited  it,  together  with  other  securities,  with  the  National 
Exchange  Bank  of  Baltimore,  as  collateral  security  for  a  call  loan 
of  $80,000  then  made  by  that  bank  to  said  firm  of  Bayne  &  Co. 


424  FIRST    NAT.  BANK    V.  NAT.  EXCHANGE    BANK.         [CHAP.  I. 

A  few  days  after  the  delivery  of  said  certificate,  the  plaintiff  de- 
posited in  New  York,  to  the  credit  of  Bayne  &  Co.,  a  sum  sufficient 
to  pay  the  same,  and  received,  in  January,  18GG,  oral  notice  from 
them  that  the  certificate  was  discharged,  and  subject  to  its  order.  In 
March,  1866,  the  plaintiff  received  a  written  notice  to  the  same 
effect,  but  did  not  apply  for  the  surrender  of  said  certificate.  In 
April  following,  Bayne  &  Co.  failed;  and  the  plaintiff  was  then 
notified  by  the  defendant  that  it  hold  the  certificate  of  deposit 
for  value,  and  demanded  the  delivery  of  the  bonds  therein  men- 
tioned. 

Wilkes,  the  president,  was  sent  by  the  plaintiff  to  Baltimore  to 
negotiate  for  the  return  of  said  certificate.  He  informed  the  defend- 
ant that  it  had  been  satisfied  by  the  payment  to  Bayne  &  Co.,  and 
disavowed  any  legal  liability  on  account  of  same  to  the  defendant. 
To  avoid  suit,  however,  Wilkes  offered  to  pay  So, 000  upon  the  de- 
livery of  the  certificate;  which  defendant  refused,  but  offered  to  take 
$20,000,  and  threatened  suit  unless  so  settled.  Wilkes  declined  to 
pay  this  sum,  but  asked  for  delay  until  he  could  return  to  Charlotte 
and  consult  the  directors  of  his  bank.  He  again  returned  to  Balti- 
more, and  new  negotiations  for  compromise  of  the  controversy  be- 
tween the  two  banks  in  regard  to  their  respective  rights  to  the  cer- 
tificate were  opened.  Wilkes  ascertained  that  the  defendant  held, 
among  its  collaterals  from  Bayne  &  Co.,  a  large  number  of  shares 
of  Washington,  Alexandria,  and  Georgetown  Railroad  stocks,  the 
market-value  of  which  had  been  seriously  depressed  by  the  failure  of 
Bayne  &  Co.  Having  informed  himself  in  regard  to  the  condition 
of  the  stock  and  its  supposed  value,  and  after  one  or  two  interviews 
with  the  president  and  directors  of  the  defendant,  it  was  finally 
agreed  that  the  plaintiff  should  take  four  hundred  shares  of  the 
Washington,  Alexandria,  and  Georgetown  Railroad  stock,  and  one 
thousand  shares  of  the  Maryland  Anthracite  stock,  the  same  being 
valued  at  $40,000;  and  one  hundred  and  twenty-five  shares  of  the 
stock  of  the  plaintiff,  valued  at  $15,000,  —  the  latter,  inasmuch  as 
he  was  advised  that  a  national  bank  could  not  buy  its  own  stock,  to  be 
taken  by  Wilkes  himself;  thus  making  $55,000.  Upon  the  basis  of 
this  settlement,  the  defendant  was  to  deliver  to  Wilkes  the  certificate 
held  by  it  for  the  $55,000  United  States  bonds.  The  plaintiff  paid  to 
the  defendant  the  sum  of  $40,000  according  to  the  terms  of  the  above 
settlement,  and  received  the  certificates  for  one  thousand  shares  coal 
stock.  The  four  hundred  shares  of  railroad  stock  were  not  then  de- 
Hvered,  there  being  a  suit  about  it  at  the  time  of  the  agreement  which 
prevented  ail  transfers;  but  it  was  regarded  and  treated  by  both 
parties  as  belonging  to  the  plaintiff. 

In  September,  1869,  nearly  three  years  after  the  date  of  the  settle- 
ment, suit  was  brought  by  the  plaintiff  in  the  Superior  Court  of 
Baltimore  City  to  recover  the  $40,000  paid  by  it  to  the  defendant  in 


SECT.  III.]     FIRST    NAT.  BANK   V.  NAT.  EXCHANGE    BANK.  425 

pursuance  of  the  arrangement  above  stated.  At  the  request  of  the 
plaintiff,  the  court  gi-anted  the  following  propositions  of  law :  — 

First,  That  if  the  plaintiff  agi-eed  to  purchase  for  $40,000  the  rail- 
road and  coal  stock,  and  paid  that  sum,  then  the  court  must  find  for 
the  plaintiff  for  that  amount;  provided  the  court  shall  find  that  the 
defendant  knew  the  plaintiff  to  be  a  national  bank,  and  shall  further 
find  that  the  certificate  of  deposit  was  delivered  up  in  consequence 
of  said  contract,  if  by  said  contract  no  part  of  the  $40,000  was  to  be 
paid  for  the  certificate. 

Second,  That  if  the  plaintiff  agreed  to  purchase  the  said  stock  for 
140,000,  and  Wilkes  also  agreed  to  pui'chase  for  SI 5, 000  one  hundred 
and  twenty-five  shares  of  plaintiff's  stock,  and  the  inducement  to 
both  agreements  was  Wilkes's  desire  to  obtain  the  certificate  of 
deposit,  and  he  did  so  obtain  it,  that  does  not  inure  to  make  the  first 
contract  vahd,  provided  the  court  shall  find,  that,  by  the  first-men- 
tioned contract,  the  consideration  for  which  the  sum  of  $40,000  was 
to  be  paid  was  the  railroad  and  coal  stock,  and  that  no  part  of  said 
sum  was  to  be  paid  for  the  certificate  of  deposit. 

Third,  That  if  the  plaintiff,  in  order  to  compromise  the  certificate 
of  deposit,  agreed  to  purchase  it  and  the  railroad  and  coal  stock  for 
$40,000,  and  paid  the  money,  then  the  plaintiff  is  entitled  to  recover 
so  much  of  said  sum  as  the  court  shall  find  was  paid  for  said  stock. 

The  court  found  for  the  defendant,  and  rendered  a  judgment  in 
its  favor,  which  the  Court  of  Appeals  affirmed:  whereupon  the  case 
was  brought  here  by  writ  of  error. 

Mr.  Chief  Justice  Waite  delivered  the  opinion  of  the  court. 

The  question  presented  for  our  consideration  in  this  case  is, 
whether  a  national  bank,  organized  under  the  National  Banking 
Act,  may,  in  a  fair  and  bona  fide  compromise  of  a  contested  claim 
against  it  growing  out  of  a  legitimate  banking  transaction,  pay  a 
larger  sum  than  would  have  been  exacted  in  satisfaction  of  the  de- 
mand, so  as  to  obtain  by  the  arrangement  a  transfer  of  certain  stocks 
in  railroad  and  other  corporations;  it  being  honestly  believed  at  the 
time,  that,  by  turning  the  stocks  into  money  under  more  favorable 
circumstances  than  then  existed,  a  loss,  which  would  otherwise  ac- 
crue from  the  transaction,  might  be  averted  or  diminished.  Such, 
according  to  the  finding  below,  was  the  state  of  facts  out  of  which 
this  suit  has  arisen.   That  finding  is  conclusive  upon  us. 

A  national  bank  can  "exercise  by  its  board  of  directors,  or  duly 
authorized  officers  or  agents,  subject  to  law,  all  such  incidental 
powers  as  shall  be  necessary  to  carry  on  the  business  of  banking,  by 
discounting  and  negotiating  promissory  notes,  drafts,  bills  of  ex- 
change, and  other  evidences  of  debt ;  by  receiving  deposits ;  by  buying 
and  selling  exchange,  coin,  and  bulhon;  by  loaning  money  on  per- 
sonal security;  and  by  obtaining,  issuing,  and  circulating  notes." 
Rev.  Stat.,  §  5136,  par.  7;  15  Stat.  101,  §  8. 


426  FIRST   NAT.    BANK   V.  NAT.    EXCHANGE  BANK.       [ciIAP.  I. 

Authority  is  thus  given  to  transact  such  a  banking  business  as  is 
specified,  and  all  incidental  powers  necessary  to  carry  it  on  are 
granted.  These  powers  are  such  as  are  required  to  meet  all  the  legiti- 
mate demands  of  the  authorized  business,  and  to  enable  a  bank  to 
conduct  its  affairs,  within  the  general  scope  of  its  charter,  safel}'  and 
prudently.  This  necessarily  implies  the  right  of  a  bank  to  incur 
liabiUties  in  the  regular  course  of  its  business,  as  well  as  to  become 
the  creditor  of  others.  Its  own  obligations  must  be  met,  and  debts 
due  to  it  collected  or  secured.  The  power  to  adopt  reasonable  and 
appropriate  measures  for  these  purposes  is  an  incident  to  the  power 
to  incur  the  liability  or  become  the  creditor.  Obligations  may  be 
assumed  that  result  unfortunately.  Loans  or  discounts  may  be  made 
that  cannot  be  met  at  maturity.  Compromises  to  avoid  or  reduce 
losses  arc  oftentimes  the  necessary  results  of  this  condition  of  things. 
These  compromises  come  within  the  general  scope  of  the  powers 
committed  to  the  board  of  directors  and  the  officers  and  agents  of 
the  bank,  and  arc  submitted  to  their  judgment  and  discretion,  ex- 
cept to  the  extent  that  they  are  restrained  by  the  charter  or  by-laws. 
Banks  may  do,  in  this  behalf,  whatever  natural  persons  could  do 
under  like  circumstances 

To  some  extent,  it  has  been  thought  expedient  in  the  National 
Banking  Act  to  hmit  this  power.  Thus,  as  to  real  estate,  it  is 
provided  (Rev.  Stat.,  §  5137;  13  Stat.  107,  §  28)  that  it  may  be 
accepted  in  good  faith  as  security  for,  or  in  pajniient  of,  debts  pre- 
viously contracted;  but,  if  accepted  in  payment,  it  must  not  be 
retained  more  than  five  years.  So,  while  a  bank  is  expressly  prohib- 
ited (§  5201;  13  Stat.  110,  §  35)  from  loaning  money  upon  or  pur- 
chasing its  own  stock,  special  authority  is  given  for  the  acceptance  of 
its  shares  as  security  for,  and  in  payment  of,  debts  pre\'iously  con- 
tracted in  good  faith;  but  all  shares  purchased  under  this  power  must 
be  again  sold  or  disposed  of  at  private  or  public  sale  within  six 
months  from  the  time  they  are  acquired. 

Dealing  in  stocks  is  not  expressly  prohibited;  but  such  a  pro- 
hibition is  implied  from  the  failure  to  grant  the  power.  In  the  honest 
exercise  of  the  power  to  compromise  a  doubtful  debt  owing  to  a  bank, 
it  can  hardly  be  doubted  that  stocks  may  be  accepted  in  payment 
and  satisfaction,  with  a  view  to  their  subsequent  sale  or  conversion 
into  money  so  as  to  make  good  or  reduce  an  anticipated  loss.  Such 
a  transaction  would  not  amount  to  a  dealing  in  stocks.  It  was,  in 
effect,  so  decided  in  Fleckner  v.  Bank  of  U.S.,  8  Wheat.  351,  where 
it  was  held  that  a  prohibition  against  trading  and  dealing  was  noth- 
ing more  than  a  prohibition  against  engaging  in  the  ordinary  business 
of  buying  and  selling  for  profit,  and  did  not  include  purchases  re- 
sulting from  ordinary  banking  transactions.  For  this  reason,  among 
others,  the  acceptance  of  an  indorsed  note  in  payment  of  a  debt  due 
was  decided  not  to  be  a  "  deahng  "  in  notes.  Of  course,  all  such  trans- 


SECT.  III.]      FIRST    NAT.  BANK    V.  NAT.  EXCHANGE    BANK.  427 

actions  must  be  compromises  in  good  faith,  and  not  mere  cloaks  or 
devices  to  cover  unauthorized  practices. 

It  is  difficult  to  see  how  a  debt  due  from,  or  a  contested  obHgation 
resting  upon,  a  bank,  occupies  any  different  position  in  respect  to 
this  power  of  adjustment  and  compromise  from  that  of  a  debt  owing 
to  it.  The  object  in  both  cases  is  to  get  rid  of  or  reduce  an  appre- 
hended loss  growing  out  of  legitimate  business;  and  it  would  seem 
that  whatever  might  be  done  in  the  one  case  ought  not  to  be  ex- 
cluded from  the  other  under  the  same  circumstances.  Often  a  dis- 
charge by  a  bank  of  its  own  obligation  creates  a  debt  due  to  it  from 
another.  Such  was  the  case  here.  Bayiie,  without  authority,  trans- 
ferred to  the  defendant,  as  collateral  security  for  his  indebtedness, 
a  certificate  of  deposit  issued  to  him  by  the  plaintiff,  and  afterwards 
collected  the  money  due  upon  the  certificate  from  the  plaintiff  with- 
out disclosing  the  transfer.  Any  payment  by  the  plaintiff  to  the 
defendant,  therefore,  in  discharge  of  its  liability  upon  the  certificate 
became  a  lawful  charge  against  Bayne.  He  was  insolvent.  It  was, 
on  this  account,  not  only  the  right,  but  the  duty,  of  the  officers  and 
agents  of  the  plaintiff  to  protect  by  their  arrangements,  as  far  as 
possible,  the  stockholders  whose  interests  they  represented.  This 
was  necessarily  left  to  their  judgment  and  discretion.  No  question 
of  good  faith  is  involved.  The  transaction  for  all  the  purposes  of  this 
suit  must  be  taken  to  have  been,  in  fact,  what  it  purports  to  be,  — 
a  fair  and  honest  compromise  of  an  outstanding  claim,  with  a  view 
to  ultimate  protection  against  an  impending  loss.  As  such,  we  think 
it  was  within  the  corporate  powers  of  the  bank,  and  that  the  Court 
of  Appeals  did  not  err  in  so  holding. 

Judgment  affirmed. 

Note.  —  It  was  held  that  the  corporation  in  question  had  power 
to  take  stock  in  other  corporations  in  payment  of  a  previously  ex- 
isting debt  in  Morgan  v.  King,  27  Colo.  539 ;  Latimer  v.  State  Bank, 
102  Iowa,  162;  Deposit  Bank  v.  Barrett,  13  S.W.  (Ky.)  337;  Hill  v. 
Shilling,  69  Neb.  152;  Howe  v.  Boston  Carpet  Co.,  16  Gray  (Mass.) 
493;  Holmes  Mfg.  Co.  v.  Holmes  Metal  Co.,  127  N.Y.  252,  259. 

But  see  First  National  Bank  v.  Converse,  200  U.S.  425.  A  manu-  . 
facturing  corporation  became  insolvent.  A  National  Bank  was 
among  its  creditors.  The  creditors  organized  a  new  corporation  with 
power  to  purchase  the  capital  stock  of  the  old  corporation,  evidences 
of  indebtedness  issued  by  it,  and  its  assets,  and  with  power  to  manu- 
facture and  sell  specified  articles.  The  bank  took  stock  in  this  new 
corporation  in  payment  of  its  debt,  and  a  majority  of  the  court 
was  of  opinion  that  this  was  ultra  vires.  Mr.  Justice  White  said 
that  the  new  corporation  "was  organized  to  embark  in  the  purely 
speculative  business  of  buying  and  selling  the  stock  and  assets  of 
an  existing  and  insolvent  corporation,  with  power,  but  without 


428  FIRST    NAT.  BANK   V.  NAT.  EXCHANGE    BANK.        [cHAP.  I. 

the  obligation,  to  engage  as  an  independent  enterprise  in  a  manu- 
facturing business.  ...  As  no  authority,  express  or  implied,  has  ever 
been  conferred  by  the  statutes  of  the  United  States  upon  a  national 
bank  to  engage  in  or  promote  a  purely  speculative  business  or 
adventure,  ...  it  follows  that  the  bank  had  no  power  to  engage  in 
such  business  by  taking  stock  or  otherwise.  The  power  of  a  national 
bank  to  engage  in  the  character  of  business  which  the  articles  of 
association  of  the  thresher  company  manifested,  as  defined  by  the 
Supreme  Court  of  Minnesota,  cannot  be  inferred  to  have  been  pos- 
sessed by  the  bank  as  an  incident  of  securing  a  present  loan  of  money 
or  as  a  means  of  protecting  itself  from  loss  upon  a  preexisting 
indebtedness.  To  concede  that  a  national  bank  has  ordinarily  the 
right  to  take  stock  in  another  corporation  as  collateral  for  a  present 
loan  or  as  security  for  a  preexisting  debt,  does  not  imply  that 
because  a  national  bank  has  lent  money  to  a  corporation  it  may 
become  an  organizer  and  take  stock  in  a  new  and  speculative  venture; 
in  other  words,  do  the  very  thing  which  the  previous  decisions  of 
this  court  have  held  cannot  be  done." 

As  to  the  power  of  a  corporation  to  sell  property  for  stock  in 
another  corporation,  with  intent  to  resell  the  stock,  see  White  v. 
Marquardt,  105  Iowa,  145;  Hodges  v.  N.E.  Screw  Co.,  1  R.I.  312,  347. 
Cf.  Railway  Co.  v.  Iron  Co.,  46  Ohio,  44. 

In  Hodges  v.  N.E.  Screw  Co.,  1  R.I.  312,  the  court  said  (p.  347): 
"There  are  large  classes  of  corporations  in  Rhode  Island  and  the 
other  States,  which  may  and  do  rightfully  invest  their  capital  in  the 
stock  of  other  corporations;  such,  for  instance,  as  rehgious  and 
charitable  corporations,  and  corporations  for  literary  and  scientific 
purposes.  So  insurance  companies  may  rightfully  invest  their 
capital  in  the  stock  of  other  corporations,  such  as  banks  and  rail- 
roads, and  the  like."  But  in  Commercial  Insurance  Co.  v.  Board  of 
Revenue,  99  Ala.  1,  it  was  held  that  an  insurance  company  has  no 
power  to  invest  in  the  stock  of  a  bank. 

In  Burland  v.  Earle  [1902],  A.C.  83,  95,  it  was  held  that  the 
company  in  question  had  power  to  invest  its  surplus  in  shares  in 
other  companies.  There  is  some  American  authority  in  accord. 
In  Booth  V.  Robinson,  55  Md.  419,  the  court  said  (p.  433) :  "  Having 
money  to  loan  or  invest,  there  would  appear  to  be  no  good  reason 
why  it  might  not  invest  in  the  stock  of  other  corporations  as  well 
as  in  any  other  funds,  provided  it  be  done  bona  fide,  and  with  no 
sinister  or  unlawful  purpose."  And  see  Layng  v.  French  Spring  Co., 
Ltd.,  149  Pa.  308. 


SECT.  III.]  HILL    V.  NISBET.  429 

HILL  V.   NISBET. 

100  Ind.  341.     18S4. 

One  question  presented  was  whether  the  purchase  of  stock  of  the 
Cincinnati,  Ilockport  and  Southwestern  Railway  Company  by  the 
Evansville  Local  Trade  Railroad  Company  was  ultra  vires. 

Mitchell,  J.  The  Evansville  Local  Trade  Railroad  Company 
was  organized  under  the  general  statute  of  the  State  for  the  organ- 
ization of  railroads,  with  the  purpose  in  view  of  constructing  a  rail- 
road from  the  city  of  Evansville  to  some  point  of  connection  with, 
or  intersection  of,  the  Cincinnati,  Rockport  and  Southwestern  Rail- 
way, and  from  the  whole  record  it  may  be  gathered  that  it  was 
within  the  object  of  the  organization  to  become  ultimately  consoli- 
dated with  the  latter  company.  The  general  purpose  being  to  pro- 
mote the  commercial  interests  of  the  city  of  Evansville,  and  to 
create  a  railroad  corporation  whose  business  would  prove  remuner- 
ative to  its  stockholders. 

As,  under  the  statutes  of  the  State,  railroad  corporations  may  be 
organized,  and  after  organization  they  may  acquire  by  purchase,  or 
consolidate  with,  other  connecting  or  intersecting  Knes,  it  can  not 
be  said  that  the  organization  of  a  railroad  corporation,  with  a  view 
of  ultimately  becoming  consolidated,  upon  equitable  terms  and  in 
accordance  with  the  provisions  of  the  statute,  with  one  already 
existing,  is  against  pubhc  poUcy. 

At  the  time  of  the  purchase  of  the  stock  in  question  the  Local 
Trade  Railroad  Company  was  in  its  incipiency,  not  having  pro- 
gressed farther,  perhaps,  than  a  paper  organization,  and  the  sub- 
scription of  $70,750  to  its  stock. 

It  does  not  appear  whether  its  line  had  been  located  or  not,  but 
if  this  was  done  it  seems  to  be  granted  that  no  further  progi-ess  had 
been  made.  It  seems  to  be  conceded  on  all  hands,  too,  that  the 
accomphshment  of  the  end  had  in  view  by  its  projectors  would  be 
greatl}''  facilitated  by  the  acquisition  by  it  of  a  controlling  interest 
in  the  Cincinnati,  etc.,  Co.,  with  the  ultimate  purpose  in  view  of 
consohdating  the  two  properties,  thereby  making  one  of  more  value 
to  the  stockholders  and  of  more  efficiency  for  public  good. 

The  proposition  is  stated  broadly  in  many  cases,  that  one  corpora- 
tion can  not,  without  express  statutory  authority,  become  the  owner 
of  any  portion  of  the  stock  of  another  corporation.  Pearce  v.  Madi- 
son, etc.,  R.  R.  Co.,  21  How.  441;  Mutual  Savings  Bank,  etc.,Ass'n  v. 
Meridian  Agency  Co.,  24  Conn.  159;  Franklin  Co.  v.  Leuiston  Savings 
Bank,  G8  Maine,  43;  Central  Railroad  Co.  v.  Collins,  40  Ga.  582; 
Sumner  v.  Marcy,  3  Wood.  &  M.  105;  Franklin  Bank  v.  Coinmercial 
Bank,  36  Ohio  St.  350  (38  Am.  R.  594). 

It  is  said  that  if  this  were  not  so,  a  banking  corporation  could 


430  HILL    V.  NISBET.  [CIIAP.  L 

become  the  operator  of  a  railroad,  or  a  railroad  corporation  niij^ht 
engage  in  the  banking  business.  It  must  be  said  at  once,  that  where 
the  purchase  of  stock  in  one  corporation  by  another  amounts  to 
engaging  in  a  business  other  than  that  authorized  by  its  charter, 
such  purchase  is  ultra  vires,  and  this  is  so,  not  because  the  purchase 
is  stock,  but  because  the  business  is  outside  the  scope  of  its  charter. 

Whether  the  pui'chase  of  stock  in  one  corporation  by  another  is 
ultra  vires  or  not,  must  depend  upon  the  purpose  for  which  the 
purchase  was  made,  and  whether  such  purchase  was,  under  all  the 
circumstances,  a  necessary  or  reasonable  means  of  carrying  out  the 
object  for  which  the  corporation  was  created,  or  one  which  under 
the  statute  it  might  accomplish. 

§  3951,  R.S.  1881,  authorizes  any  railroad  corporation  organized 
under  the  provisions  of  the  general  railroad  law,  "to  acquire,  by 
purchase  or  contract,  the  road,  road-bed,  real  and  personal  property, 
rights  and  franchises  of  any  other  railroad  corporation  or  corpora- 
tions which  may  cross  or  intei-sect"  its  hne;  and  if  in  any  case  it 
should  appear  to  be  a  necessary  or  reasonable  means  to  that  end, 
no  reason  is  perceived  why  it  might  not  be  accomplished  by  pur- 
chasing the  stock,  instead  of  purchasing  the  corporate  property 
directly.  In  short,  the  purchase  of  stock  by  one  railroad  corporation 
in  another  will  be  upheld  whenever  it  is  a  necessary  or  reasonable 
means  to  the  accomplishment  of  an  end  proposed,  which  is  within 
the  scope  of  its  statutory  powers. 

Keeping  in  view  the  averments  in  the  complaint,  from  which  the 
purpose  for  which  the  stock  was  purchased  may  be  fairly  inferred, 
and  considering  the  broad  and  comprehensive  powers  conferred  by 
the  statutes  on  railroad  corporations,  authorizing  them  to  acquire 
real  and  personal  property  "necessary  to  accomplish  the  objects 
for  which  the  corporation  is  created,"  and  to  acquire  the  property 
of,  and  consolidate  with  uncompleted  connecting  and  mtersecting 
lines,  we  can  not  say  that  the  purchase  of  the  stock  was  unauthor- 
ized. R.S.  1881,  §§  3903,  3951. 

Note.  —  For  other  cases  where  the  legislative  enactments  on  the 
power  of  corporations  to  hold  stock  in  other  corporations  have  been 
liberal,  see  Atchison,  Topeka  &  Santa  Fe  R.R.  Co.  v.  Fletcher,  35 
Kan.  236;  Baltimore  v.  Baltimore  &  Ohio  R.R.  Co.,  21  Md.  50; 
Dewey  v.  Toledo,  Ann  Arbor  &  North  Michigan  Ry.  Co.,  91  Mich. 
351;  MacGinniss  v.  Boston  &  Montana  Mining  Co.,  29  Mont.  428; 
Dittman  v.  Distilling  Company  of  America,  64  N.J.  Eq.  537;  Clark 
V.  Memphis  Street  Ry.  Co.,  123  Tenn.  232;  State  v.  Superior  Court, 
56  Wash.  214. 


SECT.  III.]       STATE    V.  ATLANTIC    CITY    AND    SHORE    R.R.  CO.  431 

STATE  V.  ATLANTIC  CITY  AND  SHORE  R.R.   CO. 

77  N.J.L.  465.     1909. 

The  Atlantic  City  and  Shore  Railroad  Company  was  authorized 
under  the  revised  "Act  concerning  Railroads"  (Pamph.  L.  1903, 
p.  645)  to  build  and  operate  a  railroad  from  Egg  Harbor  to  a  point 
in  Atlantic  City.  It  acquii'ed  all  the  stock  of  the  Central  Passenger 
Railway  Company  (excepting  a  few  qualifying  shares  of  stock 
necessary  to  preserve  the  organization),  a  street  railroad  corporation. 
The  tracks  of  the  two  corporations  met,  and  the  first  corporation 
intended  that  its  passengers  should  be  transported  over  the  tracks 
of  the  second  corporation. 

The  State  contended  that  the  Atlantic  City  and  Shore  Railroad 
Company  had  no  power  to  own  the  stock  of  the  Central  Passenger 
Railway  Company. 

Pitney,  Chancellor.  The  Supreme  Court  entertained  the  \'iew 
that  irrespective  of  the  powers  conferred  upon  railroad  companies 
by  §  3  of  the  revised  act  concerning  railroads  (Pamph.  L.  1903,  p. 
C47),  the  legislature,  by  the  fifty-first  section  of  the  General  Cor- 
poration Act  (Pamph.  L.  1896,  p.  294),  has  conferred  upon  every 
corporation  of  this  State,  no  matter  under  what  law  it  may  have  been 
organized,  the  right  to  acquire  and  hold  the  stock  and  bonds  of  any 
other  corporation  of  this  or  any  other  State;  and  that  the  statute  puts 
no  limitation  upon  the  quantity  of  stock  or  bonds  that  may  be  ac- 
quired, so  long  as  one  corporation  does  not  acquire  all  of  the  stock 
of  another  and  thus  destroy  its  organization  and  power  to  exercise 
its  franchise.  It  was  therefore  held  that  the  act  of  the  Shore  com- 
pany in  pm-chasing  and  holding  a  controlling  interest  in  the  stock 
of  the  Central  company  was  within  the  power  conferred  upon  the 
Shore  company  by  the  legislature. 

§  51  of  the  General  Corporation  Act  (Pamph.  L.  1896,  p.  294) 
reads  as  follows: 

"Any  corporation  may  purchase,  hold,  sell,  assign,  transfer,  mort- 
gage, pledge  or  otherwise  dispose  of  the  shares  of  the  capital  stock  of, 
or  any  bonds,  securities  or  evidences  of  indebtedness  created  by  any 
other  corporation  or  corporations  of  this  or  any  other  State,  and  while 
owner  of  such  stock  may  exercise  all  the  rights,  powers  and  privi- 
leges of  ownership,  including  the  right  to  vote  thereon." 

Reading  this  section  alone,  and  treating  it  as  unqualified  by  other 
legislation,  it  no  doubt  conveys  the  very  broad  import  that  is  at- 
tributed to  it  in  the  opinion  of  the  Supreme  Court.  And  the  cir- 
cumstance, pointed  out  in  the  opinion,  that  in  the  year  1893  the 
legislature  by  a  supplement  to  the  General  Corporation  Act  of  1875 
(Pamph.  L.  1893,  p.  301;  Gen.  Stat.,  p.  963,  pi.  260)  authorized 
corporations  created  under  the  act  of  1875  to  purchase,  hold,  etc., 


432  STATE   V.  ATLANTIC    CITY    AND    SHORE   R.R,  CO.        [CHAP.  I. 

shares  of  the  capital  stock  of  any  other  corporation  created  under 
the  laws  of  this  or  any  other  State;  and  that  in  the  revision  of  1896 
the  express  limitation  of  this  authority  to  companies  organized  un- 
der the  General  Corporation  Act  was  omitted,  is  no  doul^t  an  added 
reason,  beyond  the  mere  language  of  the  present  §  51,  for  giving  a 
somewhat  extensive  signification  to  that  language. 

Nevertheless,  upon  mature  reflection,  it  seems  to  us  that  §  51, 
when  read  (as  it  must  be)  in  the  light  of  what  is  elsewhere  contained 
in  the  act  of  which  it  is  a  part,  and  of  the  general  policy  of  our  cor- 
poration laws  manifested  in  numerous  other  statutes,  including  the 
General  Railroad  Act  of  1903,  is  very  much  more  limited  in  its  effect. 

Manifestly,  we  should  first  refer  to  the  act  under  which  the  rail- 
road company  was  incorporated.  Had  this  been  a  special  act  of  legis- 
lation it  would  naturally  have  contained  within  itself  not  only  a 
grant  of  powers  but  a  limitation,  express  or  implied,  upon  such  grant. 
But  since  the  constitutional  amendments  of  1875  forbidding  the 
legislature  thereafter  to  pass  special  laws  granting  the  right  to  lay 
down  railroad  tracks,  or  any  special  act  conferring  corporate  powers, 
and  requiring  that  general  laws  be  passed  under  which  corporations 
may  be  organized  and  corporate  powers  of  every  nature  obtained 
(N.J.  Const.,  art.  4,  §  7,  pi.  11),  the  grant  of  corporate  powers  is  now 
to  be  sought  in  the  general  laws  thus  enacted  and  in  the  articles  of 
association  filed  thereunder,  which  are  in  effect  the  "charter"  of 
the  company. 

The  revised  "Act  concerning  Railroads"  (Pamph.  L.  1903,  p.  645), 
in  its  first  section  requires,  as  the  first  act  to  be  done  by  those 
who  assume  corporate  powers  thereunder,  that  a  certificate  of  incor- 
poration shall  be  executed,  proved  or  acknowledged  as  required  for 
deeds  of  real  estate,  and  filed  in  the  office  of  the  secretary  of  state, 
which  shall  set  forth  sundry  matters  requisite  for  a  proper  definition 
and  limitation  of  the  powers  of  the  corporation;  amongst  other 
things,  "the  object  of  the  company,  the  terminal  points  of  the  pro- 
posed railroad,  the  counties  of  this  state  in  or  through  which  it  and 
its  branches  are  intended  to  be  constructed,  and  the  length  of  such 
road  and  each  of  its  branches,  as  near  as  may  be." 

§  3  of  the  same  act  declares  that  every  railroad  company  shall 
have  the  general  powers  conferred  by  the  Corporation  Act  of  1896 
and  the  supplements  thereto,  and  shall  be  governed  by  the  provisions 
and  be  subject  to  the  restrictions  and  liabilities  in  said  act  contained, 
'^  so  far  as  the  same  are  appropriate  to  and  not  inconsistent  with  this 
act  or  with  the  provisions  of  the  act  under  which  any  such  company  may 
have  been  created  and  organized,''  and  in  addition  thereto  shall  have 
power  to  locate  and  determine  its  route  and  works,  to  acquire  from 
time  to  time  and  hold  and  use  all  such  real  estate  and  other  prop- 
erty as  may  in  the  judgment  of  its  directors  be  necessary  for  terminal 
purposes  and  for  the  construction  and  maintenance  of  its  railroad, 


SECT.  III.]      STATE    V.  ATLANTIC    CITY    AND    SHORE    R.R.  CO.  433 

and  stations,  branches,  sidings,  car  yards,  engine  houses,  repair 
shops,  and  other  accommodations  necessary  to  accomphsh  the  ob- 
jects of  its  incorporation,  and  to  construct  and  operate  its  road,  to 
charge  and  collect  fares,  etc.,  and  to  exercise  all  other  powers  by 
this  act  granted.  §  7  provides  that  when  the  route  of  the  railroad 
shall  have  been  determined  upon,  a  survey  of  such  route  and  loca- 
tion, particularly  describing  the  same,  shall  be  filed  in  the  office  of 
the  secretary  of  state.  Subsequent  sections  provide  for  the  construc- 
tion of  the  proposed  railroad  and  for  its  maintenance,  operation  and 
regulation. 

Concerning  the  Atlantic  City  and  Shore  Railroad  Company,  the 
record  before  us  discloses  that  under  its  charter  and  according  to 
its  route  filed  in  the  office  of  the  secretary  of  state  it  is  authorized 
to  build  and  has  built  a  line  of  railway  from  a  point  in  Egg  Harbor 
township  to  a  point  at  the  corner  of  Virginia  and  Adriatic  avenues  in 
Atlantic  City.  These  points,  therefore,  are  the  termini  adopted  by 
the  company  and  publicly  manifested  in  the  mode  prescribed  by  the 
Railroad  Act.  It  is  plain,  we  think,  that  this  company  is  by  its  arti- 
cles of  association  and  the  provisions  of  the  Railroad  Act  excluded 
from  building  or  operating  a  railroad  beyond  the  termini  thus  speci- 
fied, either  by  direct  means  or  by  the  indirect  method  of  stock  owner- 
ship in  another  company,  unless,  indeed,  such  power  is  to  be  derived 
from  §  3  of  the  Railroad  Act,  which  confers  upon  every  railroad 
company  certain  general  powers  conferred  by  the  Corporation  Act 
of  189G  and  the  supplements  thereto.  But  this  grant  is  expressly 
limited  so  as  to  have  effect  only  so  far  as  said  powers  are  "appro- 
priate to  and  not  inconsistent  with  this  act  or  with  the  provisions 
o^the  act  under  which  any  such  company  may  have  been  created 
and  organized." 

The  proper  construction  of  this  enactment,  as  we  think,  is,  that 
since  the  Railroad  Act  prescribes  definite  termini  for  the  raih-oads 
authorized  to  be  constructed  thereunder,  and  requires  these  to  be 
stated  in  the  articles  of  association,  powers  that  are  not  appro- 
priate to  and  consistent  with  the  construction,  maintenance  and 
operation  of  a  railroad  between  such  termini  may  not  be  claimed  by 
the  railroad  company  under  the  section  referred  to. 

Moreover,  the  grant  of  general  powers  contained  in  that  section 
is  confined  to  such  as  are  conferred  by  the  Corporation  Act  of  1896. 
(Pamph.  L.  1896,  p.  277.)  If  this  act  contains  in  itself  any  limitation 
upon  the  grant  of  the  stockholding  power  set  forth  in  its  fifty-first 
section,  this  limitation  is  of  course  operative  upon  railroad  companies 
assuming  the  power  to  hold  stock  in  other  corporations. 

Turning,  therefore,  to  the  Act  of  1896,  we  find  its  first  section 
sets  forth  certain  powers  that  every  corporation  shall  have,  viz.,  to 
have  succession  for  the  period  limited  in  its  charter  or  certificate  of 
incorporation,  and  when  no  period  is  limited  then  perpetually;  to 


434  STATE    V.  ATLANTIC    CITY    AND    SHORE    R.R.  CO.       [cHAP.  I. 

sue  and  be  sued;  to  make  and  use  a  common  seal;  to  hokl,  purchase 
and  convey  such  real  and  personal  estate  as  the  purposes  of  the  cor- 
poration shall  require;  to  appoint  officers  and  agents  such  as  the 
business  of  the  corporation  shall  require;  to  make  by-laws;  to  wind 
up  and  dissolve  itself  or  be  wound  up  and  dissolved. 

§  2  reads  as  follows:  " In  addition  to  the  powers  enumerated  in  the 
first  section  of  this  act,  and  the  powers  specified  in  its  charter  or  in 
the  act  or  certificate  under  which  it  was  incorporated,  every  cor- 
poration, its  officers,  directors  and  stockholders,  shall  possess  and 
exercise  all  the  powers  and  privileges  contained  in  this  act  so  far  as 
the  same  are  necessary  or  convenient  to  the  attainment  of  the  objects  set 
forth  in  such  charter  or  certificate  of  incorporation,  and  shall  be  gov- 
erned by  the  provisions  and  be  subject  to  all  the  restrictions  and 
liabilities  in  this  act  contained  so  far  as  the  same  are  appropriate 
to  and  not  inconsistent  with  such  charter  or  the  act  under  which 
such  corporation  was  formed;  and  no  corporation  shall  possess  or 
exercise  any  other  corporate  powers  except  such  incidental  powers  as 
shall  be  necessary  to  the  exercise  of  the  powers  so  given." 

In  the  former  General  Corporation  Act,  approved  April  7th,  1875 
(Gen.  Stat.,  p.  907,  etc.),  §  3  was  as  follows:  "That  in  addition  to 
the  powers  enumerated  in  the  first  section  of  this  act  and  to  those 
expressly  given  in  its  charter  or  in  the  act  or  certificate  under  which 
it  is  or  shall  be  incorporated,  no  corporation  shall  possess  or  exer- 
cise any  corporate  powers  except  such  as  shall  be  necessary  to  the 
exercise  of  the  powers  so  enumerated  and  given." 

A  similar  provision  contained  in  the  Corporation  Act  of  1846  was 
referred  to  by  this  court  in  Morris  and  Essex  Railroad  Co.  v.  Sussex 
Railroad  Co.,  5  C.E.  Gr.  542,  562,  where  it  was  pointed  out  that  the 
common  law  rule  limits  corporations  to  such  powers  as  are  given  by 
the  charter  or  necessarily  implied  for  carrying  into  effect  the  objects 
and  powers  expressly  sanctioned. 

In  the  Act  of  1896,  it  will  be  observed  that  §  2  combines  with  the 
prohibition  of  corporate  powers  other  than  such  as  are  incidental 
and  necessary  to  the  exercise  of  the  granted  powers,  a  liberty  to 
exercise  all  the  powers  and  privileges  contained  in  this  act  (only) 
"so  far  as  the  same  are  necessary  or  convenient  to  the  attainment  of 
the  objects  set  forth  in  such  charter  or  certificate  of  incorporation." 
But  this  language  itself  imports  a  grant  merely  incidental  to  the 
declared  objects  of  the  company. 

Among  the  powers  and  privileges  referred  to  are  those  mentioned 
in  §  51  of  the  same  act  w4th  respect  to  purchasing  and  holding  shares 
of  the  stock  and  bonds  and  other  evidences  of  indebtedness  of  other 
corporations.  We  deem  it  clear  that  §  51  is  to  be  construed  in  sub- 
ordination to  §  2,  and  that  the  State  thereby  grants  to  one  corpora- 
tion the  capacity  to  hold  stock  in  another  corporation  only  so  far  as 
such  stock  ownership  is  necessary  or  convenient  to  the  attainment 


SECT.  III.]       STATE    V.  ATLANTIC    CITY    AND    SHORE    R.R.  CO.  435 

of  the  objects  set  forth  in  the  charter  or  certificate  of  incorporatioB. 
of  the  holding  company. 

Not  only  does  this  construction  result,  as  we  think,  from  the  letter 
of  the  law,  but  it  seems  to  us  that  to  read  §  51  as  unqualified  by  any- 
thing ab  extra  would  contravene  the  general  policy  of  our  corporation 
laws. 

Our  Corporation  Act  and  Railroad  Act  are  not  exceptional  in  re- 
quiring that  the  objects  of  the  proposed  company  shall  be  stated 
in  the  certificate  of  incorporation,  and  that  this  certificate  shall  be 
made  a  matter  of  public  record.  Numerous  other  acts  providing  for 
the  incorporation  of  different  kinds  of  companies  contain  similar 
provisions.  The  legislative  purpose  is  to  preserve,  for  the  benefit  of 
the  people  and  of  private  parties  concerned,  solemn  evidence  of  the 
corporate  powers  that  have  been  granted,  of  the  contract  made  be- 
tween the  State  and  the  corporations,  and  of  the  contract  made  by 
the  corporators  inter  sese.  It  is  only  by  reference  to  the  certificates 
of  incorporation  that  the  attorney-general  and  other  officials  in- 
terested in  behalf  of  the  State  can  readily  determine  what  powers 
have  been  granted  and  what  have  not  been  granted,  and  whether 
the  company  is  usurping  franchises  not  granted  by  the  State.  It 
is  by  reference  to  the  articles  of  association  that  investors  can  con- 
veniently ascertain  the  character  of  the  contract  into  which  they  are 
entering  and  the  property  rights  they  are  acquiring  bj'"  purchasing 
stock  of  the  company.  And  while  the  present  proceeding  raises  no 
question  of  the  rights  of  dissenting  stockholders,  the  interests  of 
stockliolders  and  investors  are  not  to  be  laid  aside  when  we  are  in- 
quiring what  construction  is  to  be  placed  upon  the  statutory  provi- 
sions in  question. 

It  will  be  seen  upon  a  little  reflection  that  if  the  language  of  §  51 
of  the  General  Corporation  Act  had  unlimited  scope,  the  articles  of 
association  would  afford  the  least  possible  indication  of  the  real 
objects  of  the  company,  and  no  evidence  whatever  of  any  limitation 
upon  the  powers  that  might  in  fact  be  exercised.  Indeed,  there' 
would  be  practically  no  limitation. 

For  it  must  not  be  forgotten  that  stock  owmership  by  one  com- 
pany in  another  is  only  a  mode  by  which  the  former  company  en- 
gages in  the  business  of  the  latter.  Whether  the  stock  ownershii3  be 
large  or  small,  it  amounts  in  effect  to  a  participation  in  the  business 
for  which  the  second  company  is  formed.  But  since  the  second  com- 
pany (if  §  51  were  unqualified  in  its  effect)  might  likewise  hold  stock 
in  any  other  corporation  or  corporations,  and  these  might  do  the 
same  ad  infinitum,  stock  ownership  in  any  company  under  such  a 
system  would  not  evidence  a  participation  in  any  definite  kind  of 
business,  but  in  effect  a  participation  in  a  "blind  pool,"  subject  to 
the  uncontrolled  will  of  the  majority.  There  would  be  an  end  at  once 
of  all  practical  force  of  the  doctrine  that  a  certificate  of  incorpora- 


436  STATE    V.  ATLANTIC    CITY    AND    SHORE    R.R.  CO.       [cHAP.  I. 

tion  evidences  a  contract  between  the  State  and  the  corporation,  or 
between  the  corporators  or  stockholders  themselves.  For  an  aj^ee- 
ment  imports  an  obligation  to  do  some  things  and  to  refrain  from 
doing  other  things.  Without  defining  terms  and  bounds  there  can  be 
no  agreement. 

Thus,  if  the  Atlantic  City  and  Shore  Railroad  Company,  upon 
becoming  incorporated  for  the  avowed  purpose  of  constructing  and 
operating  a  specified  line  of  railroad,  and  without  regard  to  whether 
the  purchase  of  stock  in  other  companies  is  necessary  or  convenient 
to  the  attainment  of  the  objects  set  forth  in  its  certificate,  has  the 
unlimited  power  to  i)urchase  stock  and  bonds  of  any  other  corpora- 
tion or  corporations  of  this  or  any  other  State,  it  may  purchase  not 
only  the  stock  of  a  traction  company  in  Atlantic  City,  but  the  stock 
of  a  mining  company  in  Colorado,  or  may  participate  in  like  manner 
in  any  conceivable  business  or  speculation  in  any  part  of  the  civilized 
world.  Its  articles  of  association  would  afford  no  evidence,  either  to 
the  law  officer  of  the  State  or  to  intending  purchasers  of  its  shares, 
as  to  the  actual  scope  of  its  activities;  nor  would  any  investor  have 
the  slightest  assurance  that  the  money  he  intended  to  embark  in  a 
railroad  enterprise  in  Atlantic  count}-^,  or  the  earnings  of  the  capital 
already  embarked,  would  not  be  diverted  into  schemes  that  he  had 
no  means  of  foreseeing. 

Again,  §  6  of  the  Corporation  Act  of  1896  (Pamph.  L.  1896,  p.  279; 
amended  before  incorporation  of  the  Shore  Company  by  Pamph.  L. 
1899,  p.  473),  undertakes  to  prescribe  the  objects  for  which  corpora- 
tions may  be  formed  mider  that  act,  and  these  include  almost  any 
lawful  purpose  whatever,  other  than  the  formation  of  a  savings  bank, 
a  building  and  loan  association,  an  insurance  company,  a  surety  com- 
pany, or  a  companj'^  operating  railroads,  telephone  or  telegraph  lines 
within  this  State. 

It  has,  indeed,  been  repeatedly  held  that  where  the  legislature 
passes  separate  acts  proxdding  for  the  organization  of  certain  classes 
of  corporations  (especially  those  owing  duties  and  responsibilities  to 
the  public)  under  conditions  inconsistent  with  or  different  from  those 
prescribed  by  the  General  Corporation  Act,  the  effect  is  to  impliedly 
prohibit  the  organization  of  corporations  of  those  classes  under  the 
latter  act,  although  there  be  no  express  prohibition  in  terms.  See 
Domestic  Telegraph  Co.  v.  Newark,  20  Vroom,  344,  348;  Richards  v. 
Dover,  32  Id.  400,  403;  Montclair  Military  Academy  v.  Assessors, 
36  Id.  516;  Fogg  v.  Ocean  City,  45  Id.  362,  366;  Knickerbocker  Im- 
portation Co.  V.  Board  of  Assessors,  Id.  583,  590.  So  far  as  observed, 
this  doctrine  has  not  heretofore  been  directly  in  question  in  this 
court,  and  we  do  not  at  present  propose  to  pass  upon  its  soundness, 
or  its  precise  limitations  if  sound. 

But  it  is  worthy  of  remark  that  if  §  51  of  the  Act  of  1896  has  the 
unlimited  scope  that  a  reading  of  that  section  alone  would  indicate, 


SECT.  III.]       STATE    V.  ATLANTIC    CITY    AND    SHORE    R.R.  CO.  437 

then  a  company  may  be  organized  under  that  act,  and,  without  ex- 
pressing any  such  purpose  in  its  articles  of  association,  may  in  effect 
conduct  banks  and  other  financial  institutions,  or  operate  railroads, 
telegraph  lines,  and  other  public  utilities  in  this  State,  by  employing 
the  device  of  acquiring  a  controlling  interest  in  companies  having 
such  activities. 

k  Again,  it  is  undoubtedly  the  general  rule  in  this  country  that  one 
corporation  may  not  become  a  stockholder  in  another  unless  au- 
thority is  clearly  granted  by  statute;  and  this  is  but  a  corollary  of 
the  principle  that  corporations  possess  only  such  powers  as  are  speci- 
fically granted  by  the  State,  and  such  incidental  powers  as  are  neces- 
sary for  carrying  these  into  effect.  Franklin  Company  v.  Lewiston 
histitution  for  Savings,  68  Me.  43;  28  Am.  Rep.  9,  and  note,  p.  15; 
1  Thomp.  Corp.,  §  1102;  4  7(i.,  §  5719. 

To  read  §  51  of  the  Corporation  Act  as  conferring  upon  every  com- 
pany, as  a  primary  power,  the  capacity  of  holding  stock  in  other  cor- 
porations, without  the  mention  of  such  an  object  among  the  declared 
purposes  of  the  company,  and  without  regard  to  whether  such  stock- 
holding is  necessary  or  appropriate  to  the  objects  that  are  declared, 
would  result  in  such  an  overthrow  of  these  established  rules  and 
general  principles  and  of  the  general  statutory  policy  referred  to,  and 
would  lead  to  such  confusion  and  such  destruction  of  proper  safe- 
guards, that  we  are  constrained  to  reject  that  reading  in  the  absence 
of  language  imperatively  requiring  it. 

On  the  other  hand,  to  treat  §  51  (as  we  do)  as  designed  to  express 
and  define  one  of  those  powers  that  are  referred  to  in  §  2  of  the  same 
act,  which  may  be  claimed  as  a  primary  power  when  the  purpose  to 
exercise  it  as  such  is  expressed  in  the  certificate  of  incorporation,  and 
which  otherwise  may  be  claimed  only  as  an  incidental  power,  extend- 
ing so  far  as  may  be  necessary  or  convenient  to  the  objects  of  the 
company  that  are  expressed  in  the  certificate  of  incorporation, 
renders  §  51  consistent  not  only  with  §  2,  but  with  the  general  leg- 
islative policy  of  the  State  respecting  corporations. 

It  will  be  observed,  therefore,  that  while  the  legislature,  upon 
placing  the  provisions  that  were  in  Pamph.  L.  1893,  p.  301  (Gen. 
Stat.,  p.  963,  pi.  260)  into  the  revised  Act  of  1896,  eliminated  the 
words  that  confined  their  operation  to  corporations  created  under  the 
Act  of  1875,  they  at  the  same  time,  as  we  think,  embodied  a  more 
practical  and  useful  limitation  by  the  language  employed  in  §  2  of  the 
new  act. 

We  incline  to  think  the  view  we  entertain  of  the  proper  scope  and 
operation  of  §  51  is  the  same  that  is  held  by  the  legal  profession  in 
general.  The  articles  of  association  of  what  are  known  as  "holding 
companies"  usually,  we  believe,  are  made  to  express  in  terms  the 
purpose  of  holding  stocks  in  other  corporations.  This  is  true,  at  least, 
of  notable  examples  that  have  come  before  this  court  in  litigation. 


438  STATE   V.  ATLANTIC    CITY   AND    SHORE    R.R.  CO.       [CHAP.  I. 

As  already  remarked,  the  incidental  powers  of  railroad  companies 
organized  under  the  act  of  1903  (Pamph.  L.,  p.  645),  is  likewise 
limited  by  the  language  of  the  third  section  so  as  to  extend  only  so 
far  as  appropriate  to  and  not  inconsistent  with  this  act;  which 
means,  in  effect,  not  inconsistent  with  the  objects  of  the  railroad 
company  as  declared  pursuant  to  the  provisions  of  this  act. 

The  result  is  that  the  Atlantic  City  and  Shore  Railroad  Company 
has  not  the  power  to  purchase  or  hold  stock  or  bonds  in  any  other 
company  except  so  far  as  may  be  appropriate,  necessary  or  con- 
venient to  the  attainment  of  the  objects  set  forth  in  its  certificate  of 
incorporation  and  its  route  filed  under  the  provisions  of  the  Railroad 
Act,  that  is  to  say,  the  construction,  maintenance  and  operation  of 
a  line  of  railway  from  a  point  on  the  meadows  in  the  township  of 
Egg  Harbor  to  a  point  at  the  corner  of  Virginia  and  Adriatic  avenues 
in  Atlantic  City.  The  fact  that  the  street  railway  lines  of  the  Central 
Company  are  beyond  those  termini  is  sufficient,  of  itself,  to  show 
that  a  control  of  its  securities  is  beyond  the  legitimate  functions  of 
the  Shore  Company. 

Let  the  judgment  of  the  Supreme  Court  be  reversed. 

Far  affirmance  —  Minturn,  Gray,  Dill,  JJ.   3. 

Far  reversal  —  The  Chancellor,  Garrison,  Sawyze,  Reed, 
Trenchard,  Parker,  Voorhees,  Bogert,   Vredenburgh,  JJ.  9. 

Note.  —  See  also  Robatham  v.  Prudential  Insurance  Co.,  64  N.J. 
Eq.  673. 

Even  if  a  corporation  has  power  to  purchase  stock  in  another  cor- 
poration, such  a  purchase  may  be  ol)jectionable  on  some  ground 
other'  than  that  it  is  ultra  vires.  See  United  States  v.  Union  Pacific 
R.R.  Co.,  226  U.S.  61,  infra. 


SECT.  IV.]  TREVOR    V.  WHITWORTH.  439 


SECTION  4. 
TO  HOLD  THEIR  OWN  STOCK. 


TREVOR  V.   WHITWORTH. 

L.R.  12  A.C.  409.     1887. 

Appeal  from  a  decision  of  the  Court  of  Appeal. 

James  Schofield  &  Sons  Limited  were  incorporated  in  1865  under 
the  Companies  Act  1862  with  a  capital  of  £150,000  in  15,000  shares 
of  £10  each.  The  objects,  as  stated  in  the  memorandum  of  asso- 
ciation, were  to  acquire  and  carry  on  the  business  of  certain  flannel 
manufacturers,  and  any  other  businesses  and  transactions  which 
the  company  might  consider  to  be  in  any  way  conducive  or  auxiliary 
thereto,  or  proper  to  be  carried  on  in  connection  therewith. 

The  memorandum  did  not  authorize  the  company  to  purchase  its 
own  shares;  but  the  articles  of  association  purported  to  authorize 
such  purchases. 

The  company  having,  in  1884,  gone  into  liquidation,  a  claim  was 
made  against  the  company  by  the  respondents,  as  executors  of  Whit- 
worth,  a  deceased  shareholder,  for  the  balance  of  the  price  of  Whit- 
worth's  shares  sold  by  the  executors  to  the  company  in  1880,  and  not 
wholly  paid  for. 

The  Vice  Chancellor  of  the  County  Palatine  of  Lancaster  disal- 
lowed the  claim. 

»'  The  Court  of  Appeal  (Cotton,  Bowen  and  Fry,  L.J  J.)  reversed 
this  decision  and  allowed  the  claim.  Against  this  last  decision  the 
official  liquidators  now  appealed. 

Lord  Herschell.  I  pass  now  to  the  main  question  in  this  case, 
which  is  one  of  great  and  general  importance,  whether  the  company 
had  power  to  purchase  the  shares.  The  result  of  the  judgment  in  the 
Court  below  is  certainly  somewhat  startling.  The  creditors  of  the 
company  which  is  being  wound  up,  who  have  a  right  to  look  to  the 
paid-up  capital  as  the  fund  out  of  which  their  debts  are  to  be  dis- 
charged, find  coming  into  competition  with  them  persons  who,  in 
respect  only  of  their  having  been,  and  having  ceased  to  be,  share- 
holders in  the  company,  claim  that  the  company  shall  pay  to  them 
a  part  of  that  capital.  The  memorandum  of  association,  it  is  ad- 
mitted, does  not  authorize  the  purchase  by  the  company  of  its  own 
shares.  It  states,  as  the  objects  for  which  the  company  is  established, 
the  acquiring  certain  manufacturing  businesses  and  the  undertaking 
and  carrying  on  the  businesses  so  acquired,  and  any  other  business 


440  TREVOR    V.  WHITWORTH.  [cHAP.  I. 

and  transaction  which  the  company  consider  to  be  in  any  way 
auxihary  thereto,  or  proper  to  be  carried  on  in  connection  therewith. 

It  cannot  be  questioned,  since  the  case  of  Ashbury  Railway  Car- 
riage and  Iron  Company  v.  Riclie,  Law  Rep.  7  H.L.  653,  that  a  com- 
pany cannot  employ  its  funds  for  the  purpose  of  any  transactions 
which  do  not  come  within  the  objects  specified  in  the  memorandum, 
and  that  a  company  cannot  by  its  articles  of  association  extend  its 
power  in  this  respect.  These  propositions  arc  not  and  could  not  be 
impeached  in  the  judgments  of  the  Court  of  Appeal,  but  it  is  said 
to  be  settled  by  authority,  that  although  a  company  could  not,  under 
such  a  memorandum  as  the  present,  by  articles  authorize  a  trafficking 
in  its  own  shares,  it  might  authorize  the  board  to  buy  its  shares 
"whenever  they  thought  it  desirable  for  the  purposes  of  the  com- 
pany," or  "in  cases  where  it  was  incidental  to  the  legitimate  objects 
of  the  company  that  it  should  do  so."  The  former  is  Lord  Justice 
Cotton's  expression;  the  latter  that  of  Lord  Justice  Bowen. 

I  will  first  consider  the  question  apart  from  authority,  and  then 
examine  the  decisions  relied  on. 

The  Companies  Act  1862  requires  (§  8)  that  in  the  case  of  a  com- 
pany where  the  liability  of  the  shareholders  is  limited,  the  memoran- 
dum shall  contain  the  amount  of  the  capital  with  which  the  com- 
pany proposes  to  be  registered,  divided  into  shares  of  a  certain  fixed 
amount;  and  provides  (§  12)  that  such  a  company  may  increase  its 
capital  and  divide  it  into  shares  of  larger  amount  than  the  existing 
shares,  or  convert  its  paid-up  shares  into  stock,  but  that  "save  as 
aforesaid,  no  alteration  shall  be  made  by  any  company  in  the  con- 
ditions contained  in  its  memorandum  of  association." 

What  is  the  meaning  of  the  distinction  thus  drawn  between  a  com- 
pany without  limit  on  the  liability  of  its  members  and  a  company 
where  the  liability  is  limited,  but,  in  the  latter  case,  to  assm-e  to  those 
dealing  with  the  company  that  the  whole  of  the  subscribed  capital, 
unless  diminished  by  expenditure  upon  the  objects  defined  by  the 
memorandum,  shall  remain  available  for  the  discharge  of  its  lia- 
bilities? The  capital  may,  no  doubt,  be  diminished  by  expenditure 
upon  and  reasonably  incidental  to  all  the  objects  specified.  A  part 
of  it  may  be  lost  in  carrying  on  the  business  operations  authorized. 
Of  this  all  persons  trusting  the  company  are  aware,  and  take  the  risk. 
But  I  think  they  have  a  right  to  rely,  and  were  intended  by  the 
Legislature  to  have  a  right  to  rely,  on  the  capital  remaining  undi- 
minished by  any  expenditure  outside  these  limits,  or  by  the  return 
of  any  part  of  it  to  the  shareholders. 

Experience  appears  to  have  shewn  that  circumstances  might  occur 
in  which  a  reduction  of  the  capital  would  be  expedient.  Accordingly, 
by  the  Act  of  1867  provision  was  made  enabling  a  company  under 
strictly  defuied  conditions  to  reduce  its  capital.  Nothing  can  be 
stronger  than  these  carefully-worded  provisions  to  shew  how  incon- 


SECT.  IV.]  TREVOR    V.  WHITWORTH.  441 

sistent  with  the  very  constitution  of  a  joint-stock  company,  with 
limited  Uabihty,  the  right  to  reduce  its  capital  was  considered 
to  be. 

Let  me  now  invite  your  Lordships'  attention  to  the  facts  of  the 
present  case.  The  company  had  purchased,  prior  to  the  date  of  the 
liquidation,  no  less  than  4142  of  its  own  shares;  that  is  to  say,  con- 
siderably more  than  a  fourth  of  the  paid-up  capital  of  the  company 
had  been  either  paid,  or  contracted  to  be  paid,  to  shareholders,  in 
consideration  only  of  their  ceasing  to  be  so.  I  am  quite  unable  to 
see  how  this  expenditure  was  incurred  in  respect  of  or  as  incidental 
to  any  of  the  objects  specified  in  the  memorandum.  And,  if  not,  I 
have  a  difficulty  in  seeing  how  it  can  be  justified.  If  the  claim  under 
consideration  can  be  supported,  the  result  would  seem  to  be  this, 
that  the  whole  of  the  shareholders,  with  the  exception  of  those  hold- 
ing seven  individual  shares,  might  now  be  claiming  pa\anent  of  the 
sums  paid  upon  their  shares  as  against  the  creditors,  who  had  a  right 
to  look  to  the  moneys  subscribed  as  the  source  out  of  which  the  com- 
pany's liabilities  to  them  were  to  be  met.  And  the  stringent  pre- 
cautions to  prevent  the  reduction  of  the  capital  of  a  limited  com- 
pany, without  due  notice  and  judicial  sanction,  would  be  idle  if  the 
company  might  purchase  its  O'vnti  shares  wholesale,  and  so  effect  the 
desired  result.  I  do  not  think  it  was  disputed  that  a  company  could 
not  enter  upon  such  a  transaction  for  the  purpose  of  reducing  its 
capital,  but  it  was  suggested  that  it  might  do  so  if  that  were  not  the 
object,  but  it  was  considered  for  some  other  reason  desirable  in  the 
interest  of  the  company  to  do  so.  To  the  creditor,  whose  interests, 
I  think,  §§8  and  12  of  the  Companies  Act  were  intended  to  protect, 
it  makes  no  difference  what  the  object  of  the  purchase  is.  The  result 
to  him  is  the  same.  The  shareholders  receive  back  the  money  sub- 
scribed, and  there  passes  into  their  pockets  what  before  existed  in  the 
form  of  cash  in  the  coffers  of  the  company,  or  of  buildings,  machinery, 
or  stock  available  to  meet  the  demands  of  the  creditors. 

What  was  the  reason  which  induced  the  company  in  the  present 
case  to  purchase  its  shares?  If  it  was  that  they  might  sell  them  again, 
this  would  be  a  trafficking  in  the  shares,  and  clearly  unauthorized. 
If  it  was  to  retain  them,  this  would  be  to  my  mind  an  indirect 
method  of  reducing  the  capital  of  the  company.  The  only  suggestion 
of  another  motive  (and  it  seems  to  me  to  be  a  suggestion  unsupported 
by  proof)  is  that  this  was  intended  to  be  a  family  company,  and  that 
the  directors  wanted  to  keep  the  shares  as  much  as  possible  in  the 
hands  of  those  who  were  partners,  or  who  were  interested  in  the  old 
firm,  or  of  those  persons  whom  the  directors  thought  they  would 
like  to  be  amongst  this  small  number  of  shareholders.  I  camiot  think 
that  the  employment  of  the  company's  money  in  the  purchase  of 
shares  for  any  such  purpose  was  legitimate.  The  business  of  the  com- 
pany was  that  of  manufacturers  of  flannel.   In  what  sense  was  the 


442  COPPIN    V.  GREENLEES    &    RANSOM    CO.  [CHAP,  I. 

expenditure  of  the  company's  money  in  this  way  incidental  to  the 
carrying  on  of  such  a  business,  or  how  could  it  secure  the  end  of 
enabling  the  business  to  be  more  profitably  or  satisfactorily  carried 
on?  I  can  quite  understand  that  the  directors  of  a  company  may 
sometimes  desire  that  the  shareholders  should  not  be  numerous,  and 
that  they  should  be  persons  likely  to  leave  them  with  a  free  hand  to 
carry  on  their  operations.  But  I  think  it  would  be  most  dangerous  to 
countenance  the  view  that,  for  reasons  such  as  these,  they  could 
legitimately  expend  the  moneys  of  the  company  to  any  extent  they 
please  in  the  purchase  of  its  shares.  No  doubt  if  certain  shareholders 
are  disposed  to  hamper  the  proceedings  of  the  companj'-,  and  are 
willing  to  sell  their  shares,  they  may  be  bought  out ;  but  this  must 
be  done  by  persons,  existing  shareholders  or  others,  who  can  be 
induced  to  purchase  the  shares,  and  not  out  of  the  funds  of  the 
company. 


COPPIN  V.  GREENLEES  &  RANSOM  CO. 

38  Ohio  St.  275.     1882. 

The  original  action  was  brought  by  William  Coppin,  plaintiff  in 
error,  against  The  Greenlees  &  Ransom  Company,  defendant  in 
error,  in  the  court  of  common  pleas  of  Hamilton  county,  and  the 
cause  of  action  was  thus  stated  in  the  petition: 

"The  plaintiff  states  that  the  defendant  is  and  for  several  years 
past  has  been  a  corporation,  duly  incorporated  under  the  laws  of  the 
state  of  Ohio,  for  manufacturing  purposes. 

"That  it  has  been  the  custom  of  said  corporation  that  its  officers 
and  others,  actively  engaged  in  its  service,  should  be  holders  of 
shares  of  its  stock,  and  upon  ceasing  to  be  connected  with  said  com- 
pany, such  persons  have  been  accustomed  to  sell,  and  said  company 
to  buy  their  said  stock. 

"That  the  plaintiff  was  formerly  in  the  employ  of  said  company 
as  a  workman,  and  that  while  so  engaged  he  became  the  holder  of 
shares  of  the  capital  stock  of  said  company  to  the  amount,  at  its  par 
value,  of  $3300. 

"That  having  ceased  to  work  for  said  company,  he  sought  a  pur- 
chaser for  said  stock,  and  offered  to  sell  the  same  to  the  defendant  for 
two  lots  of  land,  hereinafter  described,  valued  respectively  at  $1100 
and  $700,  and  the  balance  of  $1500  in  manufactured  work  to  be  made 
by  the  defendant,  at  ten  per  cent,  off  their  bill  of  prices,  to  which  the 
defendant  assented  and  agreed,  and  to  carry  the  same  into  effect  the 
plaintiff  on  May  28,  1875,  caused  to  be  prepared  a  written  contract, 
which  the  defendant  then  duly  executed  and  dehvered  to  the  plain- 
tiff, of  which  the  following  is  a  copy: 


SECT.  IV.]  COPPIN    V.  GREENLEE3    &    RANSOM    CO.  443 

"'Cincinnati,  May  28,  1875.  ^ 

"'For  and  in  consideration  of  thirty-three  shares  of  the  capital 
stock  in  the  Greenlees  &  Ransom  Company,  the  receipt  whereof  is 
hereby  acknowledged,  said  Greenlees  &  Ransom  Company  promise 
to  pay,  or  cause  to  be  paid,  to  "William  Coppin  the  sum  of  three 
thousand  three  hundred  dollars,  payable,  viz :  said  Coppen  to  take  a 
lot  of  ground.  No.  46  on  the  plat  of  the  Wyoming  Land  and  Build- 
ing Co.'s  subdivision  of  the  Burn's  farm,  Wyoming,  Ohio,  in  part 
pajaiient,  amounting  to  $1100.00;  also  a  lot  of  ground  on  the  north 

side  of  Wj'oming  avenue  owned  by Caruthers,  and  next  to 

Mr.  Beeson's  house,  fifty  feet  front  by  two  hundred  and  forty-five 
feet  deep,  more  or  less,  for  the  sum  of  $700.00;  leaving  a  balance  of 
$1500.00  to  be  paid  in  manufactured  work,  joist,  scantling,  etc., 
the  manufactured  work  at  ten.  per  cent,  off  their  bill  of  prices; 
the  other  "material  at  the  usual  rates;  the  work  and  material  to  be 
delivered  from  time  to  time  to  him  as  said  Coppin  may  order  it. 

"'Greenlees  &  Ransom  Company. 

'"By  E.  P.  Ransom,  President.' 

"And  the  plaintiff  says  that  afterwards,  in  the  month  of  June, 
1875,  he  tendered  said  shares  of  stock  to  the  defendant,  and  offered 
to  transfer  the  same  to  it,  and  demanded  performance  of  said  con- 
tract; but  the  defendant  refused  to  accept  the  same,  and  refused  to 
convey  said  lots,  or  either  of  them,  or  to  deliver  said  manufactured 
goods,  although  the  plaintiff  then  demanded  the  same. 

"Wherefore  he  now  brings  said  stock  into  court,  and  offers  to 
transfer  the  same  to  the  defendant,  and  prays  that  the  defendant 
may  be  compelled  to  convey  said  lots  by  a  perfect  title,  and  to  de- 
liver said  goods,  and  for  such  other  and  further  relief  as  in  equity  and 
good  conscience  he  may  prove  to  be  entitled  to." 

McIlvaine,  J.  Whether  the  defendant  corporation  was  bound  by 
its  executory  agreement  with  the  plaintiff  to  purchase  shares  of  its 
own  stock,  under  the  circumstances  detailed  in  the  petition,  was, 
undoubtedly,  the  question  upon  which  the  case  turned  in  the  dis- 
trict court. 

The  power  of  a  trading  corporation  to  traffic  in  its  own  stock, 
where  no  authority  to  do  so  is  conferred  upon  it  by  the  terms  of  its 
charter,  has  been  a  subject  of  much  discussion  in  the  courts;  and  the 
conclusions  reached  by  different  courts  have  been  conflicting.  Of 
course,  cases,  wherein  the  power  is  found  to  exist  by  express  or  im- 
plied grant  in  the  charter,  furnish  no  aid  in  the  solution  of  the  ques- 
tion before  us;  unless  the  claim  of  the  plaintiff  can  be  sustained,  that 
such  power  was  conferred  on  the  defendant  by  §  63  of  the  Corpora- 
tion Act  of  1852  (S.  &  C.  301),  as  amended,  which  confers  on  manu- 
facturing corporations  the  powers  enumerated  in  §  3  of  the  act,  and, 
among  others,  the  power  "to  acquire  and  convey,  at  pleasure,  all 
such  real  and  personal  estate  as  may  be  necessary  or  convenient  to 


444  COPPIN    V.  GREENLEES    &    RANSOM    CO.  [cHAP.  I. 

carry  into  effect  the  objects  of  the  corporation."  We  think,  however, 
that  this  claim  cannot  be  muintuinod.  The  sole  object  of  the  de- 
fendant organization  was  "for  manufacturing  purposes;"  and  it 
cannot  be  said,  in  any  just  sense,  that  the  power  to  acquire  or  con- 
vey its  own  stock  was  either  necessary  or  convenient  "for  manu- 
facturing purposes." 

The  doctrine  that  corporations,  when  not  prohibited  Ijy  their 
charters,  may  buy  and  sell  their  own  storks,  is  sup|>ortod  by  a  line 
of  authorities;  and,  prominent  among  them,  may  be  mentionetl  the 
cases  of  Dupee  v.  Boston  Water  Power  Co.,  114  Mass.  37,  antl  C.  P. 
and  S.  R.R.  Co.  v.  Marsailles,  84  111.  145.  But  nevertheless,  we  think 
the  decided  weight  of  authority  both  in  England  and  in  the  United 
States,  is  against  the  existence  of  the  power  unless  conferred  by  ex- 
press grant  or  clear  implication.  The  foundation  principle,  upon 
which  these  latter  cases  rest,  is  that  a  corporation  p<)sse.s.s(>s  no 
powei*s  except  such  as  are  conferred  upon  it  by  its  charter,  either  by 
express  grant  or  necessary  implication;  and  this  principle  has  been 
fref|uently  d(>clared  by  the  supreme  court  of  this  state;  and  by  no 
court  more  emphatically  than  by  this  court.  It  is  true,  however, 
that  in  most  jurisdictions,  where  the  right  of  a  corporation  to  traffic 
in  its  own  stock  has  been  denii'd,  an  exception  to  the  rule  has  been 
admitted  to  exist,  whereby  a  corporation  has  been  allowed  to  take 
its  own  stock  in  satisfaction  of  a  debt  iUiv  to  it.  This  exception  is 
supposed  to  rest  on  a  necessity  which  arises  in  order  to  avoid  loss; 
and  was  recognized  in  this  state  as  early  as  Taylor  v.  Miami  Export- 
ing Co.  G  Ohio,  17G,  and  has  been  incidentall}'  referred  to  as  an  exist- 
ing right  since  the  adoption  of  our  present  constitution.  Slate  v. 
Building  Association,  35  Ohio  St.  2.")8. 

But,  however  that  may  be,  the  right  of  a  corporation  to  traffic  in 
its  own  stock,  at  pleasm-e,  appears  to  us  to  be  inconsistent  with 
the  principle  of  the  provisions  of  the  present  constitution,  art.  13, 
§  3,  which  reads  as  follows:  "  Dues  from  corporations  shall  be  secured 
by  such  individual  liability  of  stockholders,  and  other  means,  as  may 
be  prescribed  by  law;  but,  in  all  cases,  each  stockholder  shall  be 
liable,  over  and  above  the  stock  by  him  or  her  ou'ned,  and  any 
amount  unpaid  thereon,  to  a  further  sum,  at  least  equal  in  amount  to 
such  stock."  Now,  it  is  just  as  plain,  that  a  business  or  trading  cor- 
poration cannot  exist  without  stock  and  stockholders,  as  it  is  that  the 
creditors  of  such  corporations  are  entitled  to  the  security  named  in 
the  constitution.  State  ex  rel.  AtVy-Gen.  v.  Sherman,  22  Ohio  St.  411. 
The  corporation  itself  caimot  be  a  stockholder  of  its  own  stock  within 
the  meaning  of  tliis  provision  of  the  constitution.  Nobody  will  deny 
this  proposition.  And  if  a  corporation  can  buy  one  share  of  its  stock 
at  pleasure,  why  may  it  not  buy  every  share?  If  the  right  of  a  cor- 
poration to  purchase  its  own  stock  at  pleasure,  exists  and  is  un- 
limited, where  is  the  provision  intended  for  the  benefit  of  creditors? 


SECT.  IV.]  COPPIN    V.  GREENLEES    &    RANSOM    CO.  445 

This  is  not  the  security  to  which  the  constitution  invites  the  credi- 
tors of  corporations.  I  am  aware,  that  the  amount  of  stock  required 
to  be  issued  is  not  fixed  by  the  constitution  or  by  statute,  and  also 
that  provision  is  made  by  statute  for  the  reduction  of  the  capital 
stock  of  corporations;  but  of  these  matters,  creditors  are  bound  to 
take  notice.  They  have  a  right,  however,  to  assume  that  stock  once 
issued,  and  not  called  back  in  the  manner  provided  by  law,  remains 
outstanding  in  the  hands  of  stockholders  liable  to  respond  to  creditors 
to  the  extent  of  the  individual  liability  prescribed.  In  this  view  it 
matters  not  whether  the  stock  purchased  by  the  corporation  that 
issued  it,  becomes  extinct,  or  is  held  subject  to  be  re-issued.  It  is 
enough  to  know  that  the  corporation,  as  purchaser  of  its  own  stock, 
does  not  afford  to  creditors  the  security  intended.  And  surely,  if  the 
law  forbids  the  organization  of  a  corporation  without  stock,  because 
the  requhed  security  is  not  furnished,  it  cannot  be,  that  having 
brought  the  corporation  into  existence,  it  invests  it  with  power  to 
assume,  at  pleasure,  the  identical  character  or  relation  to  the  public, 
that  was  an  insurmountable  objection  to  the  giving  of  corporate 
existence  in  the  first  place. 

Plaintiff  in  error  lays  much  stress  on  the  averments  in  the  petition, 
that  it  had  been  the  custom  of  the  corporation  that  its  officers  and 
others,  actively  engaged  in  its  service,  should  be  holders  of  shares  of 
its  stock,  and  upon  ceasing  to  be  connected  with  the  company,  such 
persons  had  been  accustomed  to  sell,  and  the  company  to  buy  such 
stock;  and  that  the  plaintiff  had  purchased  the  stock  for  the  price 
of  which  suit  was  brought  while  in  the  employment  of  defendant. 

We  cannot  see  why  these  averments  should  take  the  case  out  of 
the  general  rule. 

If  it  were  averred  that  the  plaintiff  had  purchased  this  stock  from 
the  defendant,  or  from  others,  under  an  agreement  with  the  com- 
pany that  it  buy  the  same  from  him  when  he  quit  its  emplojTnent, 
or  if  the  contract  of  purchase  by  the  defendant  had  been  executed, 
very  different  questions  would  arise. 

It  is  not  even  averred,  that  the  plaintiff  relied  upon  such  custom 
either  in  making  the  purchase,  or  the  sale,  of  the  stock;  so  that,  in 
fact,  he  is  unaffected  by  the  alleged  custom.  But  if  such  custom  had 
been  relied  on  by  the  plaintiff  when  he  purchased  the  stock,  it  would 
not  have  made  the  executory  contract  of  the  defendant  to  buy  the 
stock  binding,  which,  without  such  custom,  would  be  void.  The 
usage  of  a  corporation  does  not  become  the  law  of  its  existence,  or  the 
measure  of  its  powers.  The  general  law  of  the  state,  of  which  all  per- 
sons are  presumed  to  have  knowledge,  is  the  source  and  limit  of  all  its 
powers  and  duties;  and  these  cannot  be  varied  either  by  usage  or 
contract.  The  doctrine  of  estoppel  has  no  application  in  the  case. 
Nor  is  there  any  such  equity  in  the  case,  as  would  have  arisen  be- 
tween the  parties  in  case  the  contract  had  been  executed. 

Judgment  affirmed. 


446  CLAPP    V.  PETERSON.  [CHAP.  I. 

Note.  —  See  also  Vcrcmitere  v.  Gulden  State  Co.,  116  Cal.  410; 
Craiidall  v.  Lincoln,  52  Conn.  73,  09;  Ahtles  v.  Cochran,  22  Kan. 
405,  411  (c/.  Salt  Co.  v.  Barber,  58  Kan.  411));  Schaitn  v.  Brandt,  110 
Md.  560;  Herring  v.  /e^y^Am  Co-op.  Ass'n,  52  --i  W.  (Tenn.)  327. 


CLAPP  V.   PETERSEN. 

lO-J  111.  20.     1882. 

Mr.  Justice  Sheldon  delivered  the  opinion  of  the  court: 

By  the  will  of  her  step-son,  P.  W.  lionner,  who  died  in  July,  1.S70, 
appellee,  GeorRie  H.  Peterson,  a  resident  of  the  State  of  New  York, 
became  owner  of  all  personal  prof)erty  left  by  said  Bonner,  and  in 
September,  1870,  on  apjilication  made  to  her  in  New  Yi)rk,  she  sold 
all  said  property  to  the  Illinois  Land  and  Loan  Company.  On  No- 
vember 20,  1874,  she  filed  her  bill  against  said  company  to  set  aside 
such  sale,  and  for  other  relief  in  respect  thereto,  on  the  ground  that 
she  had  been  intluced  to  make  the  sale  through  the  fraudulent  mis- 
representations of  the  company,  for  an  iiiade(|uate  consideration, 
and  on  May  1,  1877,  she  obtained  in  the  suit  a  money  decree  against 
the  company,  for  $5653.33.  An  execution  issued  upon  the  decree 
having  been  returned  nulla  bona,  Mrs.  Peterson,  on  September  18, 
1879,  filed  her  bill  in  chancery  in  the  present  case,  to  subjeet  i)rop- 
crty  in  the  hands  of  Caleb  Clajip  to  the  pajment  of  this  decree.  A 
decree  was  entered  in  her  favor  granting  the  relief  sought,  which,  on 
appeal  to  the  Appellate  Court  for  the  First  District,  was  afhrmed, 
and  the  present  appeal  taken  to  this  court. 

It  appears  that  the  Illinois  Land  and  Loan  Company  was  char- 
tered by  an  act  of  the  legislature  in  1807,  with  a  capital  stock  of 
$100,000,  with  1000  shares,  of  SlOO  each,  all  of  which  was  paid  in. 
Caleb  Clapp,  a  non-resident  of  the  State,  was  a  stockholder  in  the 
company,  and  in  January,  1874,  he  surrendered  to  the  company  555 
shares  of  stock,  in  consideration  of  which  the  company  executed  to 
him  a  deed  of  warranty  of  two  lots  in  Chicago,  one  of  the  value  of 
$50,000,  and  the  other  of  the  value  of  $5500,  that  amount  being  the 
consideration  stated  in  the  deed.  The  stock  was  canceled,  and  was 
considered,  at  the  time,  of  par  value.  ]\Ir.  Clapp  continued  to  be 
till  his  death,  and  his  estate  still  is,  the  owner  of  the  lots.  It  is  these 
lots  which  are  sought  to  be  subjected  to  the  payment  of  said  money 
decree  against  the  company. 

The  legal  principle  which  appellants'  counsel  lays  down  and  in- 
sists upon  as  applj-ing  to  the  case,  is,  that  corporations  may  pur- 
chase their  owti  stock  in  exchange  for  money  or  other  property,  and 
hold,  re-issue  or  retire  the  same,  pro\'ided  such  act  is  had  in  entire 
good  faith,  is  an  exchange  of  equal  value,  and  is  free  from  all  fraud, 


SECT.  IV.]  CLAPP  V.   PETERSON.  447 

actual  or  constructive,  this  implying  that  the  corporation  is  neither 
insolvent  nor  in  process  of  dissolution.  We  think  there  must  be 
added  to  the  proposition  the  further  condition  that  the  rights  of 
creditors  are  not  affected. 

The  doctrine  so  elaborately  urged  by  appellants'  counsel,  that  a 
corporation  has  the  power  to  purchase  its  own  stock,  seems  well 
enough  settled,  and  was  asserted  by  this  court  in  Chicago,  Pekin  and 
Southwestern  R.R.  Co.  v.  Marseilles,  84  111.  643.  Yet,  in  so  holding 
there,  the  qualification  was  added,  that,  in  equity,  the  transaction 
might  be  impeached  if  it  operated  to  the  injury  of  creditors.  We  see 
nothing  to  show  that  the  transaction  in  the  present  case  was  not  in 
good  faith,  that  there  was  any  element  of  fraud  about  it,  or  that  there 
was  anything  in  the  apparent  condition  of  the  company  to  interfere 
with  the  making  of  the  exchange  that  was  had.  It  is  only  as  injuri- 
ously affecting  the  interests  of  creditors,  we  think,  that  the  trans- 
action can  be  questioned,  and  it  is  in  that  view  that  it  must  be  con- 
sidered and  passed  upon. 

In  Sanger  v.  Upton,  91  U.S.  60,  it  is  laid  down:  "The  capital  stock 
of  an  incorporated  company  is  a  fund  set  apart  for  the  payment  of  its 
debts.  It  is  a  substitute  for  the  personal  liability  which  subsists  in 
private  co-partnerships.  When  debts  are  incurred  a  contract  arises 
with  the  creditors  that  it  shall  not  be  withdrawn  or  applied,  otherwise 
than  upon  their  demands,  until  such  demands  are  satisfied.  The 
creditors  have  a  lien  upon  it  in  equity.  If  diverted,  they  may  follow 
it  as  far  as  it  can  be  traced,  and  subject  it  to  the  payment  of  their 
claims,  except  as  against  holders  who  have  taken  it  bona  fide  for  a 
valuable  consideration  and  without  notice.  It  is  publicly  pledged 
to  those  who  deal  with  the  corporation  for  their  security."  This 
doctrine  is  abundantly  established  by  the  authorities.  2  Story's 
Equity  Jur.  §  1252;  Wood  v.  Dummer,  3  Mason,  308;  Spear  v.  Grant, 
15  Mass.  505;  Curran  v.  Arkansas,  15  How.  304;  Bartlett  v.  Drew, 
57  N.Y.  587.  .  _ 

The  shareholders  of  a  corporation  are  conclusively  charged  with 
notice  of  the  trust  character  which  attaches  to  its  capital  stock.  As 
to  it  they  can  not  occupy  the  status  of  innocent  purchasers,  but  they 
are  to  all  intents  and  purposes  privies  to  the  trust.  When,  therefore, 
they  have  in  their  hands  any  of  this  trust  fund,  they  hold  it  cum 
onere,  subject  to  all  the  equities  which  attach  to  it.  Thompson's 
LiabiUty  of  Stockholders,  §  13;  Wood  v.  Dimmer,  3  Mason,  312. 

It  is  objected,  against  the  principles  above  stated,  that  the  cases 
in  which  they  were  declared  were  where  there  was  actual  or  con- 
structive fraud  or  unfairness,  where  the  corporations  were  insolvent, 
or  in  process  of  being  wound  up.  The  question  naturally  would  arise 
mostly  in  such  circumstances,  but  the  principles  enunciated  are 
general  in  scope,  following  from  the  nature  of  the  capital  stock  of 
corporations,  and  the  relation  of  a  stockholder  to  the  corporation, 


448  CLAPP  V.  PETERSON.  (CHAP.  I. 

and  wc  know  of  no  limitation  of  their  application  as  alx)vc  suggested, 
or  reason  for  denial  of  their  full  applicaljility  to  the  present  ca.se. 
Indeed,  vvc  do  not  understand  ai)pellants'  counsel  as  asserting  the 
validity  of  the  purchase,  or  reduction  by  a  corporation  of  its  slock, 
where  it  should  directly  appear  that  it  was  an  injury  to  its  creditors. 
But  it  is  denied  that  there  was  any  such  injury  in  this  case.  It  is  sjiid, 
first,  the  company  actually  owed  no  one  at  the  time,  and  even  if  it 
did,  as  the  bill  admits  that  the  shares  at  the  time  of  the  exchange 
were  valued  at  par,  and  worth  full  purported  value,  it  follows  from 
the  stock  being  worth  its  par  value,  as  a  matter  of  course,  that  the 
company  was  then  entirely  solvent,  and  had  a.ssets  sufficient  to  dis- 
charge all  its  dei)ts,  if  it  had  any  del)ts,  and  also  to  pay  the  stock  in 
full,  —  that  under  no  other  circumstances  could  the  admission  of 
the  bill  be  true.  There  was  no  proof  as  to  the  condition  of  the  com- 
pany, or  the  value  of  the  stock,  save  the  testimony  of  the  secretary 
of  the  company  that  at  the  time  of  the  deed  to  C'lapp  the  stock  in  the 
company  was  at  par  value  technically,  —  that  he  did  not  know  what 
the  market  value  was,  and  did  not  know  that  it  had  any  market 
value.  The  admission  of  the  bill  was  the  simple  fact  that  the  stock 
was  at  par.  The  comi^lainant,  of  course,  knew  nothing  as  to  what 
made  the  stock  at  par.  But  if  the  stock  was  at  par,  in  so  rating  it 
this  indebtedness  to  appellee  could  not  have  been  taken  into  ac- 
count. It  was  supposed,  of  course,  the  purchase  of  personal  property, 
which  had  been  made  of  appellee,  would  stand,  and  that  there  was 
no  liability  on  account  of  it.  If,  then,  the  stock  was  just  at  par,  not 
considering  appellee's  claim  with  that  claim  recognized,  the  assets 
would  have  failed  to  pay  the  indebtedness  of  the  company  by  the 
amount  of  her  claim,  to-wit,  .?o(353.33,  and  to  that  amount  the  com- 
pany was  insolvent. 

It  is  insisted  that  this  exchange  of  corporate  property  for  stock  was 
unassailable  by  anj^  one,  because  it  was  an  exchange  of  equal  values 
—  the  lots  being  worth  $55,500,  and  the  shares  of  stock  being  worth 
$55,500,  there  was  equal  value  received,  and  there  could  be  harm  to 
no  one.  This  can  not  be  so,  as  respects  creditors.  Suppose  all  the 
remaining  property  of  the  company  had  been  one  other  lot  worth 
$44,500,  and  the  company  had  made  a  hkc  exchange  with  another 
stockholder  of  that  lot  for  the  remaining  445  shares  of  stock,  and 
canceled  the  stock,  what  would  there  have  been  left  to  pay  creditors? 
The  partial  exchange  which  was  made  affected  the  rights  of  credi- 
tors in  a  like  way,  only  to  a  less  extent.  It  is  not  as  if  there  had  been 
an  exchange  made  with  Clapp  of  these  lots  for  other  real  property  of 
equal  value,  or  as  if  there  had  been  a  sale  to  him  for  $55,000  in 
money.  In  such  case  a  substitute  would  have  been  furnished  to  the 
company  to  which  creditors  might  have  had  recourse  for  pa\Tnent  of 
their  debts.  But  the  exchange  of  corporate  property  for  shares  of 
stock,  and  canceling  the  stock,  furnishes  no  equivalent  for  creditors. 


SECT.   IV.]  DUPEE    V.  BOSTON    WATER    POWER    CO.  449 

Although  the  money  decree  in  favor  of  appellee  was  not  obtained 
until  in  1877,  some  time  after  Clapp's  purchase,  yet  the  cause  of 
action  of  appellee  against  the  company  (the  fraudulent  purchase  of 
the  personal  property  from  her)  arose  in  September,  1870,  which 
was  before  the  purchase  by  Clapp,  that  being  in  January,  1874,  so 
that  at  the  time  of  Clapp's  purchase  appellee  must  be  regarded  as 
being  a  creditor  of  the  company. 

We  can  but  regard  the  transaction  in  question,  of  the  exchange  of 
stock  for  the  lots  and  the  cancellation  of  the  stock,  as  a  withdrawal 
by  the  stockholder  of  his  share  of  the  capital  stock,  leaving  appellee's 
debt  against  the  company  unpaid;  that  the  transaction  was  to  the 
injury  of  appellee  as  a  creditor;  that  the  property  taken  by  Clapp 
stood  charged  with  a  trust  for  the  payment  of  appellee's  claim;  that 
Clapp  can  not  be  held  to  be  an  innocent  purchaser,  and  that  the 
property  in  his  hands  is  affected  with  the  trust,  and  appellee  may 
pursue  the  property  and  subject  it  to  the  satisfaction  of  her  debt. 

Note.  —  See,  accord,  Hall  v.  Henderson,  126  Ala.  449,  481;  Copper 
Belle  Mining  Co.  v.  Costello,  12  Ariz.  318;  Oliver  v.  Rahway  Ice  Co., 
64  N.J.  Eq.  596. 

A  fortiori,  the  purchase  is  improper  if  at  the  time  the  corporation 
is  insolvent  in  the  sense  that  it  has  not  assets  equal  to  its  liabilities, 
excluding  its  capital  stock  as  a  liability;  or  if  it  was  in  grave  danger 
of  becoming  insolvent  in  this  sense.  Tiger  v.  Rogers  Cotton  Cleaner 
Co.,  96  Ark.  1;  German  Savings  Bank  v,  Widfekuhler,  19  Kan.  60; 
Pender  v.  Speight,  159  N.C.  612;  Adams  Co.  v.  Deijette,  8  S.D.  119. 

Where  the  property  of  a  corporation  is  in  the  hands  of  a  receiver, 
a  claim  against  the  corporation  for  the  price  of  stock  sold  to  it  may 
be  deferred  to  the  claims  of  other  creditors.  Van  Brocklin  v.  Queen 
City  Printing  Co.,  19  Wash.  552. 


DUPEE  V.   BOSTON  WATER  POWER  CO. 

114  Mass.  37.     1873. 

Bill  in  equity  by  minority  stockholders  in  defendant  corpora- 
tion, to  restrain  the  corporation  from  selling  land  and  receiving  its 
own  stock  in  payment. 

Colt,  J.  At  an  annual  meeting  of  the  defendant  corporation  it 
was  voted  that  the  directors  be  authorized,  "if  in  their  judgment  the 
interest  of  the  company  will  be  thereby  promoted,  to  receive  in  part 
payment  for  the  land  of  the  company  hereafter  to  be  sold,  the  stock 
of  the  company,  at  such  price  for  the  land  and  the  stock  as  may  be 
deemed  for  the  interest  of  the  stockholders."  Under  this  authority 
the  directors  advertised  a  number  of  lots  belonging  to  the  corpora- 


450  DUPEE    V.  BOSTON    WATER    POWER    CO.  (cHAP.  I. 

tion  to  be  sold  at  public  auction,  and  paid  for,  at  the  option  of  the 
purchaser,  one  half  in  cash,  and  one  half  in  tlic  st(jck  of  tin-  coriwira- 
tion  at  a  price  named.  There  is  no  other  action  of  the  cor|)oration 
or  its  directors,  past  or  contemplated,  relied  on  to  support  the  bill. 
The  prayer  is  that  the  defendants  Ik*  enjoined  and  restrained  from 
selling  the  company's  land.s  by  auction,  or  otherwise,  in  the  mode 
proposetl. 

There  is  nothing  in  this  vote  of  the  corporation,  or  in  the  action 
of  the  directors,  which  amounts  to  a  reduction  of  capital,  or  will 
amount  to  it,  if  the  proposed  sales  take  place.  That  must  depend 
on  future  corporate  action.  The  answer  dcMiies  that  the  .sale  pro- 
posed would  be  an  improper  and  illegal  reduction  of  capital,  and 
the  allegation  in  the  bill  that  the  plaintiffs  are  otherwise  advised,  as 
well  as  the  further  statement  in  the  answer,  that  it  has  alwiiys  been 
the  policy  of  the  company  to  reduce  its  capital  in  proportion  to  its 
sales,  becomes  immaterial.  It  is  unnccessarj',  therefore,  to  consider 
the  question  somewhat  discus.sed,  whether,  under  St.  1870,  chap.  224, 
§  24,  this  corporation  could  reduce  its  capital  at  any  meeting  not 
specially  called  for  that  purjiose. 

The  corporation  was  chartered  by  the  St.  of  1821,  chap.  2G,  with 
power  to  purcha.se  and  hold  any  quantity  of  water  power  createtl  by 
the  establishment  of  the  dams  between  Iloxbury  and  Boston,  to 
make  canals  and  raceways,  erect  buildings  and  fixtures,  and  to  hold 
real  estate  not  exceeding  S;3()(),0(M)  at  the  time  of  its  purchu.se,  and 
personal  property'  not  exceeding  S10(),0(K).  There  are  no  limitations 
upon  the  amount  of  its  capital  stock,  but  the  cori>oration  had  the 
right  to  make  unlimited  expenditures  in  the  construction  of  its  works 
neccs.sary  for  the  appropriation  and  use  of  the  water  power  recjuired 
under  its  charter,  and  the  power  to  determine  the  amount  of  capital 
stock  required  to  meet  these  expenses  is  left  to  the  corporation  it- 
self. Additional  acts,  subsequently  passed,  authorize  the  company 
to  hold  additional  real  estate,  l)ut  the  terms  of  the  original  incor- 
poration are  not  materially  changed  in  other  respects. 

It  is  contended  that  a  sale  of  the  lands  of  the  corporation  in  the 
mode  proposed  would  be  a  breach  of  trust.  This  depends  upon  the 
question  whether  a  sale  on  such  terms  is  by  rea.sonable  implication 
within  the  chartered  powers  of  such  a  corporation.  It  is  not  enough 
that  the  proposed  action  may  be  shown  to  be  prejudicial  to  the  gen- 
eral corporate  interests,  if  it  is  not  illegal,  and  if  it  equally  affects  all 
the  corporators.  Regard  must  be  had  to  the  peculiar  situation  of  the 
property.  The  increase  of  population  since  the  original  act  of  incor- 
poration has  given  greatly  increased  value  to  the  lands  acquired  by 
the  company.  The  business  of  the  company  can  no  longer  be  pro- 
fitably confined  to  the  development  and  use  of  its  water  privileges. 
It  has,  by  contract  with  the  Commonwealth,  the  city,  and  other 
owners  of  lands,  extinguished  its  water  power,  and  now  owns  in- 


SECT.  IV.]  MARVIN    V.  ANDERSON.  451 

stead  thereof  extensive  and  valuable  tracts  of  lands,  over  which  it 
had  originally  only  the  right  to  flow.  This  change  in  its  business  has 
made  it  necessary  to  fill  in  and  improve  the  land  that  it  might  be 
made  available  as  assets  of  the  company,  and  this  necessity  has  been 
recognized  by  a  resolve  of  the  legislature  authorizing  an  increase  of 
capital  for  that  purpose.  Res.  1856,  chap.  76.  ,  ,         • 

There  is  nothing  in  the  general  laws  of  the  Commonwealth,  or  in 
the  company's  charter,  which  forbids  the  sale  proposed.  The  power 
to  purchase  and  hold  implies  the  power  to  sell,  and  to  sell  upon  such 
terms  as  to  secure  the  highest  price.  The  whole  capital  is  now  rep- 
resented by  these  lands,  from  the  sale,  and  not  from  the  income  or 
use,  of  which  the  shareholders  must  derive  their  return.  In  the  ab- 
sence of  legislative  provision  to  the  contrary,  a  corporation  may  hold 
and  sell  its  own  stock,  and  may  receive  it  in  pledge  or  in  pajmient 
in  the  lawful  exercise  of  its  corporate  powers.  Leland  v.  Hmjden, 
102  Mass  542.  American  Railwmj-Frog  Co.  v.  Haven,  101  Mass.  398. 
Nesmith  V.  Washington  Bank,  6  Pick.  324,  329.  Coleman  v.  Columbia 
Oil  Co.,  51  Penn.  State,  74.  City  Bank  of  Columbus  v.  Bruce,  17  N.Y. 
507.   Ex  parte  Holmes,  5  Cowen,  426. 

We  cannot  see  that  the  rights  of  any  of  the  stockholders  will  be 
illegally  prejudiced  by  the  proposed  receipt  of  the  shares  in  payment 
for  its  land. 

Note.  —  See  also  Republic  Life  Ins.  Co.  v.  Swigert,  135  111.  150; 
West  V.  Averill  Grocery  Co.,  109  Iowa,  488;  Cole  v.  Cole  Realty  Co^, 
169  Mich.  347;  Forrest  v.  Nebraska  Hardware  Co.,  91  Neb.  735; 
Chapman  v.  Iron  Clad  Co.,  62  N.J.L.  497;  San  Antonio  Hardware  Co. 
V.  Sanger,  151  S.W.  (Tex.  Civ.  App.)  1104;  United  States  Mineral  Co. 
V.  Camden,  106  Va.  663;  Shoemaker  v.  Washburn  Lumber  Co.,  97 

Wis.  585.  ,     . 

Of  course  the  purchase  must  not  be  made  under  such  circumstances 
that  it  is  unfair  to  other  stockholders,  —  as  by  undervaluing  the 
assets  of  the  corporation  given  in  exchange.  See  Woodroof  v.  Howes, 
88  Cal.  184;  Price  v.  Pine  Mountain  Co.,  32  S.W.  (Ky.)  267. 


MARVIN  V.   ANDERSON. 

ill  Wis.  387.     1901. 


Action  by  the  trustee  in  bankruptcy  of  the  property  of  the  Badger 
Cycle  Company  to  set  aside  a  deed,  given  by  the  bankrupt  some  time 
before  the  commencement  of  the  bankruptcy  proceedings,  upon  the 
ground  that  it  was  fraudulent  as  to  the  creditors  and  stockholders  of 
the  corporation.  The  court  decided  as  matters  of  fact  ^s  follows: 

On  October  22,  1897,  the  day  when  the  deed  was  given  to  de- 


452  MARVIN    f.  ANDERSON.  (cilAP.  I. 

fendant  Louis  Anderson,  he  was  and  for  soino  time  prior  thereto  hati 
been  a  stockholder  of  the  corporation,  jn^sscssed  of  five  out  of  the 
fifty  shares  of  its  capital  stock,  each  share  being  of  the  par  value  of 
$1(J(),  and  was  also  a  director  of  the  coriK>ration  and  the  foreman  of 
its  business.  At  such  time  the  corpf)ration  wius  iiulebted  to  its  stcx-k- 
holders  in  the  sum  of  .Sl,r)7ii,  .SH()."i  of  which  was  dur  to  AmJatton  for 
labor  and  services;  wa.s  also  indebted  to  outside  parties  in  the  sum 
of  So, 444. 32;  and  possessed  property  of  the  value  of  from  nine  to  ten 
thousand  tloUars,  being  .solvent  and  in  every  reap<Tt  a  going  cor- 
poration. Aiidcrs<rn,  upon  the  advice  of  his  physician,  decided  to 
discontinue  his  work  for  the  corporation,  and  thereupon  requested  it 
to  pay  him  the  amount  due  for  his  services.  It  being  difficult  for  the 
corporation  to  comi)ly  with  such  rerjuest  by  paying  Anderson  in 
money,  the  parties  agreed,  without  any  formal  action  by  the  di- 
rectors as  a  board  or  by  the  .stockholders,  but  u{K)n  their  individual 
eonsitleration  and  determination,  that  plaintifT  should  release  his 
claim  against  the  corporation  and  transfer  to  it  his  five  shares  of 
capital  stock,  and  receive  therefor  the  real  estate  in  (pieslion,  which 
was  of  the  Vfdu<*  of  §8.j()  and  Wius  not  u.sed  in  the  corporate  busi- 
ness, four  bicycles  of  the  value  of  $20  each,  antl  $22o  in  money, 
which  agreement  was  fully  consummated.  All  the  stockholders  luid 
directors  luul  knowledge  of  and  fully  accpiiesced  in  the  entire  trans- 
action, and  after  it  occurred  treated  it  its  valid  till  after  the  com- 
mencement of  the  proceedings  in  bankruptcy  nearly  two  yeai^s  sub- 
sequent to  the  making  of  the  deed.  Aside  from  claims  of  stockholders 
of  the  corporation  who  acfiuiesced  in  the  transaction  in  (juestion, 
the  only  claim  proved  in  bankruptcy  which  existed  at  \\\o  time  of 
such  transaction  was  a  small  one  in  favor  of  one  Comstock,  which, 
prior  to  the  commencement  of  this  action,  was  fully  paid.  After  the 
making  of  the  deed  and  before  its  validity  was  in  any  way  called  in 
question,  Anderson  mortgaged  the  land  to  defendant  John  (lilherl 
to  secure  the  payment  of  a  loan  of  §200. 

Marshall,  J.  If  the  Badger  Cycle  Company  was  solvent  at  the 
time  of  the  transaction  in  question,  the  main  contention  by  counsel 
for  appellant,  that  the  jutlgment  appealed  from  is  wrong,  fails.  The 
trial  court  decided  that  question  in  the  affirmative  becau.^e  the  prop- 
erty of  the  corporation,  at  a  fair  valuation,  exceeded  to  a  consider- 
able extent  its  debts.  Appellant's  counsel  say  that  was  not  t he  proper 
rule  to  be  applied.  The  conclusive  answer  thereto  is  that  the  trial 
court  followed  the  law  as  it  has  been  laid  do\Mi  by  this  court.  Hamil- 
ton V.  Menominee  Falls  Q.  Co.,  lOG  Wis.  '.i')2;Shaic  v.  Gilbert,  111  Wis. 
165.  Counsel  makes  the  common  mistake  of  failing  to  distinguish 
betw-een  the  meaning  of  the  term  "insolvent,"  as  the  subject  of  in- 
solvency is  dealt  with  by  insolvent  and  bankrupt  laws,  and  the  gen- 
eral meaninj:  thereof.  The  former  is  inability  of  a  person  to  pay  his 
debts  as  they  mature  in  the  ordinary  course  of  business;  the  latter 


SECT.  IV.]  MARVIN    V.  ANDERSON.  453 

is  a  substantial  excess  of  a  person's  liabilities  over  the  fair  cash  value 
of  his  property.   The  former  does  not  militate  against  a  debtor  cor- 
poration dealing  with  its  property  as  it  sees  fit;  while  the  latter,  in 
case  of  a  corporation,  if  it  is  on  the  verge  of  collapse  or  has  suspended 
payment  —  is  in  a  condition,  as  the  boolcs  say,  to  be  rightfully  con- 
sidered, so  far  as  capacity  to  do  business  is  concerned,  civilly  dead  — 
is  held  to  impress  upon  its  property  a  trust  for  the  benefit  of  its 
creditors  Einz  v.  Van  Dusen,  95  Wis.  50S;  Shoemaker  v.  Washburn  L. 
Co.,  97  Wis.  585;  Graham  v.  Railroad  Co.,  102  U.S.  148;  Slack  v.  N.W. 
Nat.  Bank,  103  Wis.  57;  Hamilton  v.  Menominee  Falls  Q.  Co.,  supra. 
The  further  question  is  presented  of  whether  the  corporation  was 
justified,  as  to  its  creditors  or  stockholders,  in  purchasing  its  own 
stock  and  parting  with  corporate  property  in  pajnnent  therefor. 
There  is  no  impediment  in  the  way  of  a  solvent  corporation,  having 
power  to  purchase  and  sell  and  convey  property  and  not  prohibited 
by  its  constitution  or  any  statute,  from  buying  in  its  own  stock. 
This  court  has  several  times  passed  upon  that  question.   Shoemaker 
V.  Washburn  L.  Co.,  supra;  Calteaux  v.  Mueller,  102  Wis.  525.  It  was 
held  in  the  last  case  cited  that  such  rule  could  not  be  invoked  to 
justify  an  officer  of  a  corporation,  without  special  authority,  in  buy- 
ing in  its  capital  stock  in  its  name,  but  that  situation  does  not  apply 
in'this  case,  since  all  the  stockholders  of  the  cycle  company  knew  of 
and  individually  considered  and  approved  the  transaction  in  question 
before  it  occurred,  and  thereafter,  so  long  as  the  corporation  existed  as 
a  business  institution,  a  period  of  some  two  years,  acquiesced  in  it. 
If  under  any  circumstances  the  sale  of  land  to  respondent  could 
be  impeached  on  the  ground  of  fraud  or  want  of  power  in  the  cor- 
poration to  make  the  sale,  appellant  has  no  standing  in  court  to  do 
so,  since  all  the  stockholders  are  estopped  by  their  conduct  from 
complaining,  and  the  receiver,  as  the  representative  of  the  corpora- 
tion, has  no  better  right  in  their  behalf.-  Further,  there  is  no  mdebt- 
edness  to  any  nonstockholder  of  the  corporation  which  existed  at 
the  time  the  transaction  took  place.  Shoemaker  v.  Washburn  L.  Co., 
supra;  Graham  v.  Railroad  Co.,  supra.    Here  again  counsel  seem  to 
have  fallen  into  a  common  error,  that  of  not  keeping  in  mmd  that 
the  rule  under  which,  in  any  case,  the  property  of  a  corporation  is 
deemed  a  trust  fund  for  creditors  and  stockholders,  or  either,  is 
wholly  a  creation  of  courts  of  equity,  and  that  only  those  have  equit- 
able rights  in  a  fund  at  the  time  of  its  depletion  who  have  then  a  right 
to  resort  to  such  fund  to  satisfy  their  claims.  Creditors  of  a  corpora- 
tion are  not  presumed  to  have  rehed  upon  property  of  their  debtor 
which  it  did  not  possess  when  the  indebtedness  accrued,  and  there- 
fore are  not  held  to  have  any  equitable  claim  thereon. 

Note  —See  also  Blalock  v.  Kernersville  Mfg.  Co.,  110  N.C.  99; 
Joseph  V.  Raff,  82  N.Y.  App.  Div.  47;  aff'd,  176  N.Y.  611. 


454  RICHARDS    V.  WIENER   CO.  [CHAP.  1. 

RICHARDS  V.  WIENER  CO. 

207  N.Y.  59.     1912. 

HiAGHT,  J.  This  action  was  brouf^lit  to  recover  the  sum  of  S;i(KX) 
and  interest  thereon,  claimed  to  be  due  from  the  defendant  under  a 
written  contract,  which  is  as  follows: 

"New  York,  October  24,  1908. 
"Mr.  J.  N.  Richards, 

"New  York  City: 

"Dear  Sir.  —  We  beg  to  confirm  our  agreement  with  you  as  fol- 
lows: 

"  (1)  You  subscril)c  for  100  shares  of  our  0  ])er  cent  preferred  stock 
of  a  par  value  of  SIOO.OO  at  the  price  of  S  10,000  and  you  agree  to 
pay  not  less  than  $3,000.00  immediately  (§1,000.00  at  the  time  of 
signing  this  contract,  $2,0{K).00  on  or  before  Novcmi)er  10th.  H)OS), 
not  less  than  $5,000.00  within  6  months  after  date  and  the  balance 
within  3  months  thereafter,  that  is  9  months  from  date. 

"(2)  In  consideration  of  this  purchase  of  our  stock,  we  agree  to 
employ  you  in  our  business  and  you  agree  to  devote  to  same  your 
entire  time  exclusively  and  to  use  your  very  best  efforts  to  further 
its  interest  directly  or  indirectly.  We  agree  to  allow  you  a  salary  of 
$50.00  per  week  and  a  connnission  on  all  the  new  business  that  you 
bring  us,  that  is,  on  all  orders  from  custoinei"s,  whose  fii*st  order  has 
been  obtained  by  you.  This  commission  to  be  10  per  cent  on  the  net 
profits  of  such  orders.  Such  profits  to  result  in  deducting  from  the 
sales  price  all  the  expenses  had  with  the  order,  as  f.i.,  the  cost  price  of 
the  material  figures  in  the  regular  way,  discounts,  freight  and  cart- 
age allowances,  etc.  Among  the  expenses  on  the  order  to  be  counted 
the  interests  from  date  of  expenditure  until  date  of  payment  by  the 
customer,  all  special  ex-penses  such  as  telegrams,  long  distance  tele- 
phone messages,  traveling  expenses  if  incurred  especially,  shares  of 
profit  to  manufacturers  if  any,  and  outside  commissions,  but  no 
general  office  expenses. 

"  (3)  As  soon  as  you  have  paid  the  second  installment  of  $5,000.00 
on  the  above  purchase  of  preferred  stock,  we  will  guarantee  you  the 
above  commission  in  addition  to  the  salary  with  $000.00  per  year 
and  we  will  sign  a  contract  with  you  on  this  basis,  to  be  good  for  not 
less  than  2  years  from  the  date  of  this  letter. 

"If,  however,  you  should  fail  to  pay  the  second  installment,  we 
will  have  the  option  to  discontinue  your  employment,  and  if  in  this 
case  you  should  not  want  to  have  the  first  installment  paid  by  you 
considered  as  the  purchase  price  m  full  for  30  shares  of  our  pre- 
ferred stock,  then  we  shall  repurchase  these  30  shares  of  stock  from 
you  at  par  within  6  months  thereafter.  If,  however,  at  any  time 
during  the  first  6  months  or  at  the  end  of  same  you  should  discon- 


SECT.  IV.]  RICHARDS    V.  WIENER    CO.  455 

tinue  your  services  of  your  own  account  and  fail  to  pay  in  the 
$5,000.00,  then  the  first  installment  of  $3,000.00  paid  in  by  you 
shall  be  considered  as  the  pui'chase  price  in  full  for  30  shares  of  our 
preferred  stock  without  any  obligation  on  our  part  to  repurchase 
same. 

"In  case  this  agreement  should  be  terminated  the  commission  will 
be  paid  on  all  orders  coming  mider  this  agreement,  such  as  have  been 
received  in  our  office,  before  the  date  of  expiration  of  this  contract 
whether  accepted  and  executed  before  this  date  or  thereafter. 

"Please  acknowledge  this  agreement,  and  oblige, 
"Yours  very  truly, 

"Ernst  Wiener  Company, 

"Walter  J.  Briggs,,  Sec' y." 

It  appears  that  the  plaintiff  thereupon  paid  to  the  defendant  the 
sum  of  $3,000,  being  the  first  of  the  two  sums  mentioned  in  the  con- 
tract, and  then  entered  the  employment  of  the  defendant  and  con- 
tinued therein  until  the  14th  day  of  August,  1900.  He  did  not,  how- 
ever, at  the  expiration  of  the  six  months  pay  the  additional  sum  of 
$5,000  upon  the  contract,  but  notified  the  defendant  that  he  was 
unable  to  do  so.  Thereupon  and  on  the  14th  day  of  August,  1909, 
the  defendant  wrote  the  plaintiff  as  follows:  "After  a  fair  trial  we 
have  come  to  the  conclusion  that  you  are  not  competent  to  fill  the 
position  now  occupied  by  you  nor  do  the  results  warrant  our  keeping 
you,  and  we,  therefore,  beg  to  notify  you  that  with  the  payment  of 
this  week's  salary  your  services  will  not  be  required  after  this  date." 
(Signed  by  the  defendant  company.)  At  the  same  time  the  defend- 
ant company  drew  a  certificate  for  thirty  shares  of  preferred  capital 
stock  of  the  corporation  and  delivered  the  same  to  the  plaintiff. 
Thereupon  the  plaintiff  wrote  the  defendant  as  follows:  "Having 
received  from  you  under  date  of  the  14th  notice  that  my  services  were 
no  longer  required  by  your  Company,  I  beg  to  notify  you  that  I  shall 
require  you  to  repurchase  from  me  thirty  (30)  shares  of  your  pre- 
ferred stock  for  which  I  have  heretofore  paid  you  the  sum  of  Three 
Thousand  ($3,000)  Dollars,  but  which  stock  was  never  delivered  to 
me,  as  I  do  not  wish  to  have  the  money  paid  in  by  me  under  the  con- 
tract between  us  bearing  date  October  24th,  1908,  considered  as  the 
purchase  price  of  said  thirty  (30)  shares."  The  chief  defense  inter- 
posed in  the  case  is  to  the  effect  that  the  provision  of  the  contract 
with  reference  to  purchasing  back  the  stock  was  void  and  contrary 
to  the  provisions  of  the  Penal  Law  and  is  contrary  to  public  policy 
and  to  the  law.  §  664  of  the  Penal  Law,  formerly  §  594  of  the 
Penal  Code,  provides  as  follows: 

"A  director  of  a  stock  corporation,  who  concurs  in  any  vote  or  act 
of  the  directors  of  such  corporation,  or  any  of  them,  by  which  it  is 
intended: .  .  . 

"5.  To  apply  any  portion  of  the  funds  of  such  corporation,  ex- 


456  MORGAN    V.  LEWIS.  [CIIAP.  I. 

cept  surplus  profits,  directly  or  indirectly,  to  the  purchase  of  shares 
of  its  own  stock,  is  guilty  of  a  misdemeanor." 

We  are  much  impressed  with  the  contention  that  the  contract  in 
this  case,  properly  construed,  amounts  merely  to  an  option  to  pur- 
chase stock  on  the  part  of  the  plaint ifT,  and  the  advancement  on  such 
option  of  S3,000  upon  condition  that  he  he  ^iven  employment  by  the 
corporation  at  the  price  agreed  upon,  and  that  in  case  the  company 
terminated  such  employment  he  had  the  right  to  demand  the  return 
of  the  money  that  he  had  advanced.  But  we  have  thought  it  wi.se  in 
this  ca.sc  to  follow  the  Appellate  Division.  Assuming,  therefore,  that 
under  the  contract  the  plaintiff  had  the  title  to  the  stock  which  he 
could  resell  but  for  the  provision  of  the  Penal  Law,  the  defendant 
nevertheless  was  recjuired  to  prove  its  invalidity,  und(>r  the  law  re- 
ferred to.  Upon  the  trial  there  was  an  attempt  to  show  that  the  cor- 
poration had  no  surplus  profits  out  of  which  the  purchiuse  of  the 
stock  could  be  made.  But  the  evidence  offered  upon  this  subject  was 
not  proper  and  consequently  was  excluded  by  the  trial  court.  We, 
therefore,  have  a  ca.se  in  which  the  corporation  has  failed  to  show 
that  it  did  not  possess  surplus  j)rofits  out  of  which  the  stock  could  be 
purchased.  As  was  said  by  Scott,  J.,  below:  "The  law  will  not  pre- 
sume, unless  forced  to  do  so,  that  a  person  intends  to  do  an  illegal 
act.  It  will  not,  therefore,  presume  that  the  parties  intended  to 
make  an  illegal  contract.  The  contract  it.self,  therefore,  w:us  per- 
fectly legal  subject  to  certain  limitations  upon  its  enforcibility.  If 
when  the  time  came  defendant  had  a  sufficient  surplus  the  contract 
w^ould  be  enforced.  If  it  had  not  the  contract  could  not  be  enforced. 
In  defending  against  plaintiff's  attempt  to  enforce  it  the  burden 
rested  upon  defendant  to  show  that  it  would  be  illegal  to  do  so,  for 
there  is  no  presumption  one  way  or  the  other  as  to  the  existence  of  a 
surplus.  The  defendant  assumed  this  burden  but  failed  in  sustain- 
ing it,  .  .  .  " 

The  judgment  appealed  should  be  affirmed,  with  costs. 

Judgment  affirmed. 

CuLLEN,  Ch.J.,  Vann,  Willard  Bartlett,  Hiscock  and  Chase, 
JJ.,  concur;  Collin,  J.,  absent. 


MORGAN  V.   LEWIS. 

46  Ohio  1.     1888. 

The  action  below  was  commenced  by  Lewis,  one  of  the  defendants 
in  error,  against  the  Alliance  Rolling  Mill  Company  and  other  de- 
fendants alleged  to  be  stockholders  in,  or  creditors  of,  the  company, 
for  the  purpose  of  enforcing  the  statutory  liability  of  the  stockholders 
to  contribute  to  the  payment  of  the  debts  of  the  corporation,  which 


SECT.  IV.]  MORGAN    V.  LEWIS.  457 

was  alleged  to  be  insolvent,  and  to  have  assigned  its  property  and 
ceased  to  do  business. 

The  case  was  referred;  there  was  a  trial  before  the  referee,  and 
Morgan,  the  plaintiff  in  error,  was  held  as  a  stockholder.  He  ex- 
cepted, and  had  a  bill  of  exceptions  signed  by  the  referee.  On  hear- 
ing, the  court  of  common  pleas  affirmed  the  referee's  report,  Morgan 
excepting.  He  then  presented  a  petition  in  error  in  the  district  court 
where  the  case  was  reserved  for  decision  in  this  court. 

Upon  the  trial  before  the  referee,  Morgan  offered  to  prove  that 
prior  to  the  time  the  Alliance  Rolling  Mill  Company  acquired  title 
to  the  furnace  property,  the  property  was  principally  owned  by  the 
defendant,  Morgan,  and  that  for  his  interest  in  the  furnace  property 
the  Alliance  Rolling  Mill  Company  issued  to  the  defendant,  Morgan, 
stock  in  the  Rolling  Mill  Company,  which  stock  was  the  same  stock 
which  was  afterwards  transferred  by  the  defendant,  Morgan,  to  the 
Alliance  Rolling  Mill  Company  in  consideration  of  the  re-transfer  to 
him  of  the  furnace  property.  And  further  offered  to  prove,  that  after 
the  Alliance  Rolling  Mill  Company  acquired  title  to  the  furnace 
property,  the  furnace  not  proving  as  successful  and  profitable  as  had 
been  expected,  some  of  the  stockliolders  were  dissatisfied  with  the 
purchase  from  Morgan,  and  contentions  arose  among  them,  and  the 
defendant,  Morgan,  was  blamed  by  many  of  them  for  having  gotten 
the  company  into  the  purchase  and  was  requested  to  take  the  prop- 
erty off  their  hands  and  paj^  for  it  in  stock  of  the  company;  and  that 
Morgan,  for  the  sake  of  settling  such  contentions  and  dissatisfac- 
tion, did  purchase  the  furnace  and  pay  for  it  in  stock  which  had  been 
issued  to  him  as  shown  by  the  record.  And  thereupon  the  referee 
sustained  the  objection  to  the  evidence  so  offered,  and  defendant, 
Morgan,  excepted. 

It  was  testified  to  before  the  referee,  and  not  contradicted,  that 
Morgan  transferred  his  stock  to  the  company  and  the  latter  deeded 
to  him  the  furnace  property,  of  which  he  took  immediate  possession, 
and  which  he  continued  to  hold  and  use  as  his  own. 

No  action  has  been  taken  looking  to  the  subjection  of  this  furnace 
property  to  the  payment  of  the  claims  of  any  creditors,  but  all 
parties  have  treated  it  as  if  it  were  the  property  of  Morgan  since  it 
was  so  deeded  to  him. 

In  his  report  the  referee  finds  that  between  February  5,  1867,  and 
January  2,  1871,  Morgan  became  the  legal  owner  and  holder  of 
$116,583  worth  (at  par  value)  of  stock  in  the  company.  That  on  the 
17th  of  January,  1872,  "by  a  resolution  of  the  said  board  of  di- 
rectors, the  president  of  said  corporation,  by  deed  duly  executed, 
deeded  the  furnace  property  mentioned  in  said  proposition  to  said 
David  Morgan,  and  on  the  same  day  said  David  Morgan  signed 
powers  of  attorney  in  blank,  transferring  said  stock,  and  delivered 
up  the  certificates  of  the  same  to  the  secretary  of  the  corporation,  who 


458  MORGAN    V.  LEWIS.  [cHAP.  I. 

wrote  the  word  'cancelled'  on  the  face  of  each  certificate,  and  in- 
serted said  certificates  in  the  stock  certificate  book  of  the  corjiora- 
tion,  as  surrendered  stock. 

"That  at  the  time  of  said  delivery  of  said  certificates  of  stock  to 
said  corporation  said  David  Morgan  was  the  legal  ouncr  of  said 
stock  represented  thereby. 

"That  said  stock  so  delivered  and  intended  to  be  surrendered  to 
said  corporation,  was  never  afterwards  represented,  and  the  same 
was  completely  merged  in  said  corporation,  and  the  capital  stock 
of  said  corjx^rution  was  treated  by  the  directors  as  reduced  by  the 
amount  of  $110, .')83. 

"Said  transaction  was  with  the  directors  of  said  corporation 
alone,  and  without  any  submission  of  the  same  to,  or  vote  on  the 
same  by,  the  general  stockholders  of  said  corporation,  and  without 
any  knowletlge  or  a.s.sent  of  the  general  stockholdei-s,  and  that  no 
certificate  of  decrease  was  filed  with  the  Secretary  of  Stale  as  re- 
quired by  statute,  nor  was  any  notice  of  the  action  of  the  directors 
ever  given. 

"That  at  the  time  of  said  attempted  surrender  said  corporation 
was  reported  to  be  solvent. 

"That  said  David  Morgan  bought  .said  property  from,  and  in- 
tended to  transfer  said  stock  to,  said  corporation  in  good  faith  and 
without  fraudulent  intent. 

CONCLUSIONS    OF   LAW. 

"The  transfer  of  this  stock  to  the  corporation  had  the  effect  of 
reducing  the  capital  stock  of  the  corporation;  the  directors  of  the 
corporation  did  not  have  the  jiower  to  thus  reduce  the  cupital  stock, 
and  such  transfer  is  void  anil  of  no  effect,  and  left  the  title  to  said 
$116,583  of  stock  precisely  where  it  had  been,  and  the  same  as  if  no 
effort  hatl  been  made  to  transfer  the  same. 

"Unless  the  power  to  buy  its  own  stock  is  exprcs.sly  conferred  in 
its  charter,  a  corporation  can  not  deal  in  its  own  stock,  and  such 
transactions  are  void. 

"The  fund  arising  from  the  individual  liability  of  stockliolders  is 
a  trust  fund  set  apart  under  our  constitution  and  statutes  for  the 
benefit  of  creditors,  and  the  directors  by  no  arrangement  or  dealing 
whatever  can  affect  or  impair  this  fund. 

"I  find  David  Morgan  liable  on  account  of  said  stock,  to  con- 
tribute to  the  payment  of  the  claims  of  the  creditors  of  said  corpora- 
tion, to  the  amount  of  $116,583." 

The  referee  finds  in  another  connection,  that  the  capital  stock  of 
the  company  was  increased  from  time  to  time,  until  in  December, 
1870,  when  it  was  increased  to  $450,000. 

The  fact  that  Morgan  took  immediate  possession  of  the  furnace 
property  upon  its  conveyance  to  him,  is  not  found  by  the  referee, 


BECT.  IV.]  MORGAN    V.  LEWIS.  459 

and  does  not  seem  to  have  entered  into  the  consideration  of  the 
case  by  him,  or  by  the  court  of  common  pleas. 

It  also  appeared  in  the  case  that  the  claims  of  creditors  all  accrued 
after  the  transfer  by  Morgan  of  his  stock  to  the  company,  and  of  the 
furnace  property,  by  the  latter,  to  him. 

Owen,  C.J.  The  theory  upon  which  the  referee  and  the  court  of 
common  pleas  must  have  proceeded,  was  that  the  entire  transaction 
by  which  Morgan  acquired  the  furnace,  and  the  company  acquired 
his  stock,  was  void ;  that  it  was  beyond  the  power  of  the  company  to 
engage  in  the  transaction,  and  that  consequently  the  company  ac- 
quired no  title  to  the  stock,  and  Morgan  acquired  none  to  the  furnace 
property.  If  this  conclusion  is  sound,  the  inevitable  consequence  is, 
that  the  company  still  owns  the  furnace,  and  it  is  assets  in  the  hands 
of  the  assignee  for  the  payment  of  the  company's  debts.  It  is  an 
absurdity  to  assume  that  Morgan  is  still  the  owner  of  both  the  fur- 
nace and  the  stock.  If  he  is  still  liable  to  creditors  as  a  holder  of  this 
stock,  the  company,  by  the  same  reasoning,  is  owner  of  the  furnace. 
It  is  conceded  that  the  proceeding  to  subject  the  liability  of  stock- 
holders to  the  satisfaction  of  the  claims  of  creditors,  has  throughout 
ignored  this  property.  It  does  not  appear  but  that  this  property 
alone  would  satisfy  creditors,  nor  to  what  extent  it  would  exonerate 
stockholders  from  the  liability  which  it  is  now  sought  to  subject  to 
the  satisfaction  of  creditors'  claims.  If  we  were  in  accord  with  the 
referee  and  court  of  common  pleas,  upon  the  main  proposition  of  the 
case,  still  it  would  be  our  duty  to  send  the  case  back  for  proceedings 
to  subject  this  property  of  the  company  to  the  satisfaction,  pro 
tanto,  of  its  debts. 

We  are  of  opinion,  however,  that  the  referee  erred  in  excluding  the 
evidence  which  Morgan  offered,  to  throw  light  upon  the  transaction 
by  which  he  assumed  to  acquire  the  furnace,  and  transfer  his  stock 
to  the  company. 

The  contention  of  Morgan,  in  this  respect,  is  not  answered  by  the 
proposition  that  the  only  purpose  of  offering  the  rejected  proof  was 
to  show  that  the  transaction  was  in  good  faith,  and  that  this  already 
sufficiently  appeared.  We  have  no  disposition  to  call  in  question  the 
general  and  well  recognized  principle  that  a  corporation  cannot  buy 
its  own  stock.  It  is  conceded  that  this  principle  proceeds  upon  a  want 
of  power,  rather  than  upon  any  express  prohibition  in  its  charter. 
With  this  general  principle  conceded,  however,  the  right  of  a  cor- 
poration to  take  its  own  stock  in  satisfaction  of  a  debt  due  to  it,  has 
long  been  recognized  in  this  state. 

This  has  been  recognized  as  an  exception  supposed  to  rest  upon  the 
necessity  of  avoiding  loss.  Coppin  v.  Greenlees,  38  Ohio  St.  279.  It  is, 
nevertheless,  a  relaxation  of  the  general  rule.  It  is,  of  course,  because 
of  the  necessity  of  avoiding  loss,  and  not  because  it  is  for  the  satisfac- 
tion of  a  debt,  that  the  exception  is  recognized.  If  the  same  or  a  like 


460  MORGAN    v.   LEWIS.  (cHAP.  I. 

necessity  of  avoiding  loss  should  arise  in  any  of  the  transact iijns  of 
the  company,  it  could  not,  with  any  show  of  reason,  Ix*  contendc<l 
that  the  application  of  this  principle  of  necessity  should  \jv  liniite<l 
by  any  iron  rule  to  the  case  of  taking  stock  for  an  otherwise  hoi)ek»s8 
debt. 

The  evidence  which  Morgan  offered,  and  the  referee  rejecte<l, 
tended  to  establish,  in  substance,  that  Morgan  had  traded  to  the 
company  this  furnace  property  for  stock.  That  the  furnace  promised 
to  prove  a  failure,  or,  at  best,  a  di.sappointing  Jind  un.s;itisfactory  ven- 
ture. Contentions  arose  over  the  transa<'tion,  U'twet-n  Morgan  and 
some  of  the  stockliolders.  Many  of  them  blamed  him  for  having 
induced  the  company  to  make  the  purchase.  Thereupon  they  — 
"many  stockholdei-s"  •— simply  propositi  a  rescission  of  the  con- 
tract of  purcluusc;  that  Morgan  take  back  the  furnace  and  restore  to 
the  company  the  stock  he  had  reeeivetl  for  it.  The  company  Wiis  out 
of  debt.  Nobody  could  iK)ssibly  be  hurt  by  a  rescission  of  this  con- 
tract which  had  caused  so  nuich  discontent  and  contention,  and 
which  promised  to  be  a  losing  venture  for  the  comjiany  and  Mor- 
gan's fellow  stockholders.  This  j)roof  woukl  have  established  some- 
thing beyond  the  mere  good  faith  of  the  transaction.  It  would  have 
tended  to  establish  the  fact  that  Morgan  yielded  to  the  importunities 
of  many  stockhoidci-s  to  rescind  a  l)argain  antl  set  at  rest  an  unfor- 
tunate controversy  which  was  rapidly  breeding  discord  among  the 
stockholders. 

The  finding  of  the  referee,  that  this  transaction  itself  worked  a 
reduction  of  the  capital  stock  of  the  company,  is  not  tenable.  There 
wius  notiiing  in  the  way  of  the  company  rc-issuing  this  stock  or  its 
equivalent  to  others  who  may  have  desired  it.  There  was  nothing  in 
the  fact  that  these  certificates  were  marked  "cancelled"  on  the  face, 
by  the  secretary  of  the  company,  and  by  him  treated  as  surrendered 
stock,  to  authorize  the  finding  that  the  capital  stock  of  the  company 
was  reduced.  This  wius  no  part  of  the  transaction  with  Morgan,  and 
there  was  nothing  in  the  fact  of  the  re-exchange  of  the  stock  for  the 
furnace  which  calletl  ujwn  the  officers  of  the  company  to  treat  the 
stock  as  cancelled,  or  *he  capital  pro  tanto  reduced.  Green's  Brice's 
Ultra  Vires,  2d  ed.,  191,  192.  This  conclusion  is  not,  in  principle, 
qualified  by  the  fact  that  the  stock  wius  not  in  fact  thereafter  rep- 
resented. Then,  we  should  not  lose  sight  of  the  fact  that  there  was 
an  executed  transaction.  The  exchange  —  or  the  re-exchange, 
rather  —  had  been  made,  possession  of  the  furnace  taken  by  Morgan, 
and  retained  by  him  for  years  before  the  transaction  was  questioned 
by  any  one.  To  this  day  it  has  remained  free  from  direct  attack. 
Certainly,  the  possession  by  Morgan  of  this  property  which  had 
theretofore  been  in  the  possession  of  the  company,  was  a  circum- 
stance proper  to  be  considered  with  other  facts  in  the  case.  It  at 
least  helps  us  to  distinguish  it  from  the  case  of  Coppin  v.  Greenlees, 


SECT.  IV.]  MORGAN    V.  LEWIS.  461 

38  Ohio  St.  275,  relied  upon  by  defendants  in  error.  In  that  case  it 
was  held  that:  "An  executory  agreement  between  a  manufacturing 
corporation  of  this  state  and  one  of  the  stockholders,  for  the  purchase 
of  the  stock  of  such  corporation,  by  the  former  from  the  latter,  can 
not  be  enforced,  either  by  action  for  specific  performance  or  for 
damages."  That  this  presents  a  very  different  case  from  one  of  an 
executed  contract  is  emphasized  by  the  following  language  of  Mc- 
Ilvaine,  J.,  by  whom  the  opinion  was  prepared:  "If  it  were  averred 
that  the  plaintiff  had  purchased  this  stock  from  the  defendant,  or 
from  others,  under  an  agreement  with  the  company  that  it  buy  the 
same  from  him  when  he  quit  its  employment,  or  if  the  contract  of 
purchase  by  the  defendant  had  been  executed,  very  different  questions 
would  arise."  In  State  v.  Building  Association,  35  Ohio  St.  263,  the 
general  principle  that  a  corporation  may  not  traffic  in  its  own  stock  is 
recognized.  Yet  in  the  same  connection  it  is  said:  "  We  do  not  deny 
that  a  corporation  has  power  to  receive  shares  of  its  stock  as  security 
for  a  debt  or  other  similar  purposes."  26  Ga.  28;  84  111.  145;  17  N.Y. 
507;  114  Mass.  37;  18  Vt.  131.  It  is  apparent  from  the  foregoing  that 
no  inflexible  rule  has  been  recognized  by  this  court,  that  a  corporation 
may  not  in  any  case,  nor  for  any  purpose,  receive  its  own  stock.  On 
the  contrary,  the  way  is  left  open  for  the  application  of  exceptions 
to  the  general  rule  in  proper  cases.  It  is  one  of  the  established  facts 
in  the  case  that  all  the  debts  which  are  sought  to  be  satisfied  by  this 
proceeding  were  contracted  subsequently  to  the  transaction  which 
is  assailed.  The  transfer  of  the  furnace  property  from  the  possession 
of  the  company  to  that  of  Morgan  was  a  fact  to  which  persons  giving 
credit  to  the  company  could  not  safely  close  their  eyes.  The  inquiry 
which  it  would  naturally  excite  would  have  led  to  the  information 
that  the  trade  by  which  the  company  secured  the  furnace,  and  Mor- 
gan the  stock,  had  simply  been  rescinded  and  the  property  —  stock 
and  furnace  —  re-exchanged.  It  being  the  law  of  our  state  that  there 
are  exceptions  to  the  general  rule,  that  corporations  may  not  deal 
in  their  own  stock,  all  persons  dealing  with  this  company  must  be 
held  to  have  done  so  in  the  light  of  this  state  of  the  law.  All  persons 
are  as  much  presumed  to  know  of  exceptions  to  a  principle  as  of  the 
principle  itself.  The  slightest  inquiry  would  have  revealed  the  fact, 
that,  as  between  himself  and  the  company,  Morgan  did  not  sustain 
the  relation  of  stockholder,  at  the  time  these  debts  were  contracted. 

In  the  light  of  this  state  of  adjudication  in  this  court,  we  do  not 
hesitate  to  say  that  the  peculiar  state  of  circumstances,  which  Mor- 
gan offered  to  prove  before  the  referee,  ought  to  have  been  received 
in  evidence  and  considered  in  the  light  of  other  facts  which  did  appear, 
in  order  that  the  referee  and  courts  could  have  had  an  opportunity 
to  say  whether  they  did  not  bring  the  case  within  some  of  the  well 
founded  exceptions  to  the  wise  and  well-established  general  rule. 

The  facts  alleged  in  the  petition,  concerning  the  insolvency,  etc., 


462  VENT    V.  DULUTII    COFFEE    CO.  [cHAP.  I. 

of  the  company,  were  sufficient  to  dispense  with  an  averment  of  the 
recovery  of  a  judgment  afiainst  it  iis  a  pn'n'f|uisite  to  the  proceeding 
to  subject  the  hability  of  the  stockholders  to  the  satisfaction  of  the 
corporate  debts. 

Judgment  reversed  and  cause  remanded. 

Note.  —  It  was  held  that  the  corporation  in  question  had  power 
to  take  its  own  stock  in  payment  of  a  previously  existing  debt  in 
Draper  v.  Blackwell,  138  Ala.  182;  Costello  v.  Portsmouth  Brewing 
Co.,  69  N.H.  40.5;  City  Bank  v.  Bruce,  17  N.Y.  507;  Taylor  v.  Miami 
Co.,  6  Ohio,  177;  Barto  v.  Nix,  I't  Wiush.  503.  8o,  of  taking  its  own 
stock  as  collateral.  Red  Bud  Realty  Co.  v.  South,  96  Ark.  281. 


VENT   V.   DULUTH   COFFEE  CO. 

&4  Minn.  .307.      1S90. 

Canty,  J.  On  April  23,  1894,  plaintiffs  and  the  defendant  cor- 
poration (then  called  the  Smith  &  Coulter  Spice  Company)  entered 
into  the  following  agreement:  "Parties  of  the  first  part  (plaintiffs] 
agree  to  take  five  thousand  (So.OOO)  dollars'  worth  of  capital  stock 
of  the  Smith  &  Coulter  Spice  Co.'s  stock  at  par  value,  to  be  paid 
for  on  or  before  May  1st,  '94,  which  is  to  represent  one-fourth  interest 
in  all  assets  of  the  company  at  this  date.  Parties  of  the  second  part 
[defendant]  agree  that  on  April  1st,  1895,  if  said  parties  of  the  first 
part  are  dissatisfied  with  the  said  stock  or  interest  in  said  company, 
that  the  said  Smith  &  Coulter  Spico  Co.  will  take  stock  from  said 
parties  of  the  first  part,  and  pay  them  par  value  in  cash  for  said 
stock,  or  interest  in  said  company;  parties  of  the  first  part  to  give 
notice  by  April  15th,  1895,  and  parties  of  the  second  part  to  have 
60  da>^  from  said  notice  to  i)ay  for  said  stock."  Pursuant  to  this 
agreement,  defendant  issued  the  S5,000  of  its  stock  to  plaintiffs,  who 
paid  for  the  same  in  full.  The  name  of  the  defendant  has  since  been 
changed  to  the  Duluth  Coffee  &  Spice  Company.  On  April  1,  1895, 
plaintiffs  notified  defendant  that  they  were  dissatisfied  with  the 
stock,  offered  to  return  the  same,  and  demanded  that  they  be  paid 
the  price  of  the  same.  On  April  14  the  demand  was  renewed,  and 
the  stock  again  offered  to  defendant.  Defendant  has  not  accepted 
the  stock,  or  paid  for  the  same,  and,  after  the  60  daj's  mentioned 
in  the  contract,  this  action  was  brought  to  recover  the  S5,000  so 
paid  for  the  stock.  On  the  trial  the  court  ordered  a  verdict  for  plain- 
tiffs for  the  amount  claimed.  From  an  order  denying  its  motion  for  a 
new  trial,  defendant  appeals. 

We  are  of  the  opinion  that  the  evidence  conclusively  establishes 
all  of  the  foregoing  facts,  and  the  only  point  raised  by  appellant 


SECT.  IV.]  VENT    V.  DULUTH    COFFEE    CO.  463 

worthy  of  consideration  is  the  contention  that  the  part  of  the  con- 
tract by  which  defendant  agreed  to  purchase  or  accept  a  surrender 
of  its  own  stock  is  ultra  vires  and  void.  There  is  no  express  provision 
in  its  articles  of  incorporation  authorizing  defendant  to  buy  or  deal 
in  its  own  stock,  and  whether  an  original,  independent  contract,  by 
which  it  agreed  to  purchase  its  own  stock,  would  be  ultra  vires,  we 
need  not  consider.  This  is  not  such  a  case.  This  provision  of  the. 
contract  constituted  a  material  and  substantial  part  of  the  considera- 
tion and  inducement  for  the  purchase  of  the  stock  by  plaintiffs,  and, 
if  the  provision  is  void,  it  seems  to  us  that  it  vitiates  the  whole  con- 
tract, and  is  a  sufficient  reason  for  the  rescission  of  that  contract  and 
the  return  of  the  purchase  price,  which  purchase  price  plaintiffs  are 
demanding.  But  the  better  opinion,  it  seems  to  us,  is  that  which 
holds  the  original  contract  to  be  a  conditional  sale,  with  the  option 
to  revoke  or  rescind  in  the  purchaser.  In  Browne  v.  St.  Paul  Plow 
Works,  62  Minn.  90,  64  N.W.  66,  we  held  that  a  similar  contract  was 
not  ultra  vires.  There  is  no  question  here  as  to  the  rights  of  creditors. 

Order  affirmed. 

Note.  —  See  also  Iowa  Lumber  Co.  v.  Foster,  49  Iowa,  25;  Adam  v. 
New  England  Investment  Co.,  33  R.I.  193;  Rogers  v.  Building  Ass'n, 
30  Utah,  188;  Yeaton  v.  Eagle  Oil  Co.,  4  Wash.  183.  Cf.  Sarbach  v. 
Fiscal  Agency  Co.,  86  Kan.  734. 

In  Mulford  v.  Torrey  Co.,  45  Colo.  81,  the  court  said  (p.  85) :  "  The 
statute  upon  which  the  defense  is  based,  to  the  effect  that  the  con- 
tracts in  question  are  in  violation  of  the  statutes  of  the  State,  is  as 
follows:  'It  shall  not  be  lawful  for  such  corporations  to  use  any  of 
their  funds  for  the  purchase  of  stock  in  their  own  company  or  cor- 
poration, except  such  as  may  be  forfeited  for  the  non-payment  of 
assessments  thereon,  except  as  hereinafter  provided.'  §  485,  1  Mills' 
Ann.  Stats. 

"  This  statute  does  not  apply.  The  company  desired  to  sell  its 
treasury  stock.  It  received  the  consideration  agreed  upon  therefor. 
The  plaintiff  only  purchased  upon  the  condition  that  he  should  have 
the  right  to  return  the  stock  and  have  the  consideration  which  he 
gave  therefor  returned  to  him.  There  was  but  one  contract,  namely, 
for  the  sale  and  repurchase  of  the  stock,  each  object  being  a  con- 
sideration for  the  other.  The  sale  was,  therefore,  conditional.  Such 
a  transaction  is  not  prohibited  by  the  statute." 

See  also  Sweeney  v.  Underwriters  Co.,  29  S.D.  576. 


464         NORTH    MILWAUKEE   TOWN    SITE    NO.  2  V.  BISHOP.       [ciIAP.  II. 


CHAPTER   II. 
THE   EXERCISE  OF  THE   POWERS. 


SECTION  1. 
IN  WHOM  THE  POWERS  ARE   VESTED. 


NORTH  MILWAUKEE  TOWN  SITE  NO.   2  v.   BISHOP. 

103  Wis.  492. 

The  defendant  was  the  owTier  of  shares  of  stock  in  the  plaintiff. 
The  directors  of  the  pluintifT  resolved  that  the  stock  of  the  company, 
to  the  extent  that  it  had  not  previously  been  paid  for,  should  be  paid. 
This  action  was  brought  to  recover  from  the  defendant  the  amounts 
unpaid  on  his  shares. 

Bardeen,  J.  The  judgment  of  nonsuit  was  justified  upon  either 
of  two  gi'ounds:  .  .  . 

No  proof  was  made  of  giving  notice  of  such  call  according  to  the 
by-laws  of  the  corporation.  §  1754,  Stats.  1898,  provides  that,  "un- 
less otherwise  expressly  provitled  by  law  or  the  articles  of  organiza- 
tion, the  directors  of  an\'^  corporation  may  call  in  the  subscriptions 
to  the  capital  stock  by  instalments,  in  such  proportion  and  at  such 
times  as  they  shall  think  proper,  by  giving  such  notice  thereof  as  the 
by-laws  shall  prescribe." 

It  was  admitted  on  the  trial  that  no  by-law  of  the  corporation  in 
this  regard  had  ever  been  adopted.  The  action  of  the  board  was 
attempted  to  be  justified,  however,  by  showing  that  the  board,  after 
adopting  the  resolution  for  the  call,  adopted  another  resolution  in- 
structing the  secretary  to  notify  each  stockholder  thereof  by  mailing 
to  him  a  copy  of  said  resolution.  This  latter  action  of  the  board  is 
claimed  to  be  equivalent  to  a  regular  by-law,  and  answers  all  the 
purposes  of  the  statute.  The  diflficulty  with  this  contention  is  that 
the  board  of  directors  have  no  power  to  enact  by-laws  unless  so 
authorized  by  law,  by  the  articles  of  organization,  or  by  proper  action 
of  the  stockholdei-s.  A  bj'-law  is  a  permanent  and  continuing  rule 
for  the  government  of  the  corporation  and  its  officers.  The  power  to 
enact  them  resides  primarily  with  the  stockholders.  They  have  few 
functions  to  perform,  and  this  right  to  make  by-laws  is  an  essential 
and  an  important  one.  It  is  a  power  that  the  directors  have  no  in- 
herent right  to  exercise.  This  is  the  rule  laid  down  by  the  textwriters, 


SECT.  I.]       NORTH    MILWAUKEE    TOWN    SITE    NO.  2  V.  BISHOP.  465 

and  finds  ample  support  in  the  authorities  cited  in  the  following 
works:  2  Cook,  Stock,  §  700a;  1  Thomp.  Corp.  §  956;  Ang.  Corp. 
§  327.  In  the  Germania  Case  cited,  it  is  said:  "We  hold,  therefore, 
that  it  was  intended  that  the  statutory  method  of  making  calls  should 
supersede  previous  common-law  methods,  and  to  prescribe  a  uniform 
and  reasonable  rule  easily  complied  with";  and  it  was  accordingly 
held  that  a  complaint  which  did  not  allege  that  a  call  was  made  by 
giving  such  notice  as  the  by-laws  prescribed  fails  to  state  a  cause  of 
action.  For  the  same  reason  such  an  action  cannot  be  sustained 
until  proof  is  made  in  conformity  to  these  requirements.  It  is  argued, 
however,  that  because  §  1776,  R.S.  1878,  provides  that  "the  stock, 
property,  affairs,  and  business"  of  every  corporation  shall  be  under 
the  care  of  and  be  managed  by  a  board  of  directors,  the  power  to 
enact  proper  by-laws  may  be  implied  therefrom.  As  before  inti- 
mated, the  power  to  make  by-laws  is  incident  to  the  corporation  it- 
self, and  results  from  the  necessity  of  such  a  power  to  enable  the  body 
politic  to  answer  to  the  purposes  for  which  it  was  created.  It  being 
a  valuable  and  important  right,  it  ought  not  to  be  taken  away  by 
inference  or  implication.  The  power  given  to  the  directors  to  con- 
trol the  stock  and  business  of  the  corporation  may  exist,  and  be  en- 
tirely consistent  with  the  power  of  the  stockholders  to  say  upon  what 
terms  and  conditions  the  stock  of  the  corporation  shall  be  paid  for 
and  issued.  We  therefore  hold  that,  unless  taken  away  by  the  charter 
or  some  law  of  the  state,  the  power  to  enact  suitable  by-laws  rests  in 
the  stockholders  of  the  corporation,  and  not  in  the  board  of  directors. 
Our  attention  has  been  called  to  some  expressions  used  in  the  opinion 
in  In  re  Klaus,  67  Wis.  401,  to  the  effect  that  the  directors,  and  not 
the  stockholders,  may  make  the  by-laws.  As  we  have  seen,  this 
statement  of  the  law  is  contrary  to  all  of  the  adjudicated  cases,  and 
camiot  be  sustained  on  principle,  and  was  in  fact  not  necessary  to 
the  question  decided.  In  that  regard  it  must  be  deemed  to  be  over- 
ruled. 

By  the  Court.  —  The  judgment  of  the  superior  court  of  Milwaukee 
County  is  affirmed. 

Note.  — See,  accord,  Morton  Gravel  Road  Co.  v.  Wysong,  51  Ind.  4. 
See  also  Trust  &  Savings  Co.  v.  Home  Lumber  Co.,  118  J\Io.  447. 
Cf.  Manufacturers'  Building  Co.  v.  Landay,  219  111.  168,  where  the 
court  held  that  by  the  statute  in  question  the  power  of  making  by- 
laws had  been  vested  in  the  directors. 

The  power  to  elect  directors  is  usually  vested  exclusively  in  the 
stockholders.  See  Durkee  v.  The  People,  155  111.  354;  State  v..  Mer- 
chant, 37  Ohio,  251. 


466  CHICAGO    CITY   RAILWAY    CO.  V.  ALLERTON.         [cHAP.  II. 

CHICAGO  CITY  RAILWAY  CO.   v.  ALLERTON. 

18  Wall.  (U.S.)  233.     1873. 

The  charter  of  the  Chicago  City  Railway  Company  contained  the 
following  provisions : 

§  3.  The  capital  stock  of  said  corporation  shall  he  one  hundred 
thousand  dollars,  and  may  be  increasetl  from  time  to  time,  at  the 
pleasure  of  said  corporation. 

§  4.  All  the  corporate  powers  of  said  corporation  shall  be  vested 
in  and  exercised  by  a  board  of  directors,  and  such  officers  and  agents 
as  said  board  shall  appoint. 

The  directors,  without  consulting  the  stockholders,  resolved  to 
increase  the  capital  stock.  To  this  one  Allerton,  who  was  a  stock- 
holder, objected,  afid  filed  a  bill  praying  for  an  injunction  to  prevent 
the  increase. 

Mr.  Justice  Bradley  delivered  the  opinion  of  the  court. 

We  are  satisfied  that  the  decree  must  be  affirmed  on  the  broad 
ground  that  a  change  so  organic  and  fundamental  as  that  of  increas- 
ing the  capital  stock  of  a  corporation  bcyontl  the  limit  fixed  by  the 
charter  cannot  be  made  by  the  directors  alone,  unless  expressly  au- 
thorized thereto.  The  general  power  to  perform  all  corporate  acts 
refers  to  the  ordinary  business  transactions  of  the  corporation,  and 
does  not  extend  to  a  reconstruction  of  the  body  itself,  or  to  an  en- 
largement of  its  capital  stock.  A  corporation,  like  a  jiartnership,  is 
an  a.ssociation  of  natural  persons  who  contribute  a  joint  capital  for  a 
common  purpose,  and  although  the  shares  may  be  assigned  to  new 
individuals  in  perpetual  succession,  yet  the  number  of  shares  and 
amount  of  capital  cannot  ])v  increased,  except  in  the  manner  expressly 
authorized  by  the  charter  or  articles  of  association. 

Authority  to  increase  the  capital  stock  of  a  corporation  may  un- 
doubtedly be  conferred  by  a  law  passed  subsequent  to  the  charter; 
but  such  a  law  should  regularly  be  accepted  by  the  stockholders. 
Such  assent  might  be  inferred  by  subsecjuent  acquiescence;  but  in 
some  form  or  other  it  must  be  given  to  render  the  increase  valitl  and 
binding  on  them.  Changes  in  the  purpose  and  object  of  an  associa- 
tion, or  in  the  extent  of  its  constituency  or  membership,  involving 
the  amount  of  its  capital  stock,  are  necessarily  fundamental  in  their 
character,  and  cannot,  on  general  principles,  be  made  without  the 
express  or  implied  consent  of  the  members.   The  reason  is  obvious. 

First,  as  it  respects  the  purpose  and  object.  This  may  be  said  to 
be  the  final  cause  of  the  association,  for  the  sake  of  which  it  was 
brought  into  existence.  To  change  this  without  the  consent  of  the 
associates,  would  be  to  commit  them  to  an  enterprise  which  they 
never  embraced,  and  would  be  manifestly  unjust. 

Secondly,  as  it  respects  the  constituency,  or  capital  and  member- 


SECT.  1.]  CHICAGO    CITY    RAILWAY    CO.  V.  ALLERTON.  467 

ship.  This  is  the  next  most  important  and  fundamental  point  in  the 
constitution  of  a  body  corporate.  To  change  it  without  the  consent 
of  the  stockholders,  would  be  to  make  them  members  of  an  associa- 
tion in  which  they  never  consented  to  become  such.  It  would  change 
the  relative  influence,  control,  and  profit  of  each  member.  If  the  di- 
rectors alone  could  do  it,  they  could  always  perpetuate  their  own 
power.  Their  agency  does  not  extend  to  such  an  act  miless  so  ex- 
pressed in  the  charter,  or  subsequent  enabling  act;  and  such  sub- 
sequent act,  as  before  said,  would  not  bind  the  stockholders  without 
their  acceptance  of  it,  or  assent  to  it  in  some  form.  Even  when  the 
additional  stock  is  distributed  to  each  stockholder  pro  rata,  it  would 
often  work  injustice,  because  many  of  the  stockholders  might  be 
unable  to  take  their  respective  shares,  and  might  thus  lose  their  rel- 
ative interest  and  influence  in  the  corporate  concerns. 

These  conclusions  flow  naturally  from  the  character  of  such  asso- 
ciations. Of  course,  the  associates  themselves  may  adopt  or  assent 
to  a  different  rule.  If  the  charter  provides  that  the  capital  stock  may 
be  increased,  or  that  a  new  business  may  be  adopted  by  the  cor- 
poration, this  is  undoubtedly  an  authority  for  the  corporation  (that 
is,  the  stockholders)  to  make  such  a  change  by  a  stockliolders'  vote, 
in  the  regular  way.  Perhaps  a  subsequent  ratification  or  assent  to  a 
change  already  made,  would  be  equally  effective.  It  is  unnecessary 
to  decide  that  point  at  this  time.  But  if  it  is  desired  to  confer  such  a 
power  on  the  directors,  so  as  to  make  their  acts  binding  and  final, 
it  should  be  expressly  conferred. 

Where  the  stock  expressly  allowed  by  a  charter  has  not  been  all 
subscribed,  the  power  of  the  directors  to  receive  subscriptions  for 
the  balance  may  stand  on  a  different  footing.  Such  an  act  might, 
perhaps,  be  considered  as  merely  getting  in  the  capital  alread}^  pro- 
vided for  the  operations  and  necessities  of  the  company,  and,  there- 
fore, as  belonging  to  the  orderly  and  proper  administration  of  the 
company's  affairs.  Even  in  such  case,  however,  prudent  and  fair 
directors  would  prefer  to  have  the  sanction  of  the  stockholders  to 
their  acts.  But  that  is  not  the  present  case,  and  need  not  be  further 

considered.  r>  ^  ^  j 

Decree  affirmed. 

Note.  —  A  similar  conclusion  as  to  the  power  of  the  directors,  in 
the  corporation  in  question,  to  increase  the  capital  stock  was  reached 
in  Eidman  v.  Bowman,  58  111.  444.  See  also  Finley  Shoe  Co.  v.  Kurtz, 
34  JVIich.  89;  Newport  Cotton  Mills  Co.  v.  Mims,  103  Tenn.  465.  But 
cf.  Mosely  v.  Koffyfontein  Mines,  Ltd.,  [1910]  2  Ch.  382,  where  this 
power  had  been  expressly  given  to  directors  by  amendment  of  the 
articles  of  association;  and  Payson  v.  Withers,  5  Biss.  (U.S.  C.C.)  269. 

So,  as  to  the  power  of  the  directors  to  decrease  the  capital  stock. 
Percy  v.  Millaudon,  3  La.  568,  585. 

So,  as  to  the  power  of  the  directors  to  procure  amendments  to  its 


468  COMMERCIAL    NATIONAL    BANK    V.  WEIXHARD.       [ciIAP.  II. 

charter,  or  to  assent  thereto.  See  Marlborough  Mfg.  Co.  v.  Smith,  2 
Conn.  579;  New  Orleans  R.R.  Co.  v.  Harris,  27  Miss.  517;  Hope 
Mutual  Insurance  Co.  v.  Bcckmann,  47  Mo.  93. 

See  also,  as  to  the  construction  of  powers  given  to  the  directors, 
Blatchf&rd  v.  Ross,  54  Barb.  (N.Y.)  42. 

In  the  chapter  on  Stockholders,  and  the  Book  on  the  Reorganiza- 
tion of  Corporations,  infra,  the  power  of  the  holders  of  a  majority  of 
the  stock  will  be  considered.  In  other  words,  if  the  power  to  do  cer- 
tain acts  is  vested  in  the  stockholders,  rather  than  the  directors,  the 
question  remains  whether  such  act  may  be  authorized  by  the  holders 
of  a  majority  only  of  the  stock  of  the  corporation. 


COMMERCIAL  NATIONAL  BANK   r.    WEINHARD. 

192  U.S.  243.    1904. 

The  Commercial  National  Bank  of  Portland  was  duly  organized 
under  the  National  Banking  Act,  and  carried  on  business  in  the  city 
of  Portland,  Oregon.  It  appeared  that  the  capital  of  the  bank  had 
become  impaired,  and  thereupon  such  proceedings  were  had  that  on 
December  5,  1896,  the  Comptroller  issued  the  following  notice  to  the 

"Treasury  Department, 

"Office  of  Comptroller  of  the  Currency, 

"Washington,  D.C.,  Dec.  5,  1896. 

"WTiereas,  it  appears  to  the  satisfaction  of  the  Comptroller  of  the 
Currency  that  the  capital  stock  of  the  Commercial  National  Bank, 
Portland,  Oregon,  has  become  impaired  to  an  extent  which  makes 
necessary  an  assessment  of  two  hundred  and  fifty  thousand  dollars 
(S250,000)  upon  the  shareholders  of  said  association  to  make  good 
such  deficiency: 

"Now,  therefore,  notice  is  hereby  given  to  said  association,  under 
the  provisions  of  §  5205  of  the  Revised  Statutes  of  the  United  States, 
to  pay  the  said  deficiency  in  its  capital  stock  by  assessment  upon  its 
shareholders,  pro  rata,  for  the  amount  of  the  capital  stock  held  by 
each,  and  if  such  deficiency  shall  not  be  paid,  and  saitl  bank  shall 
refuse  to  go  into  liquidation,  as  provided  by  law,  for  three  months 
after  this  notice  shall  have  been  received  by  it,  a  receiver  will  be 
appointed  to  close  up  the  business  of  the  association,  according  to 
the  provisions  of  §  5234  of  the  Revised  Statutes  of  the  United  States. 

"In  testimony  whereof,  I  have  hereunto  subscribed  my  name  and 
caused  my  seal  of  office  to  be  affixed  to  these  presents,  at  the  Treasury 
Department,  in  the  city  of  Washington,  and  District  of  Columbia, 
this  5th  day  of  December,  a.d.  1896.  ,<  j^^^^^  jj    ^^^^^^^ 

"Comptroller  of  the  Currency. 
"  To  the  Commercial  National  Bank,  Portland,  Oregon." 


SECT.  I.]        COMMERCIAL    NATIONAL    BANK    V.  WEINHARD,  469 

After  receipt  of  this  notice,  upon  December  12,  1896,  the  board 
of  directors  passed  this  resolution: 

"Resolved,  That  in  accordance  with  the  notice  served  upon  this 
association  by  the  Comptroller  of  the  Currency,  under  date  of 
December  5,  1896,  and  received  by  this  bank  on  the  11th  day  of 
December,  1896,  an  assessment  is  hereby  levied  upon  the  share- 
holders of  this  bank  of  fifty  per  cent  or  $50  per  share,  payable  at  this 
bank  on  or  before  March  11,  1897. 

"And,  resolved,  That  the  cashier  of  this  bank  be,  and  he  hereby  is, 
authorized  and  instructed  to  serve  upon  each  shareholder  of  the 
bank  a  legal  notice  of  the  above  assessment  bj^  sending  such  notice 
to  each  shareholder's  address  by  registered  mail." 

Upon  December  17,  1896,  notice  of  this  assessment  was  served 
upon  each  of  the  stockholders  of  the  bank.  The  defendants  in  error 
having  failed  to  pay  this  assessment,  on  March  18,  1897,  the  board  of 
directors  passed  a  resolution  directing  the  sale  of  the  delinquents' 
stock  to  be  made  at  public  auction  on  May  5,  1897.  In  pursuance  of 
this  order,  and  on  the  day  named,  the  stock  was  sold  for  the  amount 
of  the  assessment.  The  Federal  question  is  whether  the  board  of 
directors  in  thus  assessing  and  selling  the  stock  of  the  defendants  in 
error  exceeded  their  powers  under  the  National  Banking  Act;  it 
being  claimed  that  a  valid  assessment  could  only  be  made  by  the 
action  of  the  stockholders,  and  that  the  sale  by  the  directors  upon 
this  assessment  was  unlawful  and  amounted  to  a  conversion  of  the 
stock. 

Mr.  Justice  Day,  after  making  the  foregoing  statement  delivered 
the  opinion  of  the  court. 

This  case  requires  the  construction  of  §  5205  of  the  Revised 
Statutes  of  the  United  States  as  amended.  3  Comp.  Stat.  3495. 
The  section  is  as  follows: 

"Every  association  which  shall  have  failed  to  pay  up  its  capital 
stock,  as  required  by  law,  and  every  association  whose  capital  stock 
shall  have  become  impaired  by  losses  or  otherwise,  shall,  within  three 
months  after  recei\'ing  notice  thereof  from  the  Comptroller  of  the 
Currency,  pay  the  deficiency  in  the  capital  stock,  by  assessment  upon 
the  shareholders  pro  rata  for  the  amount  of  capital  stock  held  by 
each;  and  the  Treasurer  of  the  United  States  shall  withhold  the 
interest  upon  all  bonds  held  by  him  in  trust  for  any  such  association, 
upon  notification  from  the  Comptroller  of  the  Currency,  until  other- 
wise notified  by  him.  If  any  such  association  shall  fail  to  pay  up  its 
capital  stock,  and  shall  refuse  to  go  into  liquidation,  as  provided  by 
law,  for  three  months  after  receiving  notice  from  the  Comptroller, 
a  receiver  may  be  appointed  to  close  up  the  business  of  the  asso- 
ciation, according  to  the  provisions  of  §  fifty-two  hundred  and 
thirty-four.  And  provided.  That  if  any  shareholder  or  shareholders 
of  such  bank  shall  neglect  or  refuse,  after  three  months'  notice,  to 


470  COMMERCIAL   NATIONAL    BANK    t'.  WEIN'ILVRD.       [CHAP.  II. 

pay  the  assessment,  as  provided  in  this  section,  it  shall  be  the  duty 
of  the  board  of  directors  to  cause  a  sufficient  amount  of  the  capital 
stock  of  such  shareholder  or  shareholders  to  be  sold  at  public  auc- 
tion (after  thirty  days'  notice  shall  be  given  by  posting  such  notice 
of  sale  in  the  office  of  the  bank,  and  by  publishing  such  notice  in  a 
newspaper  of  the  city  or  town  in  which  the  bank  is  located,  or  in  a 
newspaper  published  nearest  thereto),  to  make  good  the  deficiency, 
and  the  balance,  if  any,  shall  be  returned  to  such  delinquent  share- 
holder or  shareholders." 

The  assessment  in  this  c;ise  was  made  by  the  board  of  directors 
without  any  action  of  the  stockholders  of  the  association,  and  the 
defendants  in  error  having  failed  to  pay  the  same  upon  notice,  their 
stock  was  sold  as  directed  in  the  statute.  It  is  claimed  that  an  as- 
sessment by  the  directors  without  action  of  the  stockholders  was 
without  authority  of  law  and  amounted  to  a  conversion  of  the  stock. 
This  view  was  sustained  in  the  Supreme  Court  of  Oregon.  The  as- 
sessment ordered  by  the  Comptroller  was  for  the  purpose  of  restoring 
the  capital  of  the  bank,  and  thus  enabling  it  to  contiiuie  its  business. 
Ample  power  is  conferred  upon  the  Comptroller  for  this  purpose. 
His  action  is  in  aid  of  other  sections  of  the  law  preventing  a  with- 
drawal of  the  capital,  or  the  making  of  dividends  when  losses  have 
been  sustained  equal  to  the  undivided  profits.  §§  5202-5204,  Rev. 
Stat.  When  the  notice  is  received  from  the  Comptroller  by  the  bank 
under  §  5205,  the  association  has  no  authority  to  review  or  gainsay 
the  necessity  thereof.  That  question  is  concluded  by  the  action  of 
the  Comptroller.  The  money  to  be  raised  for  the  continuance  of  the 
business  may  or  may  not  be  used  in  the  liquidation  of  debts.  The 
assessment  is  entirely  difTeivnt  from  that  provided  for  in  §  5151, 
calling  upon  the  individual  responsibility  of  shareholders  for  the 
payment  of  debts.  Under  the  last  named  section  the  stockholder  is 
required  to  pay  such  assessments  as  may  be  made,  to  meet  the  out- 
standing oljligations  of  the  bank,  within  the  limit  of  an  amount  equal 
to  the  par  value  of  the  stock  in  addition  to  the  amount  invested 
therein.  He  has  no  election  of  payment,  but  is  required  to  meet 
this  liability,  created  by  law  for  the  benefit  of  creditors.  Under 
§  5205  the  amount  paid  is  subject  to  the  control  of  the  board 
of  directors  in  the  continued  operations  of  the  bank.  If  the  stock- 
holders are  to  have  a  voice  in  making  or  declining  to  make  the 
assessment,  they  may  well  hesitate  to  entrust  more  capital  to 
the  control  of  a  board  under  whose  management  it  has  already 
been  impaired.  Certain  powers  are  conferred  by  law  upon  the 
directors. 

§  5136  provides  that  the  association  shall  have  power  — 
"Sixth.  To  prescribe,  by  its  board  of  directors,  by-laws  not  incon- 
sistent with  law,  regulating  the  manner  in  which  its  stock  shall  be 
transferred,  its  directors  elected  or  appointed,  its  officers  appointed, 


SECT.   I.]        COMMERCIAL    NATIONAL    BANK    V.  WEINHARD.  471 

its  property  transferred,  its  general  business  conducted,  and  the 
privileges  granted  to  it  by  law  exercised  and  enjoyed. 

''Seventh.  To  exercise  by  its  board  of  directors,  or  duly  authorized 
officers  or  agents,  subject  to  law,  all  such  incidental  powers  as  shall 
be  necessary  to  carry  on  the  business  of  banking;  by  discounting  and 
negotiating  promissory  notes,  drafts,  bills  of  exchange,  and  other 
evidences  of  debt;  by  receiving  deposits;  by  buying  and  selling  ex- 
change, coin,  and  bullion;  by  loaning  money  on  personal  security; 
and  by  obtaining,  issuing,  and  circulating  notes  according  to  the 
provisions  of  this  Title." 

And,  again,  by  §  5145,  it  is  declared  that  the  "affairs"  of  the  cor- 
poration "shall  be  managed  by  not  less  than  five  directors." 

Thus  the  directors  are  given  authority  to  transact  the  usual  and 
ordinary  business  of  national  banks.  Obviously,  the  power  conferred 
may  be  exercised  in  all  usual  transactions  through  the  executive 
officers  of  the  bank  without  consultatibn  with  the  stockholders.  In 
the  present  case  the  question  to  be  dealt  with  is  vital  to  the  continu- 
ance of  the  life  of  the  association,  as  only  by  complying  with  the  re- 
quirement of  the  Comptroller  in  assessing  a  sum  sufficient  to  make 
up  the  impaired  capital  of  the  bank  can  its  business  be  continued. 
The  shareholders  by  their  contracts  of  subscription  have  agreed  to 
pay  in  the  amount  of  capital  stock  subscribed  and  to  discharge  the 
additional  liability  imposed  by  the  statute.  They  have  not  con- 
tracted to  meet  assessments  at  the  will  of  the  directors  to  perpetuate 
the  business  of  a  possibly  losing  concern.  It  v/ould  be  going  far  be- 
yond the  usual  powers  conferred  upon  directors  to  permit  them  to 
thus  control  the  corporation.  Corporate  powers  conferred  upon  a 
board  of  directors  usually  refer  to  the  ordinary  business  transactions 
of  the  corporation.  Railway  Company  v.  Allerton,  18  Wall.  233.  The 
assessment  is  required  by  the  Comptroller,  not  by  the  directors.  The 
association  is  to  receive  notice  thereof,  and  action  must  be  taken  by 
the  association  to  meet  the  requirements  of  the  Comptroller  under 
the  statute.  It  is  provided  that  if  the  association  fail  to  pay  up  its 
capital  stock,  and  refuse  to  go  into  liquidation,  as  provided  by  law, 
for  three  months  after  receiving  notice  from  the  Comptroller,  a  re- 
ceiver may  be  appointed  to  close  up  the  business  of  the  association 
according  to  the  provisions  of  §  5234.  This  important  provision  is 
entitled  to  much  weight  in  determining  the  proper  construction  of 
the  statute.  The  assessment  may  be  avoided,  and  the  amount  re- 
quired is  not  payable  if  the  association  decides  to  go  into  liquida- 
tion. Provision  for  voluntary  liquidation  is  made  in  §  5220  wherein 
authority  is  given  to  liquidate  upon  a  vote  of  shareholders  owning 
two-thirds  of  the  stock.  Such  liquidation  does  not  prevent  the  assess- 
ment of  stockholders  under  §  5151  for  the  benefit  of  creditors  and  the 
enforcement  of  the  liability  of  the  shareholders  in  an  action  by  a 
receiver  or  directly  by  the  creditors.   Comp.  Stat.  §  5234;  §  2,  Act 


472  COMMERCIAL    NATIONAL    BAXK    V.  WEIXIIARD.       [CHAP.  II. 

of  June  30,  1876,  as  amended,  3  Comp.  Stat.  3509.  The  section  re- 
ferred to,  §  5234,  directs  tiie  appointment  of  a  receiver  to  take  pos- 
session of  the  books,  records  and  assets  of  the  association,  to  collect 
the  debts  and  claims  belonging  to  it,  and,  among  other  things,  if 
necessary  to  pay  the  debts  of  the  association,  to  enforce  the  individ- 
ual Hability  of  the  shareholders. 

We  are  of  opinion  that  §  5205  is  intended  to  and  does  confer  upon 
the  association  the  privilege  of  declining  to  make  the  assessment  to 
make  good  the  deficiency  to  the  capital,  and  to  elect  instead  to  wind 
up  the  business  of  the  bank  under  §  5220,  which  provides  for  volun- 
tary liquidation  by  a  vote  of  two-thirds  of  the  shareholders.  The 
question  is,  who  shall  exercise  this  privilege  and  determine  the  future 
of  the  association  —  is  it  the  directors  or  the  shareholders  who  have 
this  right  of  decision?  The  origin  and  continuation  of  the  association 
would  seem  to  l)e  matters  in  which  the  owners  and  not  the  managers 
of  the  bank  arc  primarily  interested.  If  these  are  privileges  of  the 
shareholders  and  only  exercisable  by  them,  this  case  presents  a  total 
lack  of  the  exertion  of  the  power  by  those  upon  whom  it  is  legally 
conferred,  as  no  action  of  the  shareholders  was  had  in  the  present 
case  in  making  the  assessment.  Action  upon  the  Comptroller's  order 
involves  extraordinary  action  of  the  association,  and  tletermines  its 
future  operations  or  liquidation,  and  is  not  found  within  the  powers 
conferred  upon  the  directors  for  the  management  of  the  business  of 
the  bank.  If  this  were  not  so,  then  the  decision  of  a  question  of  such 
vital  importance  is  left  to  the  directors,  who  may  or  maj'  not  be 
large  holders  of  stock.  As  it  is  a  matter  foreign  to  the  powers  of  such 
boards  and  not  conferred  by  statute  or  required  for  the  transaction 
of  the  business  of  the  bank,  we  think  it  was  intended  to  be  vested  in 
the  shareholders.  Whether  a  given  power  is  to  be  exercised  by  the 
directors  or  the  shareholders  depends  upon  its  nature  and  the  terms 
of  the  enabling  act.  In  certain  instances  the  law  specifically  requires 
the  action  of  the  avsscciation  to  be  taken  by  its  incorporators  or 
shareholders.  §§  5133,  5134,  5136,  5143,  Rev.  Stat.  These  sections 
regulate  matters  not  pertaining  to  the  ordinary  business  of  the  bank 
entrusted  to  the  directors.  They  deal  with  the  exercise  of  those 
powers  which  concern  the  organization  of  the  corporation,  the 
amount  of  its  capital  stock  and  kindred  matters. 

In  §  5205  the  requirement  of  the  Comptroller  is  that  the  associa- 
tion make  the  assessment.  It  is  the  "association"  which  is  required 
to  pay  up  the  stock  or  go  into  liquidation.  The  pajnient  of  the 
assessments  must  come  from  the  shareholders,  and  we  are  of  the 
opinion  that  the  statute  contemplates  action  upon  the  alternatives 
presented  in  the  statute  by  the  association  composed  of  its  share- 
holders. It  is  true,  as  suggested  by  the  learned  counsel  for  the 
plaintiff  in  error,  that  it  requires  a  two-thirds  vote  of  the  stock- 
holders to  put  the  bank  into  liquidation  under  §  5220;  but  if  the 


SECT.  I.]  HUTCHINSON    V.  GREEN.  473 

assessment  is  not  carried,  and  the  shareholders  have  not  a  two- 
thirds  vote  favoring  liquidation,  the  bank  is  put  in  liquidation,  and 
the  shareholders'  liabihty  is  the  statutory  one  for  the  benefit  of 
creditors,  and  not  a  venture  of  more  capital  in  the  enterprise  with 
a  possible  stockholders'  liability  upon  the  liquidation  of  the  bank  if 
it  shall  ultimately  fail.  Again,  if  the  determination  of  this  matter  is 
entirely  left  to  the  directors,  they  may,  by  declining  to  make  the 
assessment,  force  a  liquidation  of  the  bank,  although  the  share- 
holders —  the  real  owners  of  the  property  —  be  willing  to  make  good 
the  impaired  capital  and  continue  the  business.  On  the  other  hand, 
if  the  directors  may  assess  to  make  good  impaired  capital,  the  share- 
holder must  pay  the  assessment  or  submit  to  the  sale  of  his  stock. 
Such  extraordinary  powers  are  far  beyond  those  required  in  the 
management  of  the  bank's  affairs  or  conferred  in  the  sections  of  the 
law  defining  those  conferred  upon  the  directors. 


HUTCHINSON  v.   GREEN. 

91  Mo.  367.     1886. 

Black  J.  This  case  is  an  outgrowth  of  Ward  v.  Davidson,  89  Mo. 
445.  By  the  decree  rendered  in  that  case,  certain  directors  of  the 
Keokuk  Northern  Line  Packet  Company  were  removed  from  office. 
Thereafter,  and  at  a  special  election  held  on  the  seventeenth  of  No- 
vember, 1880,  pursuant  to  the  order  of  the  circuit  court,  four  direc- 
tors were  elected  to  fill  the  unexpired  term  of  the  removed  directors. 
There  had  been  a  disagreement  of  long  standing  between  the  officers 
and  stockholders  as  to  the  management  of  the  affairs  of  the  company, 
which  resulted  in  two  parties,  one  known  as  the  Davidson,  or  ma- 
jority, party,  and  the  other  as  the  Gray,  or  minority,  party;  the 
removed  directors  were  of  the  former.  By  cumulative  voting  at  the 
special  election  the  minority  party  elected  a  sufficient  number  of 
directors  to  give  them  a  majority  in  the  board  for  the  time  being. 
On  the  fifteenth  of  January,  1881,  and  four  days  before  the  annual 
election  of  directors,  notice  of  which  had  been  given,  the  board 
resolved  to,  and  did,  make  a  voluntary  assignment  of  all  the  property 
of  the  company  for  the  benefit  of  all  of  the  creditors.  At  the  annual 
election  the  majority  party  again  acquired  the  ascendency  in  the 
board,  and  the  plaintiffs  then,  for  themselves  and  other  stockholders, 
brought  this  suit  against  the  directors  who  voted  for  the  assignment. 
They  allege  that  the  defendants  combined  to  destroy  the  property 
and  business  of  the  corporation,  and  in  furtherance  thereof  made 
the  assignment,  and  pray  that  the  deed  of  assignment  be  set  aside 
for  the  alleged  fraud,  for  other  equitable  relief,  and  for  damages. 

The  defendants,  in  making  the  assignment,  acted  in  part,  at 


474  HUTCHINSON    V.  GREEN.  [CHAP.  H. 

least,  upon  a  report  made  by  a  committee  appointed  to  examine 
into  the  affairs  of  the  company.  That  report  clearly  eiiou{j;h  shows 
that  the  company  was  unable  to  pay  its  debts  in  the  usual  course  of 
business.  But  the  correctness  of  that  report  was  then,  and  is  now, 
denied.  The  new  board  caused  another  report  to  l)e  made,  l)y  a  new 
committee,  in  which  the  debts  are  placed  at  $161,944.07,  and  in  this 
respect  the  two  reports  are  not  materially  different.  In  the  last,  the 
effects  are  valued  at  $234,229.35;  thus  leaving  a  surplus  over  lia- 
bilities of  $72,285.62.  No  account  is  taken  of  capital  stock,  amount- 
ing to  seven  hundred  and  fifty-one  thousand  dollars,  paid  in  full. 
The  evidence  as  to  the  value  of  the  a.ssets  is  conflicting  and  unsatis- 
factory; many  of  the  witnesses  having  but  little  knowledge  of  the 
property  about  which  they  testified.  In  the  last  report  warehouses 
are  placed  at  $47,197.87,  and  cash  and  bills  receivable  appear  to  be 
estimated  at  nine  or  ten  thousand  dollars.  The  evidence  shows  that 
the  warehouses  were  poor  affairs,  scattered  along  the  river  from  St. 
Louis  to  St.  Paul,  on  property  not  owned  by  the  company,  and 
were  of  no  greater  value  than  eighteen  thousand  dollars.  The  bills 
receivable  were  of  little  value,  and  the  company  had  no  money  on 
hand  worthy  of  mention.  The  best  steamboats,  barges,  and  wharf- 
boats  were  mortgaged  to  at  least  forty-seven  thousand  dollars. 
Some  of  the  boats  and  barges  were  wrecks,  all  were  out  of  repair, 
and  to  put  them  in  repair  would  require  an  outlay  of  forty  thousand 
dollars.  New  boats  and  barges  were  required  to  carry  on  the  former 
business  of  the  company.  The  loss  in  l)usincss  for  1880  had  been 
sixty  thousand  dollars.  Suits  were  pending  against  the  company  for 
large  amounts.  These  plaintiffs  and  those  acting  in  concert  with 
them  had,  at  the  date  of  the  assignment,  suits  against  the  company 
amounting  to  ninety  thousand  dollars,  some  commenced  in  foreign 
jurisdictions  by  attachment.  From  the  evidence,  as  a  whole,  we 
conclude  the  entire  property  of  the  company  was  not  worth  more 
than  one  hundred  and  ninety  thousand  dollars  under  the  most 
favorable  circumstances,  and  as  a  means  of  raising  ready  money, 
it  w^as  not  equal  to  the  debts.  In  short,  it  is  clear  the  corporation 
was  insolvent,  and  wholly  unprepared  to  enter  the  spring  trade. 

On  the  other  hand,  the  defendants,  as  directors,  voted  for  and 
caused  the  assignment  to  be  made  in  opposition  to  the  known  and 
expressed  will  of  a  majority  of  the  stockholders.  They  knew  their 
power  to  control  the  affairs  of  the  corporation  must  cease  at  the 
coming  election,  only  four  days  distant.  They  also  agreed  among 
themselves  to  make  the  assignment  before  presenting  the  matter 
openly  at  a  meeting  of  the  directors,  and  then  they  had  a  deed  pre- 
viously prepared,  with  a  notar}^  public  at  hand  to  take  the  acknowl- 
edgment as  soon  as  the  resolution  should  be  passed.  Any  inference 
of  fraud  which  might  be  drawn  from  these  circumstances,  if  they 
stood  alone,  is  overcome  by  the  other  facts  in  the  case;  for  the  de- 


SECT.  I.]  HUTCHINSON    V.  GREEN,  475 

fendants  knew  that  the  affairs  of  the  corporation  were  growing  from 
bad  to  worse.  They  saw  the  efforts  of  the  plaintiffs,  and  those  acting 
with  them,  to  appropriate  the  property  of  the  company  to  the  pay- 
ment of  their  debts,  in  disregard  of  the  other  creditors.  Enough  has 
l)een  said  to  show  that  the  Packet  Company  was  in  no  condition  to 
prosecute  its  business  —  was  insolvent.  Under  these  circumstances, 
the  directors,  having  a  due  regard  for  the  creditors  in  general,  could 
not  do  otherwise  than  make  an  assignment.  The  alleged  fraud,  we 
conclude,  is  not  proved,  but  clearly  disproved. 

It  is  further  insisted  that  the  board  of  directors  had  no  power  to 
make  the  assignment  without  the  consent  of  the  stockholders.  A 
corporation  may,  like  an  individual,  make  an  assignment  under  the 
statute  of  this  state  relating  to  voluntary  assignments.  Shockley  v. 
Fisher,  75  Mo.  498.  By  whom,  then,  is  the  power  to  be  exercised? 
By  the  directors,  the  stockholders,  or  by  both?  Where  the  powers 
of  a  corporation  are  vested  in  a  board  of  directors,  they  may,  unless 
restricted,  do  whatever  the  corporation  might.  Field  on  Corp., 
§§  146  and  152.  Now,  while,  by  express  statute,  a  vote  of  the  stock- 
holders of  these  corporations  is  essential  to  enable  them  to  increase 
or  diminish  the  stock,  to  change  the  business,  to  issue  preferred 
stock,  and  to  convert  bonds  into  stocks,  still,  in  general,  article  8, 
of  chapter  21,  Revised  Statutes,  contemplates  that  the  business  will 
be  conducted  by  a  board  of  directors.  §  930,  among  other  things, 
provides  that  "the  property  or  business  of  the  corporation  shall  be 
conducted  and  managed  by  directors."  Certain  it  is  there  is  nothing 
in  the  statute  under  which  this  corporation  was  created,  and  by 
which  it  is  governed,  or  in  its  articles  of  association,  or  bylaws, 
which  limits  or  restricts  the  powers  of  the  directors  in  the  disposi- 
tion of  the  property.  The  corporation  then  has  the  power  to  make 
an  assignment,  and  that  power  being  vested  in  the  directors  without 
restriction,  it  must  follow  that  the}^,  and  they  alone,  are  authorized 
to  make  it.  It  is  the  duty  of  the  directors  to  care  for  the  creditors, 
and  when  the  corporation  becomes  crippled  and  unable  to  meet  its 
obligations  in  the  usual  course  of  business,  it  is  competent  for  the 
directors  to  make  an  assignment,  and  this  they  may  do  without 
the  consent  of  the  stockholders.  This  conclusion  has  the  support 
of  adjudications  of  this  and  other  courts.  Cheiv  w.Ellingwood,  8G  Mo. 
260;  Dana  v.  The  Bank  of  the  United  States,  5  W.  &  S.  (Pa.)  223; 
DeCamp  v.  Alward,  52  Ind.  473.  The  directors  may,  with  propriety, 
consult  with  the  stockholders,  but  under  the  circumstances  just 
stated,  and  in  the  exercise  of  their  best  judgment,  they  may  make 
the  assignment  even  against  the  expressed  will  of  the  stockholders. 

Note.  —  See,  accord,  Gibson  v.  Goldthwaife,  7  Ala.  281,  294; 
Reichwald  v.  Commercial  Hotel  Co.,  106  111.  439;  DeCamp  v.  Alward, 
52  Ind.  468,  473;  Union  Bank  v.  Ellicott,  6  G.  &  J.  (Md.)  363; 


476  WOOD    V.  WHELEN.  [CHAP.   II. 

Sargent  v.  Webster,  13  Mete.  (Mass.)  497;  Rogers  v.  Pell,  154   X.V. 
518;  Dana  v.  Bank  of  the  U.S.,  5  W.  &  S.  (Pu.)  223,  24.5. 

See,  contra.  Bank  Commissioners  v.  Bank  of  Brest,   Harrington 
(Mich.)  106. 


WOOD   V.   WHELEN. 

9.3  111.  153.     1879. 

One  question  presented  was  whether  the  directors,  without  the 
concurrence  of  the  stockholders,  had  power  to  mortgage  the  cor- 
porate propc^t3^ 

Mr.  Justice  Scott.  It  is  undeniably  the  law  that  all  bu.'^iness 
relating  to  the  legitimate  objects  of  the  corporation,  authorized  by 
its  charter,  may  be  transacted  by  the  directors  without  the  sanction 
of  the  stockholders.  The  act  under  which  the  gas  company  was 
incorporated  pro\ides,  such  companies  shall  have  power  to  borrow 
money  and  secure  the  same  by  deed  or  lien  on  their  real  or  personal 
]iroperty  or  both.  As  borrowing  money  for  the  purpose  of  forward- 
ing the  objects  of  the  corporation  is  among  the  ordinary  duties  of  the 
board  of  clirectors,  it  follows  the  board  may  secure  the  same  by  deed 
or  other  lien.  It  is  a  part  of  the  business  transactions  of  the  corpora- 
tion which  has  alwaj-s  been  regarded  as  within  the  province  of  the 
directors  to  perform. 

In  West  V.  Madison  Co.  Agricultural  Board,  82  111.  205,  the  law 
conferred  no  express  authority  on  the  corporation  to  make  a  mort- 
gage to  secure  money  borrowed  for  its  use,  yet  it  was  held  the  power 
to  mortgage  the  property  of  the  corporation  is  one  incident  to  its 
existence  and  might  be  exercised  in  furtherance  of  the  objects  for 
which  the  corporation  wiis  created.  There,  the  power  to  mortgage 
the  property  of  the  corporation  to  secure  its  indebtedness  was  exer- 
cised by  the  directors  without  the  sanction  of  the  stockliolders,  and 
it  was  regarded  as  binding  on  the  corporation. 

In  Miller  v.  7?.  and  W.  R.R.,  36  \'es.  452,  it  was  declared,  a  cor- 
poration may  contract  debts  necessary  for  the  accomplishment  of 
the  purposes  of  its  creation  and  may  secure  the  same  by  mortgage  of 
any  property  subject  to  its  disposal  by  virtue  of  the  implied  powers 
existing  in  it,  where  it  is  under  no  statutory  restriction  in  that  re- 
spect. Increasing  the  capital  stock  of  a  corporation,  or  other  acts 
changing  essentially  its  character,  do  not  pertain  to  the  ordinary 
business  of  the  corporation,  and  can  not,  therefore,  be  done  by  the 
directors,  but  to  be  legal  must  have  the  sanction  of  the  stockholders. 

Note.  —  See,  accord,  Hendee  v.  Pinkerton,  14  All.  (Mass.)  381 ; 
Thompson  v.  Natchez  Water  Co.,  68  Miss.  423;  McCurdy's  Appeal, 
65  Pa.  290. 


SECT.  I.]         SELF-CLEANSING    FILTER    CO.  V.  CUNINGHAME.  477 

But  the  concurrence  of  stockholders  to  a  mortgage  is  not  infre- 
quently exi^ressly  required.  See  Alta  Silver  Co.  v.  Alia  Placer  Co., 
78  Cal.  629. 


AUTOMATIC  SELF-CLEANSING  FILTER  CO.   v. 
CUNINGHAME. 

[1906]  2  Ch.     34. 

Motion. 

The  Automatic  Self-Cleansing  Filter  S3aidicate  Company,  Lim- 
ited, was  incorporated  on  June  10,  1896.  The  original  capital  of  the 
company  was  700^.,  divided  into  700  shares  of  1/.  each;  but  the  capi- 
tal had  since  been  increased,  and  there  had  now  been  issued  2700 
shares  of  II.  each. 

The  objects  of  the  company,  as  stated  in  clause  3  of  its  memo- 
randum of  association,  were  (inter  alia) :  (a)  To  acquire  from  James 
Wilson  the  benefit  of  certain  existing  inventions  in  relation  to  the 
filtration,  treatment,  purification,  storage,  application,  distri])ution, 
and  use  of  liquids;  and  (k)  to  sell  the  midertaking  of  the  company, 
or  any  part  thereof,  for  such  consideration  as  the  company  might 
deem  fit,  and  in  particular,  for  shares,  debentures,  or  securities  of 
any  other  company  having  objects  altogether  or  in  part  similar  to 
those  of  this  company. 

The  articles  provided  as  follows :  — 

"81.  The  company  may  by  special  resolution  remove  any  direc- 
tor before  the  expiration  of  his  period  of  office  and  appoint  another 
qualified  person  in  his  stead.  ..." 

"96.  The  management  of  the  business  and  the  control  of  the  com- 
pany shall  be  vested  in  the  directors,  who,  in  addition  to  the  powers 
and  authorities  by  these  presents  expressly  conferred  upon  them, 
may  exercise  all  such  powers  and  do  all  such  acts  and  things  as  may 
be  exercised  or  done  by  the  company,  and  are  not  hercbj^  or  by  stat- 
ute expressly  directed  or  required  to  be  exercised  or  done  by  the  com- 
pany in  general  meeting;  but  subject  nevertheless  to  the  provisions 
of  the  statutes  and  of  thcvse  presents,  and  to  such  regulations,  not 
being  inconsistent  with  these  presents,  as  may  from  time  to  time  be 
made  by  extraordinary  resolution,  but  no  regulation  shall  invali- 
date any  prior  act  of  the  directors  which  would  have  been  valid  if 
such  regulation  had  not  been  made. 

"97.  Without  prejudice  to  the  general  powers  conferred  by  the 
last  preceding  clause,  and  to  the  other  powers  and  authorities  con- 
ferred as  aforesaid,  it  is  hereby  expressly  declared  that  the  directors 
shall  be  entrusted  with  the  following  powers,  namely,  power  — 

"(1)  To  purchase  or  otherwise  acquire  for  the  company  any 


478  SELF-CLEANSING    FILTER    CO.  V.  CUNINGH.VME.       [CHAP.  II. 

property,  letters  patent,  rights  or  privileges  which  the  company  is 
authorized  to  acquire,  at  such  price,  and  generally  on  such  terms  and 
conditions,  as  they  think  fit;  also  to  sell,  lease,  abandon,  or  other- 
wise deal  with,  any  property,  rights,  or  privileges  to  which  the  com- 
pany may  be  entitled,  on  such  terms  and  conditions  as  they  may 
think  fit." 

"(16)  To  enter  into  all  such  negotiations  and  contracts  and 
rescind  and  vary  all  such  contracts,  and  execute  and  tlo  all  such 
acts,  deeds,  and  things  in  the  name  or  on  behalf  of  the  company  as 
they  might  consider  expedicMit  for  or  in  relation  to  any  of  the  mat- 
ters aforesaid,  or  otherwise  for  the  pur})oses  of  the  company." 

The  plaintiff  A.  H.  McDiarmid,  who  was  the  holder  of  1202 
shares  in  the  plaintiff  company,  being  desiious  that  the  assets  and 
undertaking  of  the  plaintiff  company  should  bo  sold,  arranged  terms 
on  behalf  of  the  company  for  the  sale  of  them  to  a  new  company 
formed  for  the  purj^jose  of  acquiring  them,  and  had  these  terms  em- 
bodied in  a  contract  which  was  engi-ossed  ready  for  execution  by  the 
company. 

On  January  2,  1906,  a  meeting  of  the  shareholders  of  the  com- 
pany, convened  by  the  directors  in  accordance  with  a  requisition 
signed  by  the  plaintiff  McDiarmid  and  other  shareholders  in  the 
company,  was  held  for  the  purpose  of  considering  and  if  thought  fit 
passing  the  following  resolution: 

"That  the  company  do  sell  the  assets  specified  in  the  contract 
which  has  been  produced  to  the  meeting  at  the  price  and  on  the 
terms  therein  mentioned  and  contained  and  that  the  directors  be 
and  they  are  hereby  directed  to  cause  the  common  seal  of  the  com- 
pany to  be  affixed  thereto  within  seven  days  and  to  carry  the  same 
into  effect." 

The  meeting  was  adjourned  until  January  16,  when  the  resolu- 
tion was  passed  by  a  majority  of  304  votes,  1502  votes  for  and  1198 
votes  against  it.  Practically  the  whole  of  the  1502  votes  were  given 
in  respect  of  shares  held  by  the  plaintiff  McDiarmid  or  his  friends. 

The  directors,  being  of  opinion  that  it  would  not  be  in  the  interests 
of  the  plaintiff  company  that  the  contract  should  be  carried  out, 
declined  to  comply  with  the  resolution. 

This  was  a  motion  by  the  plaintiff  company  and  by  the  plaintiff 
McDiarmid,  suing  on  behalf  of  himself  and  all  other  shareholders 
in  the  company,  against  the  directors  asking  that  the  defendants 
might  be  ordered  forthwith  to  affix  the  seal  of  the  plaintiff  company 
to  the  contract  and  to  carry  it  into  effect;  that  the  defendants  might 
be  restrained  by  injunction  until  judgment  or  further  order  from 
dealing  with  or  disposing  of  the  assets  of  the  plaintiff  company  in- 
tended to  be  comprised  in  the  said  agreement  in  any  manner  in- 
consistent with  the  terms  thereof;  and  for  the  appointment  of  a 
receiver  of  the  said  assets. 


SECT.  I.]         SELF-CLEANSIXG    FILTER    CO.  V.  CUNINGHAME.  479 

The  motion  was  heard  before  Warrington,  J.,  on  February  23, 
1906. 

Collins,  I\I.R.  This  is  an  appeal  from  a  decision  of  Warring- 
ton, J.,  who  has  been  asked  by  the  plaintiffs,  Mr.  McDiai'mid  and 
the  company,  for  a  declaration  that  the  defendants,  as  directors  of 
the  company,  are  bound  to  carr}^  into  effect  a  resolution  passed  at 
a  meeting  of  the  shareholders  in  the  company  on  January  16.  There 
are  a  number  of  other  incidental  reliefs  asked  —  for  instance,  that 
they  be  ordered  to  affix  the  seal  of  the  company,  and  that  they  may 
be  restrained  by  injunction  from  dealing  with  the  assets  of  the 
company  in  any  manner  inconsistent  with  the  agreement. 

The  point  arises  in  this  way.  At  a  meeting  of  the  company  a  reso- 
lution was  passed  by  a  majority  —  I  was  going  to  say  a  bare  ma- 
jority, but  it  was  a  majority —  in  favour  of  a  sale  to  a  purchaser, 
and  the  directors,  honestly  believing,  as  Warrington,  J.,  thought, 
that  it  was  most  undesirable  in  the  interests  of  the  company  that 
that  agreement  should  be  carried  into  effect,  refused  to  affix  the  seal 
of  the  company  to  it,  or  to  assist  in  carrjdng  out  a  resolution  which 
they  disapproved  of;  and  the  question  is  whether  under  the  memo- 
randum and  articles  of  association  here  the  directors  are  bound  to 
accept,  in  substitution  of  their  own  view,  the  views  contained  in  the 
resolution  of  the  company.  Warrington,  J.,  held  that  the  majority 
could  not  impose  that  obligation  upon  the  directors,  and  that  on 
the  true  construction  of  the  articles  the  directors  were  the  persons 
authorized  by  the  articles  to  effect  this  sale,  and  that  unless  the 
other  powers  given  by  the  memorandum  were  invoked  by  a  special 
resolution,  it  was  impossible  for  a  mere  majority  at  a  meeting  to 
override  the  views  of  the  directors.  That  depends,  as  Warrington, 
J.,  put  it,  upon  the  construction  of  the  articles.  First  of  all  there  is 
no  doubt  that  the  company  under  its  memorandum  has  the  power 
in  clause  3  (k)  to  sell  the  undertaking  of  the  company  or  any  part 
thereof.  In  this  case  there  is  some  small  exception,  I  believe,  to 
that  which  is  to  be  sold,  but  I  do  not  think  that  that  becomes  ma- 
terial. We  now  come  to  clause  81  of  the  articles,  which  I  think  it  is 
important  to  refer  to  in  this  connection.  [His  Lordship  read  the 
clause.]  Then  come  the  two  clauses  which  are  most  material,  96  and 
97,  whereby  the  powers  of  the  directors  are  defined.  [His  Lordship 
read  clause  96  and  clause  97  (1).]  Therefore  in  the  matters  referred 
to  in  article  97  (1)  the  view  of  the  directors  as  to  the  fitness  of  the 
matter  is  made  the  standard;  and  furthermore,  by  article  96  they 
are  given  in  express  terms  the  full  powers  which  the  company  has, 
except  so  far  as  they  "are  not  hereby  or  by  statute  expressly  di- 
rected or  required  to  be  exercised  or  done  by  the  company,"  so 
that  the  directors  have  absolute  power  to  do  all  things  other  than 
those  that  are  expressly  required  to  be  done  by  the  company;  and 
then  comes  the  limitation  on  their  general  authority —  "subject  to 


480  SELF-CLEANSIXG    FILTER    CO.  V.  CUNINGHAME,      [CHAF.  II. 

such  regulations  as  may  from  time  to  time  be  made  by  extraordi- 
nary resolution."  Therefore,  if  it  is  desired  to  alter  the  powers  of 
the  directors  that  must  be  done,  not  by  a  resolution  carried  by  a 
majority  at  an  ordinary  meeting  of  the  company,  but  by  an  ex- 
traordinary resolution.  In  these  circumstances  it  seems  to  me  that 
it  is  not  competent  for  the  majority  of  the  shareholders  at  an  ordi- 
nary meeting  to  affect  or  alter  the  mandate  originally  given  to  the 
directors,  by  the  articles  of  association.  It  has  been  suggested  that 
this  is  a  mere  question  of  principal  and  agent,  and  that  it  would  be 
an  absurd  thing  if  a  principal  in  api)ointing  an  agent  should  in  effect 
appoint  a  dictator  who  is  to  manage  him  instead  of  his  managing 
the  agent.  I  think  that  that  analogy  does  not  strictly  applj^  to  this 
case.  No  doubt  for  some  purposes  directors  are  agents.  For  whom 
are  they  agents?  You  have,  no  dou))t,  in  theorj'^  and  law  one  en- 
tity, the  company,  which  might  l)e  a  principal,  l)ut  you  have  to  go 
behind  that  when  you  look  to  the  particular  position  of  directors.  It 
is  by  the  consensus  of  all  the  individuals  in  the  company  that  these 
directors  become  agents  and  hold  their  rights  as  agents.  It  is  not 
fair  to  say  that  a  majority  at  a  meeting  is  for  the  purposes  of  this 
case  the  principal  so  as  to  alter  the  mantlate  of  the  agent.  The 
minority  also  must  be  taken  into  account.  There  are  provisions  by 
which  the  minority  may  be  over-borne,  but  that  can  only  be  done 
by  special  machinery  in  the  shape  of  special  resolutions.  Short  of 
that  the  mandate  which  nmst  be  obeyed  is  not  that  of  the  majority 
—  it  is  that  of  the  whole  entity  made  up  of  all  the  shareholders.  If 
the  mandate  of  the  directors  is  to  be  altered,  it  can  only  be  under  the 
machinery  of  the  memorandum  and  articles  themselves.  I  do  not 
think  I  need  say  more. 

One  argument  used  by  Warrington,  J.,  strongly  supports  that 
view.  He  says  in  effect :  "There  is  to  be  found  in  these  articles  a  pro- 
vision that  a  director  can  only  be  removed  by  special  resolution. 
What  is  the  use  of  that  provision  if  the  views  of  the  directors  can 
be  overridden  by  a  mere  majority  at  an  ordinary  meeting?  Practi- 
cally you  do  not  want  any  special  power  to  remove  directors  if  you 
can  do  without  them  and  differ  from  their  opinion  and  compel  some- 
thing other  than  their  \dew  to  be  carried  into  effect."  That  argu- 
ment appears  to  me  to  confirm  the  view  taken  by  the  learned 
judge. 

The  cases  cited  do  not  really  apply.  Indeed,  I  do  not  think  that 
Mr.  Gore-Browne,  who  argued  this  case  with  his  usual  ability  and 
fairness,  looked  upon  them  as  more  than  presenting  some  analogy, 
and  the  only  case  which,  at  first  sight,  appeared  to  me  at  all  near 
this  case  was  Isle  of  Wight  Ry.  Co.  v.  Tahourdin,  25  Ch.D.  320;  but 
when  that  is  looked  into,  as  was  pointed  out  by  Cozens-Hardy,  L.J., 
it  rests  upon  a  different  statute,  a  statute  differing  in  the  most 
essential  point,  namely,  in  the  limitation  of  the  directors'  authority. 


SECT.  I.]         SELF-CLEANSING    FILTER    CO.  V.  CUNINGHAME.  481 

Therefore  that  case  has  no  direct  bearing  on  the  case  before  us,  and 
on  these  grounds,  which  in  substance  are  the  same  grounds  as  those 
of  the  learned  judge  below,  I  am  of  opinion  that  this  appeal  fails. 

Cozens-Hardy,  L.J.    I  am  of  the  same  opinion.   It  is  somewhat 
remarkable  that  in  the  year  1906  this  interesting  and  important 
question  of  company  law  should  for  the  first  time  arise  for  decision, 
and  it  is  perhaps  necessary  to  go  back  to  the  root  principle  which 
governs  these  cases  under  the  Companies  Act,  1862.    It  has  Ijcen 
decided  that  the  articles  of  association  are  a  contract  between  the 
membei-s  of  the  company  inter  se.   That  was  settled  finally  by  the 
case  of  Browne  v.  La  Trinidad,  37  Ch.D.  1,  if  it  was  not  settled  be- 
fore.   We  must  therefore  consider  what  is  the  relevant  contract 
these  shareholders  have  entered  into,  and  that  contract,  of  course,  is 
to  be  found  in  the  memorandum  and  articles.  I  will  not  again  read 
articles  96  and  97,  but  it  seems  to  me  that  the  shareholders  have  by 
their  express  contract  mutually  stipulated  that  their  common  affairs 
should  be  managed   by  certain  directors  to  be  appointed   by  the 
shareholders  in  the  manner  described  by  other  articles,  such  directors 
being  liable  to  be  removed  only  by  special  resolution.    If  you  once 
get  a  stipulation  of  that  kind  in  a  contract  made  between  the  parties, 
what  right  is  there  to  interfere  with  the  contract,  apart,  of  course, 
from  any  misconduct  on  the  part  of  the  directors?    There  is  no  such 
misconduct  in  the  present  case.  Is  there  any  analogy  which  supports 
the  case  of  the  plaintiffs?  I  think  not.   It  seems  to  me  the  analogy 
is  all  the  other  way.  Take  the  case  of  an  ordinary  partnership.  If  in 
an  ordinar}^  partnership  there  is  a  stipulation  in  the  partnership  deed 
that  the  partnership  business  shall  be  managed  by  one  of  the  partners, 
it  would  be  plain  that  in  the  absence  of  misconduct,  or  in  the  absence 
of  circumstances  involving  the  total  dissolution  of  the  partnership, 
the  majority  of  the  partners  would  have  no  right  to  apply  to  the 
Court  to  restrain  him  or  to  interfere  with  the  management  of  the 
partnership  business.    I  would  refer  to  what  is  said  in  Lindley  on 
Partnership,  7th  ed.,  p.  574:  "Where,  however,  the  partner  com- 
plained of  has  by  agreement  been  constituted  the  active  managing 
partner,  the  Court  will  not  interfere  with  him  unless  a  strong  case 
be  made  out  against  him"  —  that  is  to  say,  unless  there  is  some  case 
of  fraud  or  misconduct  to  j ustify  the  interference  of  the  Court.    Nor  is 
this  doctrine  limited  to  a  case  of  co-partners.    It  is  not  a  peculiar 
incident  of  co-partnership ;  it  applies  equally  to  cases  of  co-ownership. 
I  think  in  some  of  the  earlier  cases  before  Lord  Eldon  (see  Waters  v. 
Taylor,  [1808]  15  Ves.  10;  [1813]  2  V.  &  B.  299)  with  reference  to  the 
co-owners  of  one  of  the  theatres,  he  laid  down  the  principle  that  when 
the  co-owners  had  appointed  a  particular  member  as  manager  the 
Court  would  not,  except  in  the  case  of  misconduct,  interfere  with 
him.  And  why?  Because  it  is  a  fallacy  to  say  that  the  relation  is  that 
of  simple  principal  and  agent.  The  person  who  is  managing  is  man- 


482  SELF-CLEANSING    FILTER    CO.  V.  CUNINGH.UIE.      [cHAP.  II. 

aging  for  himself  as  well  as  for  the  others.  It  is  not  in  the  least  a  case 
where  you  have  a  master  on  the  one  side  and  a  mere  servant  on  the 
other.  You  are  dealing  here,  as  in  the  case  of  a  partnership,  with 
parties  having  individual  rights  as  to  which  there  are  mutual  stipu- 
lations for  their  common  benefit,  and  when  you  once  got  that,  it  seems 
to  me  that  there  is  no  ground  for  saying  that  the  mere  majority  can 
put  an  end  to  the  express  stipulations  contained  in  the  baigain  which 
they  have  made.  Still  less  can  that  be  so  when  you  find  in  the  con- 
tract itself  provisions  which  shew  an  intention  that  the  powers  con- 
ferred upon  the  directors  can  only  be  varied  by  extraordinary  resolu- 
tion, that  is  to  say,  by  a  three-fourths  majority  at  one  meeting,  and 
that  the  directors  themselves  when  appointed  shall  only  be  removed 
by  special  resolution,  that  is  to  say,  by  three-fourths  majority  at  one 
meeting  and  a  simple  majority  at  a  confirmatory  meeting.  That  being 
so, -if  you  once  get  clear  of  the  view  that  the  directors  are  mere  agents 
of  the  company,  I  cannot  see  anything  in  principle  to  justify  the 
contention  that  the  directors  are  bound  to  comply  with  the  votes  or 
the  resolutions  of  a  simple  majority  at  an  ordinary  meeting  of  the 
shareholders.  I  do  not  think  it  true  to  say  that  the  dircctoi-s  arc 
agents.  I  think  it  is  more  nearly  true  to  say  that  they  are  in  the  posi- 
tion of  managhig  partners  appointed  to  fill  that  post  by  a  mutual 
arrangement  between  all  the  shareholders.  So  much  for  princii^le. 
On  principle  I  agree  entirely  with  what  the  Master  of  the  Rolls  has 
said,  agreeing  as  he  does  with  the  conclusions  of  Warrington,  J, 

When  we  come  to  the  authorities  there  is,  I  think,  nothing  even 
approaching  to  an  authoritj'  in  favour  of  the  appellants'  case.  Isle 
of  Wight  Ry.  Co.  v.  Tahmirdin,  25  Ch.D.  320,  at  the  utmost  con- 
tained a  dictum  which  at  first  sight  looked  in  favour  of  appellants; 
but,  treating  it  as  an  authority,  it  was  an  authority  upon  an  Act 
which  differed  in  a  vital  point  from  the  Act  which  we  are  now  con- 
sidering, because  although  by  §  90  of  the  Companies  Clauses  Act 
the  directors  have  powers  of  management  and  superintendence  very 
similar  to  those  found  in  Table  A,  article  55,  and  in  articles  96  and 
97,  that  section  contains  these  vital  words:  "  And  the  exercise  of 
all  such  powers  shall  be  subject  also  to  the  control  and  regulation 
of  any  general  meeting  specially  convened  for  the  purpose."  If 
those  words  had  been  found  in  the  present  Act  of  Parliament  the 
appellants'  case  would  have  been  comparatively  dear.  I  see  no 
ground  for  reading  them  into  the  Companies  Act,  1862,  or  into  the 
memorandum  and  articles  of  association  of  this  company.  For 
these  reasons  I  think  that  the  appeal  must  be  dismissed. 


SECT.  I.]  CHARLESTOWN    BOOT    CO.  V.  DUNSMORE.  483 

CHARLESTOWN  BOOT  CO.   v.  DUNSMORE. 

CO  N.H.  85.     1880. 

Case.  Demurrer  to  the  declaration  in  which  the  following  facts 
were  alleged:  —  The  plaintiffs  are  a  manufacturing  corporation  hav- 
ing for  its  object  a  dividend  of  profits,  and  commenced  business  in 
1871.  Dunsmore  was  elected  director  in  1871  and  Willard  in  1873, 
and  entered  upon  the  discharge  of  their  duties,  and  have  continued 
so  to  act  by  \artue  of  successive  elections  until  the  present  time. 
December  10,  1874,  the  corporation  voted  to  choose  a  committee  to 
act  with  the  directors  to  close  up  its  affairs,  and  chose  one  Osgood  for 
such  committee.  Osgood  tendered  his  services,  but  the  defendants 
refused  to  act  with  him,  and  contracted  new  debts  to  a  larger  extent 
than  allowed  by  law.  By  their  negligence,  debts  due  to  the  corpor- 
ation to  the  amount  of  $2,161.23  have  been  wholly  lost.  By  their 
negligence  in  disposing  of  the  goods  of  the  corporation,  a  loss  has 
accrued  of  $3,300.40.  By  their  neglect  to  sell  the  buildings  and  ma- 
chinery of  the  corporation  when  they  might  and  ought,  and  were 
urged  by  Osgood  to  sell,  the  same  depreciated  in  value  to  the  extent 
of  $20,000. 

Smith,  J.  The  provision  of  the  statute  is,  that  the  business  of  a 
dividend  paying  corporation  shall  be  managed  by  the  directors.  The 
statute  reads,  "The  business  of  every  such  corporation  shall  be  man- 
aged by  the  directors  thereof,  subject  to  the  by-laws  and  votes  of  the 
corporation,  and  under  their  direction  by  such  officers  and  agents  as 
shall  be  duly  appointed  by  the  directors  or  by  the  corporation." 
G.  L.,  chap.  148,  §  3;  Gen.  Stats.,  chap.  134,  §  3.  The  only  limita- 
tion upon  the  judgment  or  discretion  of  the  directors  is  such  as  the 
corporation  by  its  by-laws  and  votes  shall  impose.  It  may  define  its 
business,  its  nature  and  extent,  prescribe  rules  and  regulations  for  the 
government  of  its  officers  and  members,  and  determine  whether  its 
business  shall  be  wound  up  or  continued;  but  when  it  has  thus  acted, 
the  business  as  thus  defined  and  limited  is  to  be  managed  by  its  di- 
rectors, and  by  such  officers  and  agents  under  their  direction  as  the 
directors  or  the  corporation  shall  appoint.  The  statute  does  not 
authorize  a  corporation  to  join  another  officer  with  the  directors,  nor 
compel  the  directors  to  act  with  one  who  is  not  a  director.  They  are 
bound  to  use  ordinary  care  and  diligence  in  the  care  and  manage- 
ment of  the  business  of  the  corporation,  and  are  answerable  for  or- 
dinary negligence.  March  v.  Railroad,  43  N.H.  516,  529;  Scott  v. 
Depeijster,  1  Edw.  Ch.  513,  543;  Ang.  &  Ames  Corp.,  §  314.  There  is 
no  difference  in  this  respect  between  the  agents  of  corporations  and 
those  of  natural  persons,  unless  expressly  made  by  the  charter  or 
by-law^s.  lb.,  §  315.  It  would  be  unreasonable  to  hold  them  re- 
sponsible for  the  management  of  the  affairs  of  the  corporation  if  com- 


484  PEOPLE    EX    REL.  MANICE    V.  POWELL.  [cHAP.   IL 

pclled  to  act  with  one  who  to  a  greater  or  less  extent  could  control 
their  acts.  The  statute  not  only  entrusts  the  management  of  the 
business  of  the  corporation  to  the  directors,  but  places  its  other 
officers  and  agents  under  their  direction.  When  a  statute  provides 
that  powers  granted  to  a  corporation  shall  be  exercised  by  any  si'l  of 
officers  or  any  particular  agents,  such  powers  can  be  exercised  only  by 
such  officers  or  agents,  although  they  are  required  to  be  chosen  by 
the  whole  corporation;  and  if  the  whole  corporation  attempts  to  ex- 
ercise powers  which  by  the  charter  are  lotlged  elsewhere,  its  action 
upon  the  subject  is  void.  Insurance  Co.  v.  Keyset,  32  N.H.  313,  315. 
The  vote  choosing  Osgood  a  committee  to  act  with  the  directors  in 
closing  up  the  affairs  of  the  plaintiff  corporation  was  inoperative  and 
void. 

Demurrer  sustained. 

Note.  —  For  further  authorities  tending  to  show  that,  if  a  cor- 
porate power  is  vested  in  the  directors,  the  stockholders  cannot 
exercise  such  power  themselves,  and  the  directors  are  not  bound  to 
follow  their  instructions,  see  Ciirtin  v.  Salmon  River  Co.,  130  Cal. 
345;  Union  Gold  Co.  v.  Rocky  Mountain  Bank,  2  Col.  565;  Stoehlke  v. 
Hahn,  158  111.  79;  Manufacturers'  Bldg.  Co.  v.  Landay,  219  111.  168; 
Beveridge  v.  New  York  Elevated  R.R.  Co.,  112  N.Y.  1,  22;  Lord  v. 
Equitable  Life  Assurance  Society,  194  N.Y.  212,  228;  Continental 
Securities  Co.  v.  Belmont,  206  N.Y.  7,  16;  Dana  v.  Bank  of  U.S., 
5  W.  &  S.  (Pa.)  223,  245;  Quin  &  Axtens,  Ltd.  v.  Salmon,  [1909] 
A.C.  442. 

But  cf.  Garmany  v.  Lawton,  124  Ga.  876;  Smith  v.  Wells  Mfg.  Co., 
148  Ind.  333;  Kirwin  v.  Washington  Match  Co,  37  Wash.  285.  See 
also  Union  Pacific  Ry.  Co.  v.  Chicago  Ry.  Co.,  163  U.S.  564,  595; 
Marshall's  Valve  Gear  Co.,  Ltd.  v.  Manning,  Wardle  &  Co.,  Ltd., 
[1909]  1  Ch.  267;  Barron  v.  Potter,  [1914]  1  Ch.  895. 


PEOPLE  exrel.   MANICE  v.   POWTLL. 

201  N.Y.  194.     1911. 

Mandamus. 

The  relator,  who  had  been  elected  a  director  of  the  defendant 
Atlantic  Terra  Cotta  Company  for  a  term  which  would  not  expire 
until  January,  1912,  was  removed  prior  to  that  time,  by  a  majority 
of  the  directors,  and  this  act  was  approved  by  the  holders  of  a  ma- 
jority of  the  stock.  The  court  held  that  mandamus  was  not  the 
proper  remedy  for  reinstatement,  but  the  opinion  contained  a  state- 
ment as  to  the  merits. 

Chase,  J.   The  learned  justice  at  Special  Term,  in  denjdng  the 


SECT.  I.]  PECPLE    EX    REL.  MANICE    V.  POWELL.  485 

motion  for  a  peremptory  mandamus,  referring  to  the  relator,  said: 
"As  a  director  he  was  but  an  agent  of  the  corporation,  and  the  prin- 
ciples of  the  law  of  agency  were  applicable  to  him.  If  wrongfully 
removed  before  the  expiration  of  the  period  for  which  he  was  elected, 
he  is  entitled  to  recover  if  damages  have  resulted;  but  he  cannot  in- 
sist upon  being  retained  in  a  fiduciary  relation  towards  the  stock- 
holders against  the  latter's  wishes.  The  stocldiolders  had  the  power 
to  revoke  the  agency,  though  not  the  right." 

In  the  reason  so  given  for  the  denial  of  the  motion  we  think  the 
distinction  between  a  person  occupying  an  ordinary  contract  rela- 
tion as  an  agent  for  a  principal  and  a  person  elected  for  a  specified 
term  as  a  director  of  a  private  corporation  was  wholly  overlooked. 

"The  board  of  directors  of  a  corporation  do  not  stand  in  the  same 
relation  to  the  corporate  body  which  a  private  agent  holds  towards 
his  principal.  ...  In  corporate  bodies  the  powers  of  the  board  of 
directors  are,  in  a  very  important  sense,  original  and  undelegated." 
Hoijt  V.  Thompson's  Executors,  19  N.Y.  207,  216;  Beveridge  v.  N.Y. 
E.R.R.  Co.,  112  N.Y.  1,  22,  23. 

While  the  ordinary  rules  of  law  relating  to  an  agent  are  applicable 
in  considering  the  acts  of  a  board  of  directors  in  behalf  of  a  corpora- 
tion when  dealing  with  third  persons,  the  individual  directors  mak- 
ing up  the  board  are  not  mere  employees,  but  a  part  of  an  elected 
body  of  officers  constituting  the  executive  agents  of  the  corporation. 
They  hold  such  office  charged  with  the  duty  to  act  for  the  corpora- 
tion according  to  their  best  judgment,  and  in  so  doing  they  cannot 
be  controlled  in  the  reasonable  exercise  and  performance  of  such 
duty.  As  a  general  rule  the  stockholders  carniot  act  in  relation  to  the 
ordinary  business  of  the  corporation,  nor  can  they  control  the  di- 
rectors in  the  exercise  of  the  judgment  vested  in  them  by  \drtue  of 
their  office. 

The  relation  of  the  directors  to  the  stockholders  is  essentially  that 
of  trustee  and  cestui  que  trust.  The  peculiar  relation  that  they  bear 
to  the  corporation  and  the  owners  of  its  stock  grows  out  of  the 
inability  of  the  corporation  to  act  except  through  such  managing 
officers  and  agents.  The  corporation  is  the  owner  of  the  property, 
but  the  directors  in  the  performance  of  their  duty  possess  it,  and  act 
in  every  way  as  if  they  owned  it. 

This  court  in  Bosworth  v.  Allen,  168  N.Y.  157,  referring  to  direc- 
tors, say:  "While  not  technically  trustees,  for  the  title  of  the  cor- 
porate property  \vs,s  in  the  corporation  itself,  they  were  charged  with 
the  duties  and  subject  to  the  liabilities  of  trustees.  Clothed  ^vith  the 
power  of  controlling  the  property  and  managing  the  affairs  of  the 
corporation,  without  let  or  hindrance,  as  to  third  persons  they  were 
its  agents,  but  as  to  the  corporation,  itself,  equity  holds  them  liable 
as  trustees.  2  Pomeroy's  Equity  Jurisprudence,  §§  1061,  1063,  1088, 
1097." 


486  PEOPLE    EX    REL.  MANICE    V.   POWELL.  [cHAP.   II. 

The  relator  occupied  a  position  toward  the  corporation  tliat  wa.s 
one  of  trust  and  responsibiUty.  He  was  given  power  and  authority  to 
act  not  only  substantially  uncontrolled  l)y  the  corporation,  but  he 
was  not  subject  to  discharge  as  an  employee  unless  such  right  is 
vested  in  some  court  or  body  of  persons  by  statute  or  in  its  articles 
of  incorporation  duly  authorized  by  statute. 

It  would  be  somewhat  startling  to  the  business  world  if  we  defi- 
nitely announced  that  the  directors  of  a  corporation  were  mere  em- 
ployees and  that  the  stocklioklers  of  the  corporation  have  the  power 
to  convene  from  time  to  time  and  remove  at  will  any  or  all  of  the 
directors,  although  their  respective  terms  of  office  have  not  expired. 

It  is  and  was  prior  to  the  amendment  of  said  certificate  of  incor- 
poration provided  by  statute  that  an  action  may  be  maintained 
against  a  director  of  a  corporation  to  procure  a  jutlgment  suspending 
him  from  exercising  his  office  if  it  appear  that  he  has  abused  his  trust 
or  to  remove  him  from  office  upon  proof  or  conviction  of  miscon- 
duct. General  Corporation  Law,  §§  90  and  91;  former  §§  1781  and 
1782  of  the  Code  of  Civil  Procedure.  It  is  provided  by  §  307  of  said 
General  Corporation  Law  that  a  director  shall  not  be  suspended  or 
removed  from  office  by  a  court  or  judge  otherwise  than  by  the  final 
judgment  of  a  competent  court  in  an  action  brought  by  the  attorney- 
general  as  prescribed  by  said  §  90  of  that  act. 

The  statute  providing  for  an  action  in  the  name  of  the  attorney- 
general  to  suspend  or  remove  a  director  is  not  exclusive  of  such 
reasonable  and  lawful  chai'ter  provision  relating  thereto  as  may  be 
included  in  the  articles  of  incorporation.  Without  some  statute  or 
provision  of  the  charter  authorizing  his  removal  or  suspension,  a 
director  cannot  be  removed  or  suspended  from  office  until  the  end 
of  his  term,  at  least  without  cause.  Thompson  on  Corporations 
[2d  ed.],  §§  1084,  1085,  1086;  Taylor  on  Corporations,  §  649;  Cook 
on  Corporations,  §  711;  Morawetz  on  Pi-ivate  Corporations,  §§  541, 
542. 

Note.  —  But  the  organization  of  the  corporation  may  be  such 
that  power  is  reserved  in  the  stockholders  to  remove  a  director 
prior  to  the  expiration  of  his  term  of  office.  See  State  v.  Horan,  22 
Wash.  197;  Browne  v.  La  Trinidad,  L.R.  37  Ch.D.  1. 


SECT.  II.]  DAVENPORT    V.  PEORIA    INSURANCE    CO.  487 


SECTION   2. 
MODE  OF  EXERCISING  THE  POWERS. 


DAVENPORT  v.  PEORIA  INSURANCE  CO. 

17  Iowa,  276.     18G4. 

The  agent  of  the  defendant  entered  into  a  verbal  contract  of 
insurance  upon  a  building  belonging  to  plaintiff.  The  building  was 
burned  before  any  policy  was  issued.  One  gi-ound  of  defense  was 
that  the  defendant  was  not  bound  by  this  verbal  contract. 

Cole,  J.  The  English  rule,  that  a  corporation  cannot  expressly 
bind  itself,  except  by  deed,  unless  the  act  establishing  it  authorizes 
it  to  contract  in  another  mode,  has  been  broken  in  upon,  and  indeed 
entirely  overturned,  as  a  general  proposition,  throughout  the  United 
States;  and  it  is  here  well  settled  that  the  acts  of  a  corporation, 
evidenced  by  vote,  written  or  unwritten,  are  as  completely  binding 
upon  it,  and  are  as  complete  authority  to  its  agents,  as  the  most 
solemn  acts  done  under  the  corporate  seal. 

Note.  —  In  Bank  of  the  U.S.  v.  Dandridge,  12  Wheat.  (U.S.)  G4, 
the  court  held  that  directorate  action  need  not  necessarily  be  evi- 
denced by  a  written  resolution.  Story,  J.,  said  (p.  80):  ''Assuming, 
then,  that  the  directors  of  the  parent  bank  were,  as  a  board,  to  ap- 
prove of  the  bond,  so  far  as  it  respects  the  securities,  in  what  manner 
is  that  approval  to  be  evidenced?  Without  question,  the  directors 
keep  a  record  of  their  proceedings  as  a  board;  and  it  appears  by 
the  rules  and  regulations  of  the  parent  bank  read  at  the  bar,  that 
the  cashier  is  bomid  'to  attend  all  meetings  of  the  board,  and  to 
keep  a  fair  and  regular  record  of  its  proceedings.'  If  he  does  not 
keep  such  a  record,  are  all  such  proceedings  void,  or  is  the  bank  at 
liberty  to  establish  them  by  secondary  evidence?  The  charter  of 
the  bank  does  not,  in  terms,  require  that  such  an  approval  shall  be 
by  writing,  or  entered  of  record.  It  does  not,  in  terms,  require  that 
the  proceedings  of  the  directors  shall  generally  be  recorded,  much 
less  that  all  of  them  shall  be  recorded.  It  seems  to  have  left  these 
matters  to  the  general  discretion  of  the  corporation,  and  of  the 
directors;  and  though  it  obviously  contemplates  that  there  will  be 
books  kept  by  the  corporation  which  will  disclose  the  general  state 
of  its  affairs,  it  is  not  a  just  inference  that  it  meant  that  every 
official  act  of  the  directors  should  be  recorded,  of  whatever  nature 
it  might  be.  And  if  it  had,  it  would  deserve  consideration,  whether 


488  BALDWIN    V.  CAXFIELD.  [cHAP.  II. 

such  provisions  ought  to  be  deemed  conditions  precedent,  without 
which  the  act  was  void,  or  only  directory  to  the  officers  in  tlie  per- 
formance of  their  duty,  the  omission  of  which  might  subject  them- 
selves to  responsibility,  and  the  corporation  itself  to  the  imputation 
of  a  violation  of  its  charter." 

See  also  Young  v.  ^.,S.  Mortgage  &  Trust  Co.,  214  N.Y.  279,  285, 
and  cases  there  cited. 


BALDWIN  V.   CANFIELD. 

26  Minn.  43.     1879. 

One  King  became  the  owner  of  all  the  stock  of  the  Minneapolis 
Agricultural  and  Mechanical  Association,  a  corporation.  He  pledged 
this  stock  to  Baldwin  and  others  as  security  for  the  performance  of 
certain  promises  made  by  him.  Thereafter  he  caused  a  deed  of  the 
real  est^e  owned  by  said  corporation  to  be  executed  l>y  the  direc- 
tors of  the  corporation  wherein  the  dcfendqjit  Canfield  was  named  as 
grantee.  The  execution  of  this  deed  was  never  authorized  or  directed 
at  or  by  any  meeting  of  the  directors,  nor  was  any  resolution  ever 
passed  by  the  board  of  directors  in  r(>fcrence  to  the  execution  of  the 
deed.  The  deed  was  executed  by  the  directors  separately  and  at 
different  times,  wherever  they  happened  to  be,  at  the  request  of 
King  or  his  attorney,  for  the  purpose  of  enabling  King  to  convey 
the  property  to  Canfield.  It  was  executed  by  one  director  in  Utica, 
New  York;  by  two  directors  in  New  York  City;  and  by  eight  direc- 
tors in  Minnesota. 

Canfield  paid  King  a  valuable  consideration  for  this  deed,  re- 
corded his  deed,  and  entered  into  possession  of  the  land. 

The  pledgees  of  King's  stock  (King  not  having  redeemed  the 
stock)  brought  this  action,  praying  that  the  said  deed  might  be 
cancelled. 

The  trial  court  held:  "Fourth.  Said  deed  was  not  the  act  and 
deed  of  said  association,  and  did  not  convey  to  Canfield  the  legal 
title  of  the  real  estate  purporting  to  be  convej'ed  thereby";  and 
further  held  that  it  was  void,  as  against  the  plaintiffs. 

Berry,  J.  The  fourth  conclusion  is  called  in  question  by  the 
counsel  for  defendant  Canfield,  but  we  have  no  doubt  of  its  correct- 
ness. As  we  have  already  seen,  the  court  below  finds  that,  by  its 
articles  of  incorporation,  the  government  of  the  MinneapoUs  Agri- 
cultural and  Mechanical  Association,  and  the  management  of  its 
affairs,  was  vested  in  the  board  of  directors.  The  legal  effect  of  this 
was  to  invest  the  directors  with  such  government  and  management 
as  a  hoard,  and  not  otherwise.  This  is  in  accordance  with  the  general 
rule  that  the  governing  body  of  a  corporation,  as  such,  are  agents 


SECT.  II.]  BALDWIN    V.  CAXFIELD.  489 

of  the  corporation  only  as  a  board,  and  not  individually.  Hence  it 
follows  that  they  have  no  authority  to  act,  save  when  assembled 
at  a  board  meeting.  The  separate  action,  individually,  of  the  persons 
composing  such  governing  body,  is  not  the  action  of  the  constituted 
body  of  men  clothed  with  corporate  powers.  Angell  &  Ames  on 
Corporations,  §  504,  et  seq.;  hi  re  Marseilles  Extension  Rij.  Co.,  Law 
Rep.  7  Ch.  Ap.  161;  D'Arcy  v.  Tamar,  etc.,  Rij.  Co.,  Law  Rep.  2 
Exch.  158;  Schumm  v.  Seymour,  24  N.J.  Eq.  143;  First  Nat.  Bank  v. 
Christopher,  40  N.J.  Law  (11  Vroom),  435;  Junction  R.  Co.  v.  Reeve, 
15  Ind.  237;  Cammeyer  v.  United  German  Churches,  2  Sandf.  Ch.  186; 
Yellow  Jacket  Silver  Mining  Co.  v.  Stevenson,  5  Nev.  224;  Hilly er  v. 
Overman  Silver  Mining  Co.,  6  Nev.  51;  Stoystown,  etc.,  Turnpike 
Road  Co.  v.  Craver,  45  Pa.  St.  386;  Edgerhj  v.  Emerson,  23  N.H. 
(3  Foster),  555.  In  Vermont  a  somewhat  different  rule  is  allowed, 
as  in  the  Bank  of  Middlebury  v.  Rutland  &  Washington  R.  Co.,  30 
Vt.  159.  In  that  case,  and  perhaps  others  in  that  state,  it  is  held 
that  directors  may  bind  their  corporation  by  acting  separately,  if 
this  is  their  usual  practice  in  transacting  the  corporate  business. 
But  we  think  that  the  general  rule  before  mentioned  is  the  more 
rational  one,  and  it  is  supported  by  the  great  weight  of  authority. 
From  the  apphcation  of  this  rule  to  the  facts  of  this  case,  it  follows 
that  the  fourth  conclusion  of  law,  viz.,  that  the  deed  purporting  to 
be  made  by  the  association  was  not  the  act  and  deed  of  such  asso- 
ciation, and  therefore  did  not  convey  the  title  to  the  premises  in 
question  to  Canfield,  is  correct.  The  directors  took  no  action  as  a 
board  with  reference  to  the  sale  of  the  premises  or  the  execution  of 
any  deed  thereof.  So  far  as  in  any  way  binding  the  corporation  is 
concerned,  their  action  in  executing  the  deed  was  a  nullity.  They 
could  not  bind  it  by  their  separate  and  individual  action.  Hence  it 
follows  that  the  so-called  deed  is  not  only  ineffectual  as  a  conveyance 
of  real  property,  but  equally  so  as  a  contract  to  convey. 

Note.  —  See,  accord,  Alta  Silver  Co.  v.  Alta  Placer  Co.,  78  Cal. 
629,  632  (judgment  creditors  of  a  corporation  successfully  resisted 
the  foreclosure  of  an  alleged  mortgage  of  corporate  assets  on  the 
ground  that  the  mortgage  had  not  been  authorized  by  the  directors 
in  meeting  assembled);  Branch  v.  Augusta  Glass  Works,  95  Ga. 
573,  579  (a  president  of  a  corporation  may  not  be  authorized  by 
the  du'cctors  in  "mere  street  conversation"  to  make  calls  upon 
stock) ;  Monroe  Mercantile  Co.  v.  Arnold,  108  Ga.  449,  460  (similar 
principle  as  to  borrowing  money);  Peirce  v.  Morse-Oliver  Co.,  94 
Me.  406  (action  for  breach  of  contract  alleged  to  have  been  made  with 
corporation);  Taylor  v.  R.  D.  Scott  &  Co.,  149  Mich.  525  (corporate 
assets  burned  after  the  making  of  an  alleged  contract  of  sale,  with- 
out action  by  directors  in  meeting  assembled;  corporation  must 
stand  loss);  Brinkerhoff  Zinc  Co.  v.  Boyd,  192  Mo.  597,  613  ;  De- 


490  BALDWIN    V.  CANFIELD.  [CHAP.  II. 

marest  v.  Spiral  Riveted  Tube  Co.,  71  N.J.L.  14;  IJolcombe  v.  Tren- 
ton White  City  Co.,  80  N.J.  Eq.  122,  132;  People's  Bank  v.  ,S7.  An- 
thony's Church,  109  N.Y,  512;  State  v.  People's  Association,  42  Ohio, 
579;  In  re  Haycraft  Gold  Mining  Co.,  [1900]  2  Ch.  230. 

An  express  provision  in  the  certificate  of  incorporation  that  "any 
resolution,  in  writing,  signed  by  all  the  members  of  the  Ijoard  of 
directors  .  .  .  shall  be  and  constitute  action  by  such  board  .  .  .  with 
the  same  force  and  effect  as  if  the  same  had  been  duly  passed  by 
the  same  vote  at  a  duly  called  meeting,"  is  invalid.  Audcnricd  v. 
East  Coast  Milling  Co.,  68  N.J.  Eq.  450.  The  court  said  (p.  408): 
"The  proposition  that  the  stockholders,  in  assenting  to  this  pro- 
vision in  the  articles  of  association,  waived  the  advantage  and 
protection  they  would  enjoy  untler  the  common  law  and  our  Cor- 
poration act,  does  not  meet  the  ca.se.  Stockholders  may  waive  an 
advantage,  but  they  cannot  by  waiver  ordain  a  method  of  corporate 
action  which  the  law  does  not  recognize,  nor  dispense  with  the  aid 
of  a  board  of  directors  as  a  means  of  corporate  action.  Such  a  course 
is  not  sanctioned  by  our  law  and  is  inconsistent  with  the  twelfth 
section  of  our  act,  which  requires  that  'the  business  of  every  cor- 
poration shall  be  managed  by  its  directors.'  But  we  ought  not  to 
confine  the  consideration  of  this  question  to  the  relationship  exist- 
ing between  the  stockholders  and  t  he  directors.  The  business  of  the 
state  is  to  a  large  extent  carried  on  by  corporations,  and  their 
transactions  directly  and  vitally  affect  the  interests  of  all  the  peoj^le. 
In  committing  the  transaction  of  business  so  generally  to  corpora- 
tions, the  legislature  may  be  presumed  to  have  jirovided  for  and 
recognized  deliberative  meetings  of  directors  as  a  safeguard  to  the 
public  interest,  which  presumption  ought  not  to  be  overthrown  by 
a  forced  construction  of  the  act.  The  fundamental  idea  of  a  busi- 
ness corporation  involves  an  advantage  coming  from  the  aggi'cgation 
of  wisdom,  knowledge  and  business  foresight  which  results  fiom 
bringing  a  large  number  of  stockholders  and  directors  into  a  connnon 
enterprise.  It  is  their  knowledge  and  wisdom  combined,  acting  as  a 
miit,  that  gives  efficiency  and  safety  to  the  corporate  management." 

A  fortiori,  corporate  action  is  not  to  be  predicated  upon  the  assent, 
given  separately,  of  enough  of  the  directors  to  constitute  a  quonun. 
Herrington  v.  District  Township,  47  Iowa,  11  (action  to  recover  for 
services  in  teaching  school.  "  The  question  is  here  presented  whether 
a  corporation  whose  business  is  transacted  by  a  board  of  directors 
can  be  bound  by  the  assent  of  a  majority  of  the  directors  to  a 
contract,  expressed  otherwise  than  at  a  duly  convened  meeting. 
We  are  of  opinion  that  it  cannot.  While  it  is  true  that  a  majority 
of  the  board  will  govern  in  the  absence  of  a  provision  by  statute, 
or  in  the  articles  of  incorporation,  requiring  the  concurrence  of  a 
greater  number,  yet  their  determination  is  valid  only  after  the  mi- 
nority have  had  an  opportunity  to  be  heard.   A  board  must  act  as 


SECT.  II.]  FINLEY    SHOE    &    LEATHER    CO.  V.  KURTZ.  491 

a  unit,  and  in  the  manner  prescribed") ;  New  Orleans  Co.  v.  Lawsmi, 
11  La.  34;  Hamlin  v.  Brass  Co.,  68  N.H.  292  (alleged  discharge  of 
superintendent  not  a  corporate  act);  Bank  v.  Lumber  Co.,  116  N.C. 
827;  Doernhecher  v.  Columbia  City  Co.,  21  Or.  573;  Stoystown  Co. 
V.  Craver,  45  Pa.  386;  Singer  v.  Salt  Lake  Co.,  17  Utah,  143,  160; 
Limer  v.  Traders  Co.,  44  W.Va.  175,  180;  Leonard  v.  Lent,  43  Wis. 
83;  D'Arcy  v.  The  Tamar  Co.,  L.R.  2  Exch.  158. 

But  see,  contra,  Longmont  Supply  Ditch  Co.  v.  C  off  man,  11  Colo. 
551;  National  Bank  v.  Sandford  Fork  Co.,  157  Ind.  10,  17;  Buck  v. 
Troy  Aqueduct  Co.,  76  Vt.  75. 

There  may  be  circumstances  justifying  the  holding  of  a  meeting 
of  the  board  of  directors  without  notice  to  all  the  directors.  See 
Stafford  Springs  Co.  v.  Middle  River  Co.,  80  Conn.  37,  41. 


FINLEY  SHOE   &   LEATHER  CO.  v.   KURTZ. 

34  Mich.  89.     1876. 

CooLEY,  Ch.J.  The  plaintiff  in  error  is  a  manufacturing  corporar 
tion  doing  business  in  the  city  of  Detroit.  It  was  organized  under 
the  general  law  providing  for  the  organization  of  such  corporations, 
and  by  its  articles  its  capital  stock  is  thirty  thousand  dollars,  w4iich 
may  be  increased  to  one  hundred  and  fifty  thousand  dollars.  Kurtz 
was  in  the  employ  of  the  corporation  and  loaned  money  to  it.  For 
this  he  proposed  to  take  stock,  and  also  for  a  portion  of  what  he 
earned  by  his  services.  The  corporators  were  only  three  in  number, 
and  one  of  them  informed  Kurtz  that  he  had  conferred  with  the 
others  and  it  was  agreed  that  Kurtz  should  have  stock  for  what 
was  owing  him.  The  sum  was  afterwards  credited  him  on  the  corpo- 
rate books  as  payment  on  stock,  but  without  his  direction.  In  the 
corporate  reports  subsequently  made  to  the  secretary  of  state,  Kurtz 
was  set  down  as  a  stockholder,  but  of  this  he  had  no  knowledge. 
Afterwards  Km'tz  was  discharged  from  the  service  of  the  corporation, 
and  he  then  brought  suit  for  what  was  credited  to  him,  refusing  to 
take  stock  therefor.  It  appears  that  the  three  original  stockholders 
held  the  whole  thirty  thousand  dollars  of  stock;  that  the  corporation 
never  took  steps  to  increase  the  capital  to  any  larger  sum,  and  that 
no  individual  stockholder  offered  to  assign  to  Kurtz  any  of  his  stock. 

The  defense  to  Kurtz's  suit  is,  that  what  was  due  him  has  by  his 
consent  been  applied  on  stock,  and  that  he  is  entitled  to  stock 
therefor  and  nothing  else.  To  make  good  this  defense  the  corpora- 
tion must  have  shown,  first,  that  it  had  stock  to  give  Kurtz;  and, 
second,  that  there  was  an  agreement  on  their  part  that  he  should 
have  it,  and  on  his  part  that  he  would  take  it. 

That  the  corporation  might  have  had  the  stock  to  give  Kurtz  is 


492    HOISTING    MACHINERY    CO.  V.  GOELLER    IRON    WORKS.    [CHAP.  11. 

undoubted.  All  that  was  necessary  was  that  the  corporation  should 
mcreasc  its  capital  stock  in  the  manner  provided  hy  law,  that  is  to 
say,  by  vote  of  the  stockJioiders  at  a  nieetinj^  called  for  that  pur- 
pose. Coinp.  L.,  §  2841.  Probably  by  corix)rate  action  it  niiKlit  in 
advance  aj^ee  to  make  such  increa.so,  and  receive  money  for  stock 
to  be  issued  when  the  increiusc  shouKl  \)c  declared.  But  it  is  not  very 
clear  that  the  officers  of  the  company  could  take  action  of  that 
nature  which  would  bind  the  corporators;  for  if  they  could,  a  meet- 
inf?  of  the  stockholders  for  the  purpose  would  Ik>  a  mere  ceremony 
to  do  that  which  they  could  not  refuse  to  do.  It  certainly  could  not 
be  within  the  imjihed  powers  of  any  corporate  ofhcer  to  obligate  the 
corporation  to  any  such  increase,  antl  thus  indirectly  do  what  the 
law  permits  to  l)e  done  only  by  the  IxKly  of  corporators  specially 
convened  for  the  purpose. 

Taking  the  ca.se  as  it  st,ands  on  the  record,  it  is  very  manifest 
that  the  corporation  was  never  placed  under  obligation  to  give 
Kurtz  the  stock.  Assuming  that  all  the  stockholders  had  severally 
agreed  to  it,  this  agrecnnent  bound  no  one,  and  might  have  been 
repudiated  at  any  corporate  meeting.  Where  joint  action  is  required 
by  law,  individual  action  is  of  no  avail,  and  at  most  only  puts  the 
individuals  under  honorary  obligations  of  which  the  law  can  take 
no  notice.  Suppose  Kurtz  had  demanded  the  stock  when  he  was 
discharged,  it  is  clear  that  the  corporation  would  have  had  none  to 
give  him.  Suppose  he  had  sued  the  corporation  for  refusal  to  de- 
liver, where  would  he  have  discovered  the  elements  of  a  contract 
to  that  effect?  Certainly  not  in  a  report  to  which  he  was  no  party, 
and  which  was  made  without  his  consent  or  knowledge.  Certainly 
not  in  the  a.ssurances  of  individual  stockliolders,  when  these,  so  far 
from  binding  the  corporation,  would  not  even  bind  themselves  in- 
dividually. The  conclusion  is  inevitable  that  Kurtz  must  have 
failed  in  such  an  action,  and  if  so,  the  corporation  must  fail  in  this 
defense.  There  can  be  no  contract  without  mutuality,  and  a  corpo- 
ration can  only  be  bound  by  corporate  action,  and  that  we  look 
for  in  vain  in  this  record. 

The  judgment  must  be  affirmed,  with  costs. 

Note.  —  See,  accord,  Duke  v.  Markham,  105  N.C.  131. 


HOISTING  MACHINERY  CO.  v.  GOELLER  IRON  WORKS. 

84  N.J.L.  504.     1913. 

Trench ARD,  J.  This  suit  was  brought  to  recover  a  commission 
of  five  per  cent,  for  the  services  of  the  plaintiff,  a  mechanical  engi- 
neering company,  in  procuring  for  the  defendant,  who  was  engaged 


SECT.  II.]     HOISTING   MACHINERY  CO.  V.  GOELLER    IRON    WORKS.    493 

in  the  business  of  constructing  and  erecting  iron  work,  a  contract 
with  the  Harwood  Electrical  Company. 

The  plaintiff's  action  was  based,  primarily,  upon  the  following 
letter  purporting  to  be  from  the  defendant :  — 

Newark,  N.J.,  Aug.  23,  1909. 
Hoisting  Machinery  Co., 
New  York  Cikj : 

Dear  Sirs  —  We  have  to-day  mailed  estimates  to  the  Harwood 
Mfg.  Co.  for  structure  for  coal  and  ash  conveyor  of  which  we  enclose 
copy. 

We  hereby  agree  to  give  you  5  per  cent,  of  the  amount  for  your  com- 
mission, same  to  be  paid  to  you  on  receipt  of  payment  for  this  work. 
Respectfully  yours, 

The  Goeller  Iron  Works, 
John  Goeller, 

Sec'y. 

The  case  was  tried  before  the  judge  without  a  jury,  and  he  found 
the  following  matters  of  fact:  "That  (1)  the  plaintiff,  in  July,  1909, 
received  an  inquiry  from  a  client  concerning  the  erection  of  a  piece 
of  conveying  machinery  to  be  constructed  of  iron  or  steel ;  that  (2) 
after  preparing  plans,  the  plaintiff  sent  the  plans  to  the  defendant 
for  an  estimate;  that  (3)  as  a  result  of  the  sending  of  the  plans  by 
the  plaintiff  to  the  defendant,  an  estimate  was  made  by  the  de- 
fendant to  the  Harwood  Electrical  Company  for  the  erection  of  the 
machinery  for  which  plans  had  been  sent  by  the  plaintiff  to  the 
defendant,  and  the  defendant  agreed  to  pay  the  plaintiff  a  com- 
mission of  five  per  cent,  of  the  amount  of  money  which  the  defendant 
should  receive  if  the  estimate  was  accepted,  to  be  paid  to  the  plain- 
tiff on  receipt  of  payment  by  the  defendant  for  the  work;  that  (4) 
after  August  23d,  1909,  the  estimate  was  accepted  and  defendant 
entered  into  a  contract  with  the  Harwood  Electrical  Company, 
which  included  all  the  work  called  for  in  the  estimate,  and  more 
besides;  that  (5)  the  defendant  received  $8,342.28  for  work  done 
by  it  under  said  contract." 

Judgment  was  entered  for  the  plaintiff  for  the  sum  of  $462.98, 
being  five  per  cent,  of  $8,342.28,  with  interest,  and  the  defendant 
appealed.  .  .  . 

It  is  next  contended  that  the  judge  erred  in  refusing  to  nonsuit 
the  plaintiff.  Not  so.  The  motion  was  based  upon  two  grounds  — ■ 
first,  that  there  was  no  corporate  action  by  the  defendant  company, 
agi'eeing  to  pay  commission  to  the  plaintiff,  and  secondly,  that  no 
authority  was  shown  in  the  secretary  of  the  defendant  company  to 
make  such  contract. 

The  rules  as  to  nonsuits  are  the  same,  and  have  the  same  appli- 
cation, when  the  trial  is  by  the  court  as  when  it  is  by  a  jury,  \yeston 
Company  v.  Benecke,  53  Vroom,  445. 


494  JOURDAN    V.  LONG    ISLAND    U.R.  CO.  [CHAP.  II. 

And  the  rule  is  well  settled  that  where,  as  in  this  case,  the  evidence 
tends  to  show  that,  in  the  general  course  of  the  business  of  an  in- 
corporated business  company,  the  directors  or  managers  have  per- 
mitted an  officer  to  assume  the  direction  and  control  of  the  busitiess, 
and  have  held  him  out  to  the  public  as  its  general  agent,  his  authority 
to  act  for  the  company  in  a  particular  transaction  may  be  implied 
from  the  manner  in  which  he  has  been  permitted  by  the  directors 
or  managers  to  transact  business.  Fifth  Ward  Savings  Bank  v.  First 
National  Bank,  19  Vroom,  513. 

Note.  —  See,  accord,  Winer  v.  Bank,  89  Ark.  435,  446;  York  v. 
Mathis,  103  Me.  67,  where  the  court  said  (p.  78):  "A  corporation 
must  act  and  speak  through  its  officers  and  authorized  agents  and  it 
is  entirely  competent  for  a  board  of  directors  to  estai)lish  a  mutual 
understanding  that  one  of  their  number  shall  be  the  active  agent  of 
the  board  in  the  management  of  the  property  and  the  conduct  of  the 
business  affairs  of  the  corporation.  It  is  not  necessary  that  such  an 
understanding  should  be  created  by  a  formal  vote  pa.ssed  at  a  formal 
meeting  or  proved  by  a  formal  record.  It  may  be  inferred  from  the 
situation  and  conduct  of  the  parties.  A  tlirector  'may  acquire  the 
power  to  bind  the  corporation  by  the  habit  of  acting  with  the  assent 
and  acquiescence  of  the  board,'  and  so  his  unauthorized  acts  'may 
be  confirmed  by  the  approbation  and  acquiescence  of  the  board.' 
It  is  true  that  in  either  case  it  is  the  l)oard  that  acts  or  acquiesces  and 
not  the  directors  as  individuals,  but  subsequent  ratification  as  well 
as  previous  authority  or  acquiescence  may  be  shown  by  circum- 
stances and  conduct." 

See  also  Pottsville  Bank  v.  Water  Co.,  211  Pa.  566  (stockholders). 


JOURDAN  V.   LONG   ISLAND   R.R.   CO. 

115N.Y.  380.     1889. 

Danforth,  J.  This  action  was  begun  in  November,  1884,  to  re- 
cover damages  from  the  Long  Island  Railroad  Company  for  breach 
of  a  ^^Titten  contract  purporting  to  have  been  made  on  the  31st  day 
of  May,  1879,  between  the  "  Brooklyn,  Flatbush  and  Coney  Island 
Railway  Company,"  of  the  first  part,  "Thomas  R.  Sharp,  as  re- 
ceiver," of  the  property,  etc.,  of  the  Long  Island  Railroad  Company, 
of  the  second  part,  the  ''  Long  Island  Railroad  Company,"  of 
the  third  part,  and  the  "Atlantic  Avenue  Railroad  Company  of 
Brooklyn,"  of  the  fourth  pai't.  It  was,  by  its  terms,  to  continue  for 
a  period  of  five  years  from  its  date.  The  Brookhn,  Flatbush  and 
Coney  Island  Railroad  Company  and  the  Long  Island  Railroad 
Company  were  severally  the  owners  and  operators  of  railways,  and, 


SECT.  II.]  JOURDAN   V.  LONG    ISLAND    R.R.  CO.  495 

SO  far  as  is  material  to  any  question  calling  for  our  discussion,  the 
terms  of  the  contract  were  such  that  the  first  named  company  was 
required  to  extend  and  maintain  its  track  at  its  own  expense,  but 
in  a  manner  satisfactory  to  the  other  company,  from  its  then  ter- 
minus at  Bedford  station,  so  that  it  should  connect  with  the  tracks 
of  the  Long  Island  Railroad  Company  on  Atlantic  avenue,  and  thus 
form  continuous  lines  of  double  track  railroad  between  the  depots  of 
that  company  at  Flatbush  avenue  and  East  New  York,  and  the 
depot  of  the  Brookl>m,  Flatbush  and  Coney  Island  Railway  Com- 
pany at  Brighton  Beach  on  Coney  Island,  and  as  it  pleased,  run 
trains  over  the  line  so  made  continuous  between  Flatbush  avenue  and 
Brighton  Beach.  The  Long  Island  Railroad  Company  and  Sharp, 
its  receiver,  agreed  to  furnish  it  with  "all  necessary  depot  facilities 
for  its  trains  and  passengers"  at  Flatbush  avenue,  and  through  its 
agents  sell  the  tickets  at  that  place;  and  the  party  of  the  first  part 
agreed  to  pay  to  the  Long  Island  Railroad  Company,  in  compensa- 
tion "for  the  use  of  its  tracks,  the  sale  of  its  tickets  and  for  depot 
facilities,  twenty  per  cent  of  all  moneys  earned  by  it  for  the  trans- 
portation of  passengers  between  Flatbush  avenue  and  any  and  all 
points  on  the  line  of  the  party  of  the  first  part,  south  of  Bedford 
station."  Similar  rights  were  secured  to  the  Long  Island  Railroad 
over  the  continuous  line,  and  a  described  portion  of  the  plaintiff's 
tracks  and  depot  facilities  secured  to  it  at  Brighton  Beach,  and  for 
this  use  and  these  facilities  the  defendant  agi-eed  to  pay  thirty-three 
and  one  third  per  cent  of  all  moneys  earned  by  it  for  the  transporta- 
tion of  passengers  between  Long  Island  City  and  Brighton  Beach, 
and  thirty-five  per  cent  of  all  moneys  earned  by  it  for  the  transporta- 
tion of  passengers  between  Bushwick  and  Brighton  Beach,  and  cer- 
tain other  proportion  for  passengers  between  other  stations. 

It  was  also  provided  that  the  party  of  the  first  part  (the  B.F. 
&  C.  Co.)  shall  begin  to  run  trains  from  Flatbush  avenue  to  Brigh- 
ton Beach,  and  the  party  of  the  second  part  (the  L.I.  R.R.  Co.) 
from  Long  Island  City  to  Brighton  Beach,  on  or  before  the  fifteenth 
day  of  June  in  each  year,  and  shall  run  every  day  thereafter,  Sundays 
excepted,  until  the  first  day  of  October,  at  least  twelve  trains  each 
way.  Other  payments  were  provided  for,  growing  out  of  these 
arrangements  for  the  use  of  each  other's  track,  and  it  was  agreed  that 
full  statements  of  the  business  done  under  the  agreement  should  be 
given  to  each  party  by  the  other  at  stated  intervals,  and  that  the 
books  of  the  several  companies  should  be  open  to  the  other's  inspec- 
tion. The  receivership  of  the  Long  Island  Railroad  terminated  in 
October,  1881 ,  and  the  road  was  restored  to  the  company.  The  ques- 
tions at  issue  concern  only  the  plaintiff,  who  represents  the  party  of 
the  first  part  in  the  agreement,  and  the  defendant,  the  Long  Island 
Railroad  Company.  The  alleged  breach  consisted,  in  substance,  of 
the  failure  of  the  defendant's  receiver,  and  its  own  subsequent  refusal 


496  JOURDAN    V.  LONG    ISLAND    R.R.  CO.  [CIIAP.  II. 

to  run  the  trains  of  the  Long  Island  Railroad  Company  over  a  certain 
portion  of  the  plaintiff's  road,  as  provided  by  the  contract,  and  their 
omission  to  furnish  depot  facilities  as  also  therein  provided.  Issue 
was  taken  upon  these  allegations  and  a  trial  had.  At  the  close  of  the 
evidence  the  defendant's  counsel  moved  the  trial  judge  to  dismiss  the 
complaint  on  the  ground  that  the  evidence  was  insufficient  to  show 
a  contract  between  the  plaintiff  and  defendant.  The  motion  was 
denied  and  the  case  submitted  to  the  jury  upon  lx)th  issues.  Their 
verdict  was  for  the  plaintiff,  and  it  has  been  approved  both  by  the 
trial  judge,  in  denying  the  defendant's  motion  for  a  new  trial,  and  by 
the  General  Term  in  affirming  the  order  and  the  judgment  entered 
upon  the  verdict.  The  defendant's  contention  is  that  the  contract 
was  not  binding  upon  it.  It  was,  as  is  conceded,  executed  in  the 
name  of  the  corporation  by  its  president  and  secretary.  It  was  sealed 
with  its  corporate  seal,  affixed  Ijy  its  proper  officers.  It  was,  thei-e- 
fore,  presumptively  valid  and  was  binding  upon  the  corporation 
until  evidence  to  the  contrary  should  be  produced.  If  the  seal  was 
obtained  fraudulently  or  the  officers  acted  without  authority  either 
in  executing  the  contract  in  their  official  character,  or  in  affixing 
the  seal,  it  lay  with  the  defendant  to  establish  those  facts.  The 
evidence  adduced  for  that  purpose  was  from  the  secretary.  He  tes- 
tified that  the  contract  was  drafted  in  pursuance  of  negotiations 
between  the  two  companies,  and  the  draft  was  in  "his  office."  An 
emergency  arose  which  called  for  its  completion,  and  he,  after  con- 
sulting with  Sharp,  the  president,  with  him,  signed,  sealed  and  de- 
livered it.  "I  expected,"  he  says,  "to  get  a  ratification."  Both  of 
these  officers  were  also  directors,  and  the  witness  says:  "I  intended 
to  call  the  board's  attention  to  it,  but  forgot  it." 

The  court  committed  no  error  in  refusing  to  dismiss  the  complaint 
or  in  refusing  to  charge  the  jury  that  the  contract  was  not  binding 
upon  the  company.  Sharp,  the  president,  was  not  examined  upon 
that  point,  and  whether  the  officers  of  the  company  did,  in  fact, 
exceed  their  authority,  might  have  been,  under  the  e\idence,  a 
question  for  the  jury.  No  request  was  made  to  submit  it.  There 
was,  however,  abundant  and  conclusive  evidence  that  the  contract 
was  adopted  and  ratified  by  the  defendant  in  its  corporate  capacity. 
It  was,  as  the  secretary  and  counsel  of  the  defendant  testified, 
drafted  in  pm-suance  of  negotiations  had  between  the  parties.  It 
was  acted  upon  by  the  defendant  in  the  management  of  its  business; 
for  one  year  the  defendant  compiled  with  its  terms  and  received  for 
the  entire  period  the  benefit  of  a  faithful  performance  on  the  part 
of  the  other  contracting  party.  It  necessarily  affected  the  running 
of  plaintiff's  trains  and  the  management  of  the  business  for  which 
it  was  incorporated.  As  summarized  by  the  learned  counsel  for 
the  appellant,  "it  gave  rights  to  another  corporation"  (the  plain- 
tiff) "to  use  the  tracks  and  depots  of  the  Long  Island  Railroad 


SECT.  II.]  JOURDAN    V.  LONG    ISLAND    R.R.  CO.  497 

Company,  and  provided  for  a  division  of  earnings,"  and  it  is  impos- 
sible to  suppose  that  these  things  were  suffered  or  enjoyed  without 
full  corporate  knowledge  of  the  contract  obligations  by  which  they 
were  provided  for.  Moreover,  the  defendant  received  a  pecuniary 
benefit  under  the  contract,  upon  the  assumption  that  the  contract 
was  valid.  If  they  intended  to  disavow  it,  it  was  their  duty  to  be 
active  in  so  doing  and  not  remain  wilKully  passive,  in  order  to 
profit  by  the  omission  or  mistake  on  the  part  of  their  own  officers, 
and  which  they  might  have  prevented.  The  appellant  argues  that 
the  objects  of  the  parties  might  have  been  attained  by  two  contracts 
as  well  as  by  one,  and,  therefore,  that  the  defendant  is  at  hberty 
to  adopt  so  much  as  makes  for  its  benefit  and  reject  the  rest.  It 
may  be  that  two  separate  contracts  could  have  been  framed  in  such 
manner  as  to  meet  the  views  of  the  parties,  and  in  that  case  one 
have  been  rejected  at  the  party's  risk  and  the  other  performed,  but 
only  one  was  prepared,  and  that  recites  that  "in  consideration  of 
the  mutual  covenants  and  agreements"  therein  "contained,"  the 
parties  have  agreed  and  do  agi-ee  as  therein  expressed.  The  pro- 
visions are  reciprocal.  One  party  cannot  say  "  I  have  got  all  I  bar- 
gained for,"  and  without  hability  repudiate  the  mutual  obhgation 
which  enabled  it  to  do  so,  and  formed  the  consideration  of  the  bar- 
gain. One  promise  was  the  consideration  for  the  other,  and  together 
they  constituted  a  binding  agreement.  If,  in  fact,  the  formal  execu- 
tion of  the  contract  was  unauthorized,  it  is  plain  the  agreement  was 
one  the  company  had  power  to  make,  one  which  they  mtended  to 
make,  supposed  they  had  made,  and  which,  with  knowledge,  or  full 
means  of  knowledge  of  its  terms,  they  acquiesced  in  and  ratified 
by  acting  under  it,  so  long  as  it  was  profitable,  and  refusing  to  do 
so  only  when  it  seemed  otherwise,  but  receiving  the  benefit  of  it  at 
all  times.  It  is  now  argued  that  the  question  of  ratification  should 
have  been  passed  upon  by  the  jury.  It  is  a  sufficient  answer  that 
no  request  was  made  to  have  it  submitted  to  them,  but  it  may  be 
further  said  that  upon  that  point  the  evidence  was  all  one  way  and 
conclusive  in  the  highest  degree.  We  find  no  legal  merit  in  either 
of  these  points.  The  other  questions  raised  by  the  appellant  have 
been  examined,  and  so  far  as  they  require  particular  observation  the 
remarks  of  the  General  Term  are  sufficient.  We  find  none  wliich 
requires  other  discussion.  Upon  the  assumption  that  the  contract 
bound  the  defendant,  the  plaintiff's  way  was  clear  and  his  right  to 
a  recovery  certain.  The  reasonableness  of  the  amount  actually  given 
to  him  is  not  for  us  to  determine. 

Judgment  affirmed. 

Note.  —  See,  accord,  Blood  v.  La  Serena  Co.,  134  Cal.  361,  366 
Beach  v.  Miller,  130  111.  162,  174;  Tnjonr.  White  Co.,  62  Conn.  161 
Baker  v.  Harpster,  42  Kan.  511;  Union  Trust  Co.  v.  Electric  Park 


498  ^  SHERMAN    V.  FITCH.  [CHAP.   II. 

Co.,  163  Mich.  687;  Presbyterian  Board  v.  Gilbee,  212  1^.^310;  Bank 
of  Middlcbury  v.  Rutland  li.Ii.  Co.,  30  Vt.  159;  Murray  v.  Beal,  2li 
Utah,  548;  King  v.  ]yest  Coast  Grocery  Co.,  72  Wash.  132. 
Cf.  People's  National  Bank  v.  New  England  Home,  209  Mass.  48. 


SHERMAN   I'.   FITCH. 

98  Mass.  59.     1867. 

Bill  in  equity  by  assignees  of  the  Northampton  Street  Sugar 
Refinery,  an  insolvent  corporation,  praying  for  a  decree  that  a 
rccordctl  mortgage  of  personal  property,  hckl  forth  by  the  lespondent 
as  having  i:)ceii  made  to  him  l)y  the  corj)oration,  might  l)e  declared 
void.  The  mortgage  (dated  January  19,  1865)  purported,  by  the 
language  of  the  grant,  covenants,  and  condition,  to  be  the  mortgage 
of  the  corporation.  It  was  signetl  "George  R.  Sampson,  President 
of  Northampton  Street  Sugar  Refin(>ry."   [Seal.] 

After  a  denunrer  had  been  overruled,  the  respondent  filed  an 
answer  putting  in  i.ssue  the  validity  of  the  mortgage  as  a  mortgage 
of  the  corjioration.  The  case  was  reserved  for  determination  by  the 
full  court  on  agreed  facts,  which  were,  in  part,  as  follows:  — 

For  some  time  prior  to  .January  19,  1865.  the  respondent  had 
been,  and  then  was,  s(>lling  agent  of  the  corporation,  which  owed 
him  about  eighteen  thousand  dollars,  to  secure  the  payment  of 
which  by  the  corporation,  George  R.  Sampson,  who  Wiis  jiresident 
and  a  director,  and  was  also  manager  of  the  maimfacturing  dei)art- 
ment,  executed  and  delivered  to  him  the  instrument  in  (luestion.  At 
that  date  there  were  foui*  directors  (who  were  the  principal  stock- 
holders): Sampson;  his  son;  a  nephew;  and  one  Tappan,  who  was 
in  Europe.  That  was  the  full  number  of  the  board  recjuired  by  the 
by-laws,  which  also  j)rovitled  tliat  "the  board  of  directors  shall 
manage  and  control  the  business,  jjroperty,  and  affairs  of  the  corpo- 
ration." The  records  of  the  corporation  contained  no  express  vote 
of  either  directors  or  stockholders  authorizing  the  execution  and 
delivery  to  the  respondent  of  a  mortgiige  on  the  corporate  property; 
but  the  execution  and  delivery  of  the  instrument  was  known  to  all 
the  directors  except  Tappan,  at  the  time  thereof,  "and  was  approved 
by  them,  provided  their  neglect  to  make  any  objection  to  the  same 
can  be  construed  as  an  approval." 

Wells,  J.  The  remaining  consideration  relates  to  the  authority 
of  Sampson  to  execute  the  mortgage  in  behalf  of  the  corporation. 
It  is  not  necessary  that  the  authority  should  be  given  by  a  formal 
vote.  Such  an  act  by  the  president  and  general  manager  of  the 
business  of  the  corporation,  with  the  knowledge  and  concurrence 
of  the  directors,  or  with  their  subsequent  and  long- continued  acqui- 


SECT.  II.]  SHERMAN    V.  FITCH.  499 

escence,  may  properly  be  regarded  as  the  act  of  the  corporation. 
Authority  in  the  agent  of  a  corporation  may  be  inferred  from  the 
conduct  of  its  officers,  or  from  their  knowledge  and  neglect  to  make 
objection,  as  well  as  in  the  case  of  individuals.  Emmons  v.  Provi- 
dence Hat  Manufacturing  Co.,  12  Mass.  237;  MeUedge  v.  Boston 
Iron  Co.,  5  Cush.  158;  Lester  v.  Webb,  1  Allen,  34.  The  absence  of 
one  of  the  directors  in  Europe  could  not  deprive  the  corporation  of 
the  capacity  to  act  and  bind  itself  by  the  acts  of  the  officers  in  actual 
charge  of  its  affairs. 

If  the  validity  of  the  mortgage  were  to  depend  entirely  upon 
subsequent  ratification,  such  ratification  would  be  effective  not- 
withstanding the  recording  of  the  mortgage.  No  new  record  would 
be  necessary.  The  ratification  relates  back. 

Note.  —  See,  accord.  Union  Pacific  Ry.  Co.  v.  Chicago  Ry.  Co., 
163  U.S.  564,  596. 

See  also  Morisette  v.  Howard,  62  Kan.  463  (knowledge  and  acqui- 
escence by  stockholders). 

The  student  should  consider  whether  it  is  consistent  to  hold  that 
corporate  authorization  may  not  be  predicated  upon  the  assent  of 
the  directors,  given  severally,  that  an  act  shall  be  done  in  behalf  of 
the  corporation ;  and  also  to  hold  that  corporate  ratification  may  be 
predicated  upon  the  fact  that  the  directors  severally  knew  that  an 
act  had  been  done  in  behalf  of  the  corporation,  and  that  they  did 
nothing  to  express  their  disapproval. 


BOOK  IV. 
LIABILITY  FOR  TOUTS  AND  CRIMES. 


CHAPTER  I. 
IN  GENERAL.  1 


BLACKSTONE,  COMMENTARIES. 

Book  I.  pp.  47G,  477. 

There  are  also  certain  privileges  and  di.sabilities  that  attend  an 
aggi-cgate  corporation.  ...  It  can  neither  maintain,  or  l)e  made  tle- 
fendant  to,  an  action  of  battery  or  such  like  personal  injuries:  for 
a  corporation  can  neither  beat  nor  be  beaten,  in  its  body  politic. 
A  corporation  cannot  commit  trea.son,  or  felony,  or  other  crime,  in 
its  corporate  capacity:  though  its  members  may  in  their  distinct 
individual  capacities.  Neither  is  it  capable  of  suffering  a  traitor's 
or  a  felon's  punishment,  for  it  is  not  liable  to  corporal  penalties,  nor 
to  attainder,  forfeiture  or  corruption  of  blood.  It  cannot  be  executor 
or  administrator,  or  perform  any  personal  duties;  for  it  cannot 
take  an  oath  for  the  due  execution  of  the  office.  It  cannot  be  seised 
of  lands  to  the  use  of  another;  for  such  kind  of  confidence  is  foreign 
to  the  end  of  its  institution.  Neither  can  it  be  conunitted  to  prison, 
for  its  existence  being  ideal,  no  man  can  apprehend  or  arrest  it.  .  .  . 
Neither  can  a  corporation  be  excommunicated;  for  it  has  no  soul, 
as  is  gravely  observed  by  Sir  Edward  Coke. 


CHESTNUT  HILL  TURNPIKE  CO.  v.   RUTTER. 

4  S.  &  R.  (Pa.)  6.     1818. 

The  question  presented  was  whether  a  corporation,  authorized 
to  build  a  turnpike,  was  liable  for  damages  done  to  property  of  the 
plaintiff,  by  water  throwTi  upon  the  plaintiff's  land  by  reason  of 
structures  erected  in  building  the  turnpike.  A  judgment  for  the 
plaintiff  was  affirmed. 

*  Torts  committed  in  the  course  of  ultra  vires  undertakings  are  considered  in  the 
Book  on  Unauthorized  Corporate  Action. 


CHAP.  I.]  CHESTNUT    HILL    TURNPIKE    CO.  V.  RUITER.  501 

TiLGHMAN,  C.J.  A  very  refined  argument  is  brought  forward,  to 
prove  that  a  corporation  cannot  be  guilty  of  a  tort.  A  corporation, 
say  the  defendant's  counsel,  is  a  mere  creature  of  law,  and  can  act 
only  as  authorized  by  its  charter.  But  the  charter  does  not  authorize 
it  to  do  wrong,  and  therefore  it  can  do  no  wrong.  The  argument  is 
fallacious  in  its  principles,  and  mischievous  in  its  consequences,  as 
it  tends  to  introduce  actual  wrongs  and  ideal  remedies;  for  a  turn- 
pike company  may  do  gi-eat  injury,  by  means  of  laborers  who  have 
no  property  to  answer  the  damages  recovered  against  them.  It  is 
much  more  reasonable  to  say,  that  when  a  corporation  is  authorized 
by  law  to  make  a  road,  if  any  injury  is  done  in  the  course  of  making 
that  road  by  the  persons  employed  under  its  authority,  it  shall  be 
responsible,  in  the  same  manner  that  an  individual  is  responsible 
for  the  actions  of  his  servants,  touching  his  business.  The  act  of 
the  agent  is  the  act  of  the  principal. 

Note.  —  All  corporate  action  must,  in  the  nature  of  things,  be 
vicarious.  If  a  corporation  appoints  an  agent  to  carry  on  an  intra 
vires  undertaking,  it  is  submitted  that  the  corporation  should  be 
required  to  respond  for  the  act  of  that  agent  in  any  case  where 
the  master,  if  a  human  being,  would  be  required  to  respond. 

The  authorities,  accord,  are  very  numerous. 

See  Baltimore  R.R.  Co.  v.  Fifth  Baptist  Church,  108  U.S.  317 
(maintaining  a  nuisance) ;  Brokaw  v.  New  Jersey  R.R.  Co.,  32  N.J.L. 
328  (assault  and  battery);  Savannah  Electric  Co.  v.  Wheeler,  128 
Ga.  550  (conductor  of  a  street  railway  company  caused  'the  death 
of  A  by  firing  a  pistol);  Waterman  Co.  v.  Modern  Pen  Co.,  235  U.S. 
88,  94  (unfair  competition);  Carr  v.  National  Bank,  167  N.Y.  375 
(false  representations) ;  Peebles  v.  Patapsco  Co.,  77  N.C.  233  (deceit) ; 
Baltimore  Rij.  Co.  v.  Ennalls,  108  Md.  75  (false  imprisonment); 
Petty  V.  Loan  Co.,  70  W.Va.  688  (malicious  prosecution);  Sun  Life 
Assurance  Co.  v.  Bailey,  101  Va.  443  (libel);  Empire  Cream  Co.  v. 
De  Laval  Dairy  Co.,  75  N.J.L.  207  (slander);  Hypes  v.  Southern  Ry. 
Co.,  82  S.C.  315;  Aherthau  Construction  Co.  v.  Cameron,  194  IVIass. 
208  (conspiracy). 

But  as  to  slander,  see  Singer  Mfg.  Co.  v.  Taylor,  150  Ala.  574; 
Waters-Pierce  Oil  Co.  v.  Bridwell,  i03  Ark.  345;  Stewart  Dry  Goods 
Co.  V.  Heuchtker,  148  Ky.  228;  Kane  v.  Boston  Mutual  Co.,  200 
Mass.  265;  Redditt  v.  Mfg.  Co.,  124  N.C.  100. 

As  to  the  exemption  from  liability  of  a  charitable  corporation 
see  Hearns  v.  Waterbury  Hospital,  66  Conn.  98.  Cf.  Hordern  v.  Sal- 
vation Army,  199  N.Y.  233. 

As  to  the  exemption  from  liability  of  a  corporation  which  is  a 
servant  of  the  cro^^^l,  see  Roper  v.  Public  Works  Commissioners, 
[1915]  1  KB.  45. 

As  to  the  limits,  in  the  nature  of  things,  to  vicarious  action,  the 


502  CHESTNUT    HILL    TURNPIKE    CO.  V.  RUTTER.  [ciIAP,   I. 

student  should  compare  Matter  of  Co-Operative  Law  Co.,  198  N.Y. 
479,  with  Willmott  v.  London  Road  Car  Co.,  Ltd.,  [1910]  2  Ch.  525. 

In  Matter  of  Co-Operative  Law  Co.,  the  court  held  that  a  coi-jjora- 
tion  cannot  practice  law,  saying  (p.  483):  "The  practice  of  law 
is  not  a  business  open  to  all,  but  a  personal  right,  limited  to  a  few 
persons  of  good  moral  character,  with  special  qualifications  ascer- 
tained and  certified  after  a  long  course  of  study,  both  general  and 
professional,  and  a  thorough  examination  by  a  state  board  api)ointed 
for  the  purpose.  The  right  to  practice  law  is  in  the  nature  of  a 
franchise  from  the  state  conferred  only  for  merit.  It  cannot  be  as- 
signed or  inherited  but  must  be  earned  by  hard  study  and  good 
conduct.  It  is  attested  by  a  certificate  of  the  Supreme  Court  and 
is  protected  by  registration.  No  one  can  practice  law  unless  he  has 
taken  an  oath  of  office  and  has  become  an  officer  of  the  court,  sul> 
ject  to  its  discipline,  liable  to  punishment  for  contempt  in  violating 
his  duties  as  such,  and  to  suspension  or  removal.  It  is  not  a  lawful 
business  except  for  members  of  the  bar  who  have  complied  with 
all  the  conditions  required  by  statute  and  the  rules  of  the  courts. 
As  these  conditions  cannot  be  performed  by  a  corporation,  it  follows 
that  the  practice  of  law  is  not  a  lawful  business  for  a  corporation 
to  engage  in." 

But  in  Willmott  v.  London  Road  Car  Co.,  Ltd.,  it  was  held  that  a 
limited  company  was  capable  of  being  "a  respectable  and  respon- 
sible person."  A  lessee  covenanted  to  use  the  demised  premises 
for  the  business  of  a  jobmaster  and  livery  stable  keeper,  antl  not  to 
assign  or  underlet  without  the  written  consent  of  the  lessor,  which 
consent  was  not  to  be  withheld  in  respect  of  a  respectable  and  re- 
sponsible person.  Cozens-Hardy,  M.R.,  said  (p.  531):  "Suppose 
the  words  had  simply  been  that  consent  should  not  be  withheld  in 
the  case  of  a  responsible  person,  I  cannot  bring  myself  to  doubt  that 
in  that  case  a  company  which  was  admitted  to  be  responsible  in  the 
sense  of  being  able  to  discharge  all  obligations  in  respect  of  rent  and 
covenants  under  the  lease  would  be  a  responsible  person  within  the 
meaning  of  that  covenant,  and  therefore  a  person  with  respect  to 
whom  consent  could  not  be  refused.  But  then  it  is  said,  and  this 
is  the  point  which  alone  has  given  me  difficulty  in  this  case,  '  Can  it 
be  said  that  a  corporation  can  be  respectable?  Does  not  the  addi- 
tion of  that  word  "  respectal>le  "  compel  you  to  say  that  in  this  case 
the  word  "person"  must  be  fimited  to  an  individual,  a  human  per- 
sonafity,  a  person  who  is  capable  of  acts  moral  or  immoral?'  In 
my  opinion  that  is  not  so.  I  think  the  ordinary  use  of  language 
justifies  you  in  saying  that  a  company  is  a  respectable  company. 
We  all  use  that  language  habitually.  We  talk  of  a  respectable  in- 
surance company,  or  a  respectable  bank,  and  in  that  case  we  refer 
to  the  mode  in  which  the  company  or  the  bank  conducts  its  busi- 
ness. But  I  think  we  are  not  without  assistance  from  authority 


CHAP.  I.]  UNITED    STATES    V.  JOHN    KELSO    CO.  503 

wliich  is  absolutely  binding  on  us.  A  limited  company  or  a  com- 
pany whether  hmited  or  not  can  maintain  an  action  of  libel  for  an 
injury  to  its  reputation  without  proving  any  special  damage.  A 
company  can  have  a  reputation  which  is  not  the  reputation  of  the 
individual  directors,  but  the  reputation  of  the  company,  the  repu- 
tation which  the  company  itself  and  itseh  alone  can  protect  by 
means  of  an  action  of  hbel." 


UNITED   STATES  v.   JOHN   KELSO  CO. 

86  Fed.  304.     1898. 

De  Haven,  District  Judge.  On  October  9,  1897,  there  was  filed 
in  this  court  by  the  United  States  district  attorney  for  this  district, 
an  information  charging  the  defendant,  a  corporation,  with  the  viola- 
tion of  "  An  act  relating  to  the  hmitation  of  the  hours  of  dailj'^  service 
of  laborers  and  mechanics  employed  upon  the  public  works  of  the 
United  States  and  of  the  District  of  Columbia,"  approved  August 
1, 1892  (2  Supp.  Rev.  St.  p.  62).  Upon  the  filing  of  this  mformation, 
the  court,  upon  motion  of  the  district  attorney,  directed  that  a  sum- 
mons in  the  general  form  prescribed  by  §  1390  of  the  Penal  Code 
of  this  State,  be  served  upon  said  corporation,  and  accordingly  on 
said  date  a  summons  was  issued,  directing  the  defendant  to  appear 
before  the  judge  of  said  court  in  the  court  room  of  the  United 
States  District  Court  for  this  district  on  the  21st  day  of  October, 
1897,  to  answer  the  charge  contained  in  the  information.  The 
summons  stated  generally  the  nature  of  the  charge,  and  for  a  more 
complete  statement  of  such  offense  referred  to  the  information  on 
file.  On  the  day  named  in  said  summons  for  its  appearance,  the 
defendant  corporation  appeared  specially  by  its  attorney,  and 
moved  to  quash  the  summons,  and  to  set  aside  the  service  thereof, 
upon  grounds  hereinafter  stated.  Upon  the  argument  of  this  mo- 
tion, it  was  claimed  in  behalf  of  the  defendant:  First,  that  the 
act  of  Congress  above  referred  to  does  not  apply  to  corporations, 
because  the  intention  is  a  necessary  element  of  the  crime  therein 
defined,  and  a  corporation  as  such  is  incapable  of  entertaining  a 
criminal  intention.  ...  It  will  be  seen  that  the  first  objection  goes 
directly  to  the  sufficiency  of  the  information,  and  presents  precisely 
the  same  question  as  would  a  general  demurrer,  attacking  the  infor- 
mation on  the  gi'ound  of  an  alleged  failure  to  charge  the  defendant 
with  the  commission  of  a  public  offense.  This  objection  is  one  which 
would  not  ordinarily  be  considered  upon  a  motion  like  that  now 
before  the  court,  when  the  party  making  the  objection  refuses  to 
acknowledge  the  jurisdiction  of  the  court,  or  to  make  any  other  than 
a  special  appearance  for  the  purpose  of  attacking  its  jurisdiction; 


504  UNITED    STATES    V.  JOHN    KELSO    CO.  [cHAP.  I. 

but,  in  view  of  the  conclusion  which  I  have  reached  upon  the  second 
point  urged  by  the  defendant,  it  becomes  necessary  for  me  to  de- 
termine whether  the  act  of  Congi-ess  above  referred  to  is  apphcable 
to  a  corporation,  and  whether  a  corporation  can  be  guilty  of  the 
crime  of  violating  the  provisions  of  said  act.  §  1  of  that  act  makes 
it  unlawful  for  a  contractor  or  subcontractor  upon  any  of  the  pub- 
lic works  of  the  United  States,  whose  duty  it  shall  be  to  employ, 
direct,  or  control  the  services  of  laborers  or  mechanics  upon  such 
public  works,  "to  require  or  permit  any  such  laborer  or  mechanic 
to  work  more  than  eight  hours  in  any  calendar  day  except  in 
cases  of  extraordinaiy  emergency."  Antl  §  2  of  the  act  provides 
that  "...  any  contractor  whose  duty  it  shall  be  to  employ,  direct, 
or  control  any  laborer  or  mechanic  employed  upon  any  public 
works  of  the  United  States  .  .  .  who  shall  intentionally  violate  any 
provision  of  this  act,  shall  be  deemed  guilty  of  a  misdemeanor,  and 
for  each  and  every  offense  shall  upon  conviction  be  punished  by  a 
fine  not  to  exceed  one  thousand  dollars  or  by  imprisonment  for  not 
more  than  six  months,  or  by  both  such  fine  and  imprisonment,  in 
the  discretion  of  the  court  having  jurisdiction  thereof."  It  will  be 
observed  that  by  the  express  language  of  this  statute  there  must  be 
an  intentional  violation  of  its  provisions,  in  order  to  constitute  the 
offense  which  the  statute  defines.  In  view  of  this  ex-press  declara- 
tion, it  is  claimed  in  behalf  of  defendant  that  the  act  is  not  applic- 
able to  corporations,  because  it  is  not  possible  for  a  corporation  to 
commit  the  crime  described  in  the  statute.  The  argument  advanced 
to  sustain  this  position  is,  in  substance,  this:  That  a  corporation 
is  only  an  artificial  creation,  without  animate  body  or  mind,  and 
therefore,  from  its  very  nature,  incapable  of  entertaining  the  spe- 
cific intention  which,  by  the  statute,  is  made  an  essential  element 
of  the  crime  therein  defined.  The  case  of  State  v.  Great  Works 
M.  cfc  M.  Co.,  20  ]\Ie.  41,  supports  the  proposition  that  a  corpora- 
tion is  not  amenable  to  prosecution  for  a  positive  act  of  misfeasance, 
involving  a  specific  intention  to  do  an  unlawful  act,  and  it  must  be 
conceded  there  are  to  be  found  dicta  in  many  other  cases  to  the 
same  effect.  In  a  general  sense,  it  may  be  said  that  no  crime  can 
be  committed  without  a  joint  operation  of  act  and  intention.  In 
many  crimes,  however,  the  only  intention  required  is  an  intention 
to  do  the  prohibited  act,  —  that  is  to  say,  the  crime  is  complete 
when  the  prohibited  act  has  been  intentionally  done ;  and  the  more 
recent  and  better  considered  cases  hold  that  a  corporation  may  be 
charged  with  an  offense  which  only  involves  this  kind  of  intention, 
and  may  be  properly  convicted  when,  in  its  corporate  capacity, 
and  by  direction  of  those  controlling  its  corporate  action,  it  does 
the  prohibited  act.  In  such  a  case  the  intention  of  its  directors 
that  the  prohibited  act  should  be  done  is  imputed  to  the  corporation 
itself.   State  v.  Morris  E.  R.  Co.,  23  N.J.  Law,  360;  Reg.  v.  Great 


CHAP.  I.]  UNITED    STATES    V.  JOHN  KELSO    CO.  505 

North  of  England  Ry.  Co.,  58  E.C.L.  315;  Com.  v.  Proprietors  of 
New  Bedford  Bridge,  2  Gray,  339.  See,  also,  State  v.  Baltimore  & 
0.  R.  Co.,  15  W.Va.  380.  That  a  corporation  may  be  liable  civilly 
for  that  class  of  torts  in  which  a  specific  malicious  intention  is  an 
essential  element  is  not  disputed  at  this  day.  Thus  an  action  for 
malicious  prosecution  will  lie  against  a  banking  corporation.  Reed 
V.  Bank,  130  Mass.  434;  Goodspeed  v.  Bank,  22  Conn.  530.  An  action 
will  lie  also  against  a  corporation  for  a  malicious  libel.  Railroad  Co. 
V.  Quigleij,  21  How.  202;  Maynard  v.  Insurance  Co.,  34  Cal.  48. 
The  opinion  in  the  latter  case,  dehvered  by  Currey,  C.J.,  is  an 
able  exposition  of  the  law  relating  to  the  liability  of  corporations 
for  malicious  libel,  and  in  the  course  of  which  that  learned  judge, 
in  answer  to  the  contention  that  corporations  are  mere  legal  entities 
existing  only  in  abstract  contemplation,  utterly  incapable  of  malev- 
olence, and  without  power  to  will  good  or  evil,  said:  "The  directors 
are  the  chosen  representatives  of  the  corporation,  and  constitute, 
as  already  observed,  to  all  purposes  of  dealing  with  others,  the  cor- 
poration. What  they  do  within  the  scope  of  the  objects  and  pur- 
poses of  the  corporation,  the  corporation  does.  If  they  do  any  injury 
to  another,  even  though  it  necessarily  involves  in  its  commission  a 
malicious  intent,  the  corporation  must  be  deemed  by  imputation  to 
be  guilty  of  the  wrong,  and  answerable  for  it,  as  an  individual  would 
be  in  such  case." 

The  rules  of  evidence  in  relation  to  the  manner  of  proving  the 
fact  of  intention  are  necessarily  the  same  in  a  criminal  as  in  a  civil 
case,  and  the  same  evidence  which  in  a  civil  case  would  be  sufficient 
to  prove  a  specific  or  malicious  intention  upon  the  part  of  a  corpora- 
tion defendant  would  be  sufficient  to  show  a  like  intention  upon  the 
part  of  a  corporation  charged  criminally  with  the  doing  of  an  act 
prohibited  by  the  law.  Of  course,  there  are  certain  crimes  of  which 
a  corporation  cannot  be  guilty;  as,  for  instance,  bigamy,  perjury, 
rape,  murder,  and  other  offenses,  which  will  readily  suggest  them- 
selves to  the  mind.  Crimes  like  these  just  mentioned  can  only  be 
committed  by  natural  persons,  and  statutes  in  relation  thereto  are 
for  this  reason  never  construed  as  referring  to  corporations;  but 
when  a  statute  in  general  terms  prohibits  the  doing  of  an  act  which 
can  be  performed  by  a  corporation,  and  does  not  expressly  exempt 
corporations  from  its  provisions,  there  is  no  reason  why  such  statute 
should  be  construed  as  not  applying  to  them,  when  the  punishment 
provided  for  its  infraction  is  one  than  can  be  inflicted  upon  a  cor- 
poration, —  as,  for  instance,  a  fine.  In  the  act  of  Congress  now 
under  consideration  it  is  made  an  offense  for  any  contractor  or 
subcontractor  whose  duty  it  shall  be  to  employ,  direct,  or  control 
any  laborer  employed  upon  any  of  the  public  works  of  the  United 
States,  to  require  or  permit  such  laborer  to  work  more  than  eight 
hours  in  any  calendar  day.   A  corporation  may  be  a  contractor  or 


506  STATE    V.  EASTERN    COAL    CO.  [CHAP.   I. 

subcontractor  in  carrying  on  public  works  of  the  United  States,  and 
as  such  it  has  the  power  or  cui)acity  to  violate  this  provision  of  the 
law.  Corporations  are,  therefore,  within  the  letter,  and,  as  it  is  as 
much  against  the  policy  of  the  law  for  a  cor{)oration  to  violate  these 
provisions  as  for  a  natural  person  so  to  ilo,  they  are  also  within 
the  spirit  of  this  statute;  and  no  rea.son  is  perceived  why  a  corjxjra- 
tion  which  does  the  prohibited  act  should  be  exempt  from  the  pun- 
ishment prescribed  therefor.  If  the  law  should  receive  the  con- 
struction contendeil  for  by  the  defendant,  the  result  would  be  that 
a  corporation,  in  contracting  for  the  doing  of  any  pul)lic  work, 
would  be  given  a  privilege  denied  to  a  natural  jxirson.  »Such  jui 
intention  should  not  be  imputed  to  Congress,  unless  its  language 
will  admit  of  no  other  interpretation. 

Note.  —  See,  accord,  Evans  &  Co.,  Ltd.,  v.  London  County  Council, 
(1914)  3  K.B.  315. 

Tlie  legislature  may  impose  upon  a  railway  corporation  the  duty 
of  providing  an  ade(|uate  supply  of  pure  drinking  water  for  its 
passengers,  and  may  |)roviile  that  the  corporation  shall  be  indicted, 
prosecuted,  and  fined  for  a  neglect  of  this  duty  (Southern  Railway 
Co.  v.  State,  125  Ga.  287);  a  railroad  corporation,  constructing  its 
railroad  across  a  highway  without  lawful  authority  is  liable  to  in- 
dictment for  a  nuisance  (Commonwealth  v.  Vermont  H.Ii.  Corporation, 
4  Gray  [Mass.]  22) ;  a  corporation  may  be  found  guilty  of  having 
in  its  possession,  with  intent  to  sell,  impure  milk  (Commonwealth  v. 
GrauMein  &  Co.,  209  Mass.  38);  so,  of  selling  gooils  which  were 
underweight  (State  v.  Creamery  Co.,  83  Kan.  389);  so,  of  mailing 
obscene  matter  (United  States  v.  New  York  Herald  Co.,  159  Fed. 
296);  so,  of  taking  usury  (State  v.  First  National  Bank,  2  S.D.  508); 
so,  of  cruelty  to  animals  (Baltimore  R.R.  Co.  v.  United  States,  220 
U.S.  94);  so,  of  keeping  a  disorderly  house  (State  v.  Pa.s.saic  Coutity 
Society,  54  N.J.L.  200);  so,  of  a  contempt  of  court  (Telegram  News- 
paper Co.  v.  Commonwealth,  172  Mass.  294;  Rex  v.  J.  G.  Ham- 
mond &  Co.,  Ltd.,  [1914]  2  K.B.  800). 


STATE  V.   EASTERN  COAL  CO. 

29  R.I.  254.     1908. 

Dubois,  J.  These  are  indictments  charging  the  defendants  with 
conspiracy.  The  cases  were  heard  together,  and  came  to  this  court 
upon  certifications  from  the  Superior  Court  for  the  counties  of 
Providence  and  Bristol,  under  C.P.A.,  §  478. 

The  material  portions  of  the  four  counts  in  each  of  the  indict- 
ments set  out  that  the  defendants  "unlawfully  and  fraudulently  did 


CHAP.  I.]  STATE    V.  EASTERN    COAL    CO.  507 

combine,  confederate  and  conspire  together  by  divers  unlawful  and 
fraudulent  devices,  contrivances  and  acts,  unlawfully  to  regulate 
and  fix  the  price  at  which  coal  should  be  sold  in  the  said  City  of 
Providence,  to  the  prejudice  of  the  public  and  of  the  consumers  of 
said  coal,  which  said  coal  was  then  and  there  an  article  of  prime 
necessity  to  the  public  and  the  consumers  thereof";  and  that  the 
defendants  "wilfully  devising  and  intending  to  regulate  and  fix  the 
price  of  a  prime  necessity  of  life  in  said  City  of  Providence,  did 
unlawfully  and  maliciously  conspire,  combine,  confederate  and  agi-ee 
together  to  do  an  illegal  act  injurious  to  the  public  trade  in  reference 
to  a  prime  necessity  of  life,  to  wit,  to  then  and  there,  in  restraint  of 
trade  and  to  the  injury  of  the  public  trade,  unlawfully  create,  enter 
into  and  become  members  of  and  parties  to  a  trust,  agreement, 
combination,  confederation  and  understanding,  with  each  other 
wrongfully  and  unlawfully  to  regulate  and  fix  the  price  at  which 
coal  should  be  sold  in  the  City  of  Providence,  which  said  coal  was 
then  and  there  an  article  of  prime  necessity  to  the  public  and  con- 
sumers thereof";  and  also  that  the  defendants  "unlawfully,  fraud- 
ulently, maliciously,  wrongfully  and  wickedly  did  conspire  and  agTee 
together  to  do  an  illegal  act  injurious  to  the  public  trade,  to  wit, 
to  then  and  there  unlawfully  regulate  and  fix  the  price  at  which 
anthracite  coal  should  be  sold  in  the  City  of  Providence,  which  said 
anthracite  coal  was  then  and  there  an  article  of  prime  necessity  to 
the  public  and  the  consumers  thereof,  and  that  the  defendants  did 
unlawfully  and  fraudulently  fix  and  regulate  the  price  of  anthracite 
coal  in  said  City  of  Providence";  and  finally,  that  the  defendants 
"unlawfully,  fraudulently,  maliciously,  wrongfully  and  wickedly 
did  conspire  and  agree  together  to  do  an  illegal  act  injurious  to  the 
public  trade,  to  wit,  to  tlien  and  there  unlawfully  regulate  and  fix 
the  price  at  which  coal  should  be  sold  in  said  City  of  Providence, 
which  said  coal  was  then  and  there  an  article  of  prime  necessity  to 
the  said  public  and  consumers  thereof." 

The  following  are  the  questions  certified  for  our  determination.  .  .  . 

The  eighth  question  raises  the  inquiry:  Has  a  corporation  the 
ability  to  commit  this  kind  of  crime? 

The  defendants,  in  support  of  their  contention  that  it  has  not, 
argue  as  follows:  "We  submit  that,  on  principle  and  authority,  a 
corporation  has  not,  from  its  very  nature,  the  capacity  to  commit 
this  offense.  It  is  too  plain  to  require  argument  that  this  intangible 
entity  cannot  actually  do  any  act  requiring  any  mental,  moral,  or 
spiritual  process,  or  any  act,  as  it  is  more  frequently  put,  requiring 
intent.  In  civil  cases  the  intent  of  the  officer  or  agent  is  sometimes 
imputed  to  the  corporation,  it  is  true,  but  this  doctrine  is  admittedly 
a  pure  legal  fiction,  based  on  grounds  of  public  policy. 

"In  civil  cases  a  party  has  been  injured  and  is  seeking  compen- 
sation.  Balancing  the  equities  of  the  plaintiff  and  the  stockholders 


508  STATE    V.  EASTERN    COAL    CO.  [ciL\P,  I. 

of  the  defendant  corporation,  it  has  seemed  more  just  that  the 
person  injured  should  be  reimbursed  than  that  an  individual  stock- 
holder should  be  absolved  from  liability  forced  upon  him  by  an 
officer  of  the  corporation.  But  in  criminal  cases  the  theory  is  ade- 
quate punishment  for  an  offense  against  the  State.  The  punish- 
ment may  be  out  of  all  proportion  to  the  benefit  gainetl  by  the 
commission  of  the  crime,  and  never  has  any  logical  relation  to  it. 
Oftentimes  no  advantage  is  gained  l)y  the  corporation,  so  that  to 
punish  an  iimocent  stockholder  for  an  offense  really  committed  by 
an  officer  of  the  corporation  can  have  no  basis  in  justice.  Further- 
more, all  the  benefit  of  the  preventive  objects  of  the  punishment 
can  be  accomplished  by  punishing  those  who  ai-e  in  fact  the  wi-ong- 
doers." 

The  following  argument  in  behalf  of  the  affirmative  of  the  ques- 
tion is  presented  by  the  attorney-general  : 

"Conspiracy  is  a  misdemeanor  at  common  law,  and  not  a  felony. 
There  is  nothing  peculiar  connected  with  the  element  of  intent  in- 
volved in  the  crime  of  conspiracy  which  differs  from  the  element  of 
intent  in  other  ordinary  misdemeanors.  If  the  contention  of  the 
defendants  is  held  to  be  good  it  would  seem  to  necessarily  follow 
that  a  corporation  could  not  be  held  guilty  of  any  of  the  ordinary 
crimes  where  the  question  of  intent  was  involved.  In  the  early  his- 
tory of  corporations  they  were  held  to  be  without  power  of  action 
except  through  their  agents,  and  therefore  they  could  not  be  guilty 
of  a  crime  requiring  a  criminal  intent.  It  is  believed  that  this  theory 
has  long  since  been  exploded  both  in  England  and  America.  At 
the  present  time  there  seems  to  be  very  little  doubt  that  corporations 
may  be  guilty  of  most  of  the  common  crimes,  and  that  criminal 
intent  will  be  imputed  to  the  corporation  from  acts  done  by  its 
agents.  It  is  still  held  in  some  jurisdictions  that  corporations  can 
not  be  guilty  of  a  felony,  or  crimes  where  personal  violence  is  in- 
volved, but  that  is  as  far  as  anj^  courts,  it  is  believed,  will  now  go 
in  holding  that  they  cannot  be  guilty  of  crime.  The  tendency  of  the 
present  time  is  to  hold  corporations  responsible,  criminally  as  well 
as  civilly,  for  all  acts  committed  by  their  agents,  having  any  relation 
to  the  business  of  the  corporation. 

"It  has  been  repeatedly  held  that  a  corporation  may  be  guilty  of 
criminal  libel,  of  maintaining  the  various  kinds  of  nuisances,  and 
of  violations  of  the  various  obligations  which  it  owes  to  the  public. 
Some  States  even  hold  them  capable  of  committing  the  crime  of 
assault  and  battery  and  other  similar  crimes. 

"It  is  now  universally  held  that  corporations  may  be  liable  for 
all  kinds  of  torts,  including  conspiracy.  It  is  further  generally  held 
that  a  corporation  is  liable  in  exemplary  or  punitive  damages, 
damages  which  from  their  very  nature  are  only  allowed  as  punish- 
ment for  an  actual  wrong  committed,  which  the  law  presupposes 


CHAP.  I.]  STATE    V.  EASTERN    COAL    CO.  509 

that  the  defendant  had  the  voUtion  or  initiatory  power  to  commit 
or  not  to  commit.  The  intention  of  the  officers  and  agents  of  the 
corporation  is  imputed  to  the  corporation  in  these  civil  cases,  but 
that  is  what  is  done  in  all  other  cases  where  a  corporation  is  held 
criminally  liable.  Corporations  are  held  amenable  for  acts  of  con- 
spiracy in  the  enforcement  of  contracts  in  civil  law.  Why  should 
there  be  a  distinction  in  the  law  with  regard  to  conspiracy  between 
that  which  is  criminal  and  that  which  is  civil?" 

In  support  of  their  argument,  the  defendants  also  quote  2  Mora- 
wetz  on  Corporations,  2d  ed.,  §  732:  "It  is  sometimes  said  that  the 
act  of  an  agent  is,  in  law,  the  act  of  his  principal;  but  it  is  well  to 
bear  in  mind  that  this  is  a  mere  fiction.  A  principal  is  frequently 
liable  for  the  acts  of  his  agents,  as  if  he  had  done  the  acts  himseK; 
the  reason  of  the  liability,  however,  is  not  always  the  same.  Some- 
times the  prmcipal  is  chargeable  by  reason  of  his  previous  consent, 
sometimes  by  reason  of  his  subsequent  adoption  of  the  act  of  the 
agent,  and  sometimes  by  reason  of  a  rule  of  positive  law  estabfished 
upon  the  grounds  of  public  policy,  which  is  the  ultimate  source  of 
all  law.  It  is  for  the  latter  reason  that  a  principal  may  often  be 
held  civilly  responsible  for  the  torts  of  his  agents,  though  in  no 
manner  at  fault  himself;  and  this  is  true,  even  where  the  tort  in- 
volves a  malicious  intention  on  the  part  of  the  wrong-doer. 

"But  public  policy  certainly  does  not  demand  that  a  person  or 
association  should  be  punished  by  the  State,  through  criminal  pro- 
ceedings, on  account  of  a  wrong  committed  by  another.  This  would 
be  contrary  to  the  natural  sense  of  justice.  Hence  it  is  held  that 
where  the  commission  of  a  crime  involves  the  intention  of  the 
offender,  this  intention  cannot  be  imputed  by  means  of  a  fiction; 
actual  intention  is  required. 

"It  follows,  therefore,  that  a  corporation  carmot  be  charged 
criminally  with  a  crime  involving  malice,  or  the  intention  of  the 
offender.  Even  though  the  corporators  themselves  should  unani- 
mously join,  with  mahce  aforethought,  in  committing  a  crime  as 
a  corporate  act,  yet  the  malice  would  be  that  of  the  several  mem- 
bers of  the  company,  and  not  actually  one  malicious  intention  of 
the  whole  company." 

This  doctrine,  however,  is  contrary  to  that  held  in  The  Buffalo 
Lubricating  Oil  Company  v.  The  Standard  Oil  Company  of  New  York, 
106  N. Y.  669  (1887) :  "  We  entertain  no  doubt  that  the  action  against 
a  corporation  may  be  maintained  to^  recover  damages  caused  by 
conspiracy.  Morton  v.  Metropolitan  Life  his.  Co.,  34  Hun.  366; 
affirmed,  103  N.Y.  645;  Reed  v.  Home  Samngs  Bank,  130  ]\Iass.  443; 
Krulevitz  v.  Eastern  R.R.  Co.,  140  Mass.  575;  Western  News  Co.  v. 
Wilmarth,  33  Kan.  510.  If  actions  can  be  maintained  against  corpo- 
rations for  malicious  prosecution,  hbcl,  assault  and  battery  and  other 
torts,  we  can  perceive  no  reason  for  holding  that  actions  may  not 


dIO  people   v.  ROCHESTER    RAILWAY    &    LIGHT    CO.       [cHAP.  I. 

be  maintained  against  them  for  conspiracy.  It  is  well  settled  by 
the  authorities  cited,  that  the  malice  and  wicked  intent  needful  to 
sustain  such  actions  may  be  imputed  to  corporations." 

If  corporations  have  the  capacity  to  engage  in  actionable  con- 
spiracy they  have  the  power  to  criminally  conspire.  We  are  of  the 
opinion  that  the  better  rea.soning  sui)ports  the  contention  that  cor- 
porations can  conspire,  and  therefore  answer  the  eighth  question  in 
the  affirmative. 

Note.  —  In  Telegram  Newspaper  Co.  v.  Commonwealth,  172  Mass. 
294,  the  court  said  (p.  296):  "It  is  said  that  an  intent  cannot  be 
imputed  to  a  corporation  in  criminal  proceedings.  It  has  been  de- 
cided in  this  Commonwealth  that  a  corporation  may  be  liable  civilly 
for  a  libel  or  a  malicious  prosecution.  We  think  that  a  corjwration 
may  l)e  liable  criminally  for  certain  offenses  of  which  a  specific  intent 
may  be  necessar}'.  There  is  no  moie  difficulty  in  imputing  to  a 
corporation  a  specific  intent  in  criminal  proceedings  than  in  civil." 

In  State  v.  Passaic  County  Society,  54  N.J.L.  2G0,  the  court  said 
(p.  2G4):  "The  vtny  basis  of  the  action  for  lilx'l  or  for  malicious 
prosecution  is  the  evil  intent,  the  malice  of  the  iiarty  defendant. 
It  is  difficult,  therefore,  to  see  how  a  corporation  may  be  amenable 
to  civil  suit  for  libel  and  malicious  prosecution  and  private  nuisance, 
and  mulcted  in  exemplary  damages,  and  at  the  same  time  not  be 
indictable  for  hke  offenses,  where  the  injury  falls  upon  the  public." 


PEOPLE  V.   ROCHESTER  RAILWAY  &   LIGHT  CO. 

195  N.Y.  102.     1909. 

HiscocK,  J.  The  respondent  has  been  indicted  for  the  crime  of 
manslaughter  in  the  second  flegree  because,  as  alleged,  it  installed 
certain  apparatus  in  a  residence  in  Rochester  in  such  a  grossly 
improper,  unskillful  and  negligent  manner  that  gases  escaped  and 
caused  the  death  of  an  inmate. 

The  demurrer  to  the  indictment  has  presented  the  question 
whether  a  corporation  may  be  thus  indicted  for  manslaughter, 
imder  §  193  of  the  Penal  Code. 

Before  proceeding  to  the  interpretation  of  this  specific  provision 
we  shall  consider  very  briefly  the  general  question  discussed  by 
the  parties  whether  a  corporation  is  capable  of  committing  in  any 
form  such  a  crime  as  that  of  manslaughter. 

Of  the  correctness  of  the  proposition  urged  in  behalf  of  the  People 
that  it  may  do  so,  subject  to  various  limitations,  we  entertain  no 
doubt. 

Some  of  the  earlier  writers  on  the  common  law  held  that  a  corpo- 


CHAP.  I.]       PEOPLE    V.  ROCHESTER   RAILWAY    &    LIGHT   CO.  511 

ration  could  not  commit  a  crime.  Blackstone  in  his  Commentaries, 
Book  1,  page  47G,  stated:  "A  corporation  cannot  commit  treason 
or  felony,  or  other  crime,  in  its  corporate  capacity :  though  its  mem- 
bers may,  in  their  distinct  individual  capacities."  And  Lord  Chief 
Justice  Holt  (Anonymous,  12  Modern,  559)  is  said  to  have  held 
that  "a  corporation  is  not  indictable,  but  the  particular  members 
of  it  are."  In  modern  times,  however,  the  courts  and  text  writers 
quite  universally  have  reached  an  opposite  conclusion.  A  corpora- 
tion may  be  indicted  either  for  nonfeasance  or  misfeasance,  the 
obvious  and  general  hmitations  upon  this  liability  being  in  the 
former  case  that  it  shall  be  capable  of  doing  the  act  of  non-perform- 
ance of  which  it  is  charged,  and  that  in  the  second  case  the  act  for 
the  performance  of  which  it  is  charged  shall  not  be  one  of  which 
performance  is  clearly  and  totally  beyond  its  authorized  powers. 
Bishop's  New  Criminal  Law,  §§421,  422. 

The  instances  in  which  it  has  been  held  that  a  corporation  might 
be  liable  criminally  simply  because  it  did  or  did  not  perform  some 
act,  and  where  no  element  of  intent  was  supposed  to  be  involved, 
are  so  familiar  that  any  extended  reference  to  them  is  entirely 
unnecesary.  The  latest  authority  in  this  state  upholding  such  lia- 
bility is  found  in  the  case  of  People  v.  Woodbury  Dermatological 
Institute,  192  N.Y.  455,  where  it  was  held  that  a  corporation  might 
be  punished  criminally  for  disobeying  the  statute  providing  that 
"any  person  not  a  registered  physician  who  shall  advertise  to  prac- 
tice medicine,  shall  be  guilty  of  a  misdemeanor."  There  was  in- 
volved no  question  of  intent,  but  simply  disobedience  of  a  statutory 
prohibition  against  doing  certain  acts. 

At  times  courts  have  halted  somewhat  at  the  suggestion  that  a 
corporation  could  commit  a  crime  whereof  the  element  of  intent 
was  an  essential  ingredient.  But  this  doctrine,  again  with  certain 
limitations,  may  now  be  regarded  as  established,  and  there  is  nothing 
therein  which  is  either  unjust  or  illogical. 

Of  course,  it  has  been  fully  recognized  that  there  are  many  crimes 
so  involving  personal,  malicious  intent  and  acts  ultra  vires  that  a  cor- 
poration manifestly  could  not  commit  them.  Whai'ton's  Criminal 
Law  (9th  ed.),  191;  Morawetz  on  Private  Corporations  (2d  ed.), 
§  732  et  seq.  But  a  corporation,  generally  speaking,  is  liable  in  civil 
proceedings  for  the  conduct  of  the  agents  through  whom  it  conducts 
its  business  so  long  as  they  act  within  the  scope  of  their  authority, 
real  or  apparent,  and  it  is  but  a  step  further  in  the  same  direction 
to  hold  that  in  many  instances  it  may  be  charged  criminally  with 
the  unlawful  pm-poses  and  motives  of  such  agents  while  so  acting 
in  its  behalf.  .  .  . 

Within  the  principles  thus  and  elsewhere  declared,  we  have  no 
doubt  that  a  definition  of  certain  forms  of  manslaughter  might  have 
been  formulated  which  would  be  apphcable  to  a  corporation,  and 


512  PEOPLE    V.  ROCHESTER    RAILWAY    &    LIGHT    CO.       [CHAP.  I. 

make  it  criminally  liable  for  various  acts  of  misfeasance  and  non- 
feasance when  resulting  in  death,  and  amongst  which  very  probably 
might  be  included  conduct  in  its  substance  similar  to  that  here 
charged  against  the  respondent.  But  this  being  so,  the  question 
still  confronts  us  whether  corporations  have  been  so  made  liable 
for  the  crime  of  manslaughter  as  now  expressly  defined  in  the  section 
alone  relied  on  by  the  People,  and  this  question  we  think  must  be 
decisively  answered  in  the  negative. 

§  179  of  the  Penal  Code  defines  homicide  as  "the  killing  of  one 
human  being  by  the  act,  procurement  or  omission  of  another."  We 
think  that  this  final  word  "another"  naturally  and  clearly  means 
a  second  or  additional  member  of  the  same  kind  or  class  alone  re- 
ferred to  by  the  preceding  words,  namely,  another  human  being, 
and  that  we  should  not  interpret  it  as  appellant  asks  us  to,  as  mean- 
ing another  "person,"  which  might  then  include  corporations.  It 
seems  to  us  that  it  would  be  a  violent  strain  upon  a  criminal  statute 
to  construe  this  word  as  meaning  an  agency  of  some  kind  other 
than  that  alrc^ady  mentioned  or  referretl  to,  and  as  bridging  over  a 
radical  transition  fi-om  human  Ix'ings  to  corporations.  Therefore  we 
construe  this  definition  of  homicide  as  meaning  the  killing  of  one 
human  being  by  another  human  being. 

§  180  says  that  "Homicide  is  either:  1.  Murder;  2.  Manslaughter," 
etc.  §  193  says  that:  "Such  homicide,"  that  is,  "the  killing  of  one 
human  being  ...  by  another,"  is  manslaughter  in  the  second  de- 
gree when  committed  "without  a  design  to  effect  death.  ...  3.  By 
any  act,  procurement  or  culpable  negligence  of  any  person,  which 
.  .  .  does  not  constitute  the  crime  of  murder  in  the  first  or  second 
degree,  nor  manslaughter  in  the  first  degree."  Thus  we  have  the 
underlying  and  fundamental  definition  of  homicide  as  the  killing  of 
one  human  being  by  another  human  being,  and  out  of  this  basic  act 
thus  defined  antl  according  to  the  circumstances  which  accompany 
it  are  established  crimes  of  varying  degree  including  that  of  man- 
slaughter for  which  the  respondent  has  been  indicted.  In  the  defi- 
nition of  these  crimes  as  contained  in  the  sections  under  considera- 
tion (§§  183-193)  we  do  not  discover  any  evidence  of  an  intent  on 
the  part  of  the  legislature  to  abandon  the  limitiation  of  its  enact- 
ments to  human  beings  or  to  include  a  coi-poration  as  a  criminal. 
Many  of  these  sections  could  not  by  any  possibility  apply  to  a  cor- 
poration and  in  our  opinion  subdivision  3  of  §  193  relating  to  man- 
slaughter manifestly  does  not.  It  is  true  that  the  term  "person" 
used  therein  may  at  times  include  corporations  but  that  is  not  the 
case  here.  The  surrounding  and  related  sections  are  not  calculated 
to  induce  the  behef  that  it  has  any  such  meaning,  and  the  classifi- 
cation of  manslaughter  as  a  form  of  hoinicide  and  the  definition  of 
homicide  already  quoted  forbid  it. 


CHAP.  I.]       PEOPLE    V.  ROCHESTER    RAILWAY    &    LIGHT    CO.  513 

The  judgment  should  be  affirmed. 

CuLLEN,  Ch.J.,  Gray,  Edward  T.  Bartlett,  Werner,  Willard 
Bartlett  and  Chase,  JJ.,  concur. 

Judgment  affirmed. 

Note.  —  A  raih-oad  corporation  may  be  indicted  and  fined  in 
case  of  a  loss  of  life  by  reason  of  the  negligence  of  the  members,  or 
their  servants.  Boston  R.R.  v.  State,  32  N.H.  215. 

For  other  cases,  in  addition  to  the  principal  case,  where  the  court 
concluded  that  the  legislature  had  not  intended  that  corporations 
should  come  within  the  scope  of  a  statute  defining  an  offense,  see 
United  States  v.  Braun,  158  Fed.  456;  Pharmaceutical  Society  v. 
London  Ass^n,  Ltd.,  L.R.  5  App.  Cas.  857;  Hauke  v.  Hulton  &  Co., 
Ltd.,  [1909]  2  K.B.  93  (offender  to  be  deemed  "a  rogue  and  vaga- 
bond"). 


514     OFFENSES   UNDER   THE    SHERMAN    ANTI-TRUST    ACT.     [CHAP.  II. 


CHAPTER  II. 
OFFENSES   UNDER  THE  SHERMAN  ANTI-TRUST  ACT. 


26  U.S.  STAT.  200.    JULY  2,  1890. 

An  Act  to  protect  trade  and  commerce  against  unlawful  restraints 
and  monopolies. 

Be  it  enacted  by  the  Senate  and  House  of  Representatives  of  the 
United  States  of  America  in  Congress  assembled,  — 

Sec.  1.  Every  contract ,  combination  in  the  form  of  trust  or  other- 
wise, or  conspiracy,  in  restraint  of  trade  or  conmierce  among  the 
several  States,  or  with  foreign  nations,  is  hereby  declared  to  be 
illegal.  Every  person  who  shall  make  any  such  contract  or  engage 
in  any  such  combination  or  conspiracy,  shall  be  deemed  guilty  of  a 
misdemeanor,  and,  on  conviction  thereof,  shall  be  punished  by  fine 
not  exceeding  five  thousand  dollars,  or  by  imjirisonment  not  ex- 
ceeding one  year,  or  by  both  said  punishments,  in  the  discretion  of 
the  court. 

Sec.  2.  Every  person  w  ho  shall  monopolize,  or  attempt  to  monop- 
olize, or  combine  or  conspire  with  any  other  person  or  persons,  to 
monopolize  any  part  of  the  trade  or  commerce  among  the  several 
States,  or  with  foreign  nations,  shall  be  deemed  guilty  of  a  misde- 
meanor, and,  on  conviction  there6f,  shall  be  punished  by  fine  not 
exceeding  five  thousand  dollars,  or  by  imprisonment  not  exceeding 
one  year,  or  by  both  said  punishments,  in  the  discretion  of  the  court. 

Sec.  3.  Every  contract,  combmation  in  form  of  trust  or  otherwise, 
or  conspiracy,  in  restraint  of  trade  or  commerce  in  any  Territory  of 
the  United  States  or  of  the  District  of  Columbia,  or  in  restraint  of 
trade  or  commerce  between  any  such  Territory  and  another,  or  be- 
tween any  such  Territory  or  Territories  and  any  State  or  States  or 
the  District  of  Columbia,  or  with  foreign  nations,  or  between  the 
District  of  Columbia  and  any  State  or  States  or  foreign  nations,  is 
hereby  declared  illegal.  Every  person  who  shall  make  any  such 
contract  or  engage  in  any  such  combination  or  conspiracy,  shall  be 
deemed  guilty  of  a  misdemeanor,  and,  on  conviction  thereof,  shall 
be  punished  by  fine  not  exceeding  five  thousand  dollars,  or  by  im- 
prisonment not  exceeding  one  year,  or  by  both  said  punishments, 
in  the  discretion  of  the  court. 

Sec.  4.  The  several  circuit  courts  of  the  United  States  are  hereby 
invested  with  jurisdiction  to  prevent  and  restrain  violations  of  this 


CHAP.   II.]     OFFENSES    UNDER    THE    SHERMAN    ANTI-TRUST    ACT.      515 

act;  and  it  shall  be  the  duty  of  the  several  district  attorneys  of  the 
United  States,  in  their  respective  districts,  under  the  direction  of 
the  Attorney-General,  to  institute  proceedings  in  equity  to  prevent 
and  restrain  such  violations.  Such  proceedings  may  be  by  way  of 
petition  setting  forth  the  case  and  praying  that  such  violation  shall 
be  enjoined  or  otherwise  prohibited.  When  the  parties  complained 
of  shall  have  been  duly  notified  of  such  petition  the  court  shall  pro- 
ceed, as  soon  as  may  be,  to  the  hearing  and  determination  of  the 
case;  and  pending  such  petition  and  before  final  decree,  the  court  may 
at  any  time  make  such  temporary  restraining  order  or  prohibition 
as  shall  be  deemed  just  in  the  premises. 

Sec.  5.  Whenever  it  shall  appear  to  the  court  before  which  any 
proceedings  under  section  four  of  this  act  may  be  pending,  that  the 
ends  of  justice  require  that  other  parties  should  be  brought  before 
the  court,  the  court  may  cause  them  to  be  summoned,  whether  they 
reside  in  the  district  in  which  the  court  is  held  or  not;  and  subpoenas 
to  that  end  may  be  served  in  any  district  by  the  marshal  thereof. 

Sec.  6.  Any  property  owned  under  any  contract  or  by  any  combi- 
nation, or  pursuant  to  any  conspiracy  (and  being  the  subject  thereof) 
mentioned  in  section  one  of  this  act,  and  being  in  the  course  of  trans- 
portation from  one  State  to  another,  or  to  a  foreign  country,  shall  be 
forfeited  to  the  United  States,  and  may  be  seized  and  condemned  by 
like  proceedings  as  those  provided  by  law  for  the  forfeiture,  seizure, 
and  condemnation  of  property  imported  into  the  United  States  con- 
trary to  law. 

Sec.  7.  Any  person  who  shall  be  injured  in  his  business  or  prop- 
erty by  any  other  person  or  corporation  by  reason  of  anj^hing  for- 
bidden or  declared  to  be  unlawful  by  this  act,  may  sue  therefor  in  any 
circuit  court  of  the  United  States  in  the  district  in  which  the  de- 
fendant resides  or  is  found,  without  respect  to  the  amount  in  con- 
troversy, and  shall  recover  threefold  the  damages  by  him  sustained, 
and  the  costs  of  suit,  including  a  reasonable  attorney's  fee. 

Sec.  8.  That  the  word  "person,"  or  "persons,"  wherever  used  in 
this  act  shall  be  deemed  to  include  corporations  and  associations 
existing  under  or  authorized  by  the  laws  of  either  the  United  States, 
the  laws  of  any  of  the  Territories,  the  laws  of  any  State,  or  the 
laws  of  any  foreign  country. 

Note.  —  See  also  the  Clayton  Anti-Trust  Act,  38  U.S.  Stat.  730 
(Oct.  15,  1914). 


516  UNITED    STATES    V.  E.  C.  KNIGHT    CO.  [cHAP.   II. 

UNITED  STATES  v.   E.  C.  KNIGHT  CO. 

156  U.S.  1.     1894. 

Mr.  Chief  Justice  Fuller  delivered  the  opinion  of  the  court. 

The  material  facts  proved  are  that  the  American  Sugar  Refining 
Co.,  one  of  the  defendants,  is  incorporated  under  the  laws  of  New 
Jersey,  and  has  authority  to  purchase,  refine,  and  sell  sugar;  that 
the  Franklin  Sugar  Refinery,  the  E.  C.  Knight  Co.,  the  Spreckels 
Sugar  Refinery,  and  the  Delaware  Sugar  House,  were  incorporated 
under  the  laws  of  Pennsylvania,  and  authorized  to  purchase,  refine, 
and  sell  sugar;  that  the  four  latter  Pennsj'lvania  companies  were 
located  in  Philadelphia,  and  prior  to  March,  1892,  produced  about 
thirty-tluee  per  cent  of  the  total  amount  of  sugar  refined  in  the 
United  States,  and  were  in  active  competition  with  the  American 
Sugar  Refining  Co.,  and  with  each  other,  selling  their  product  wher- 
ever demand  was  found  for  it  throughout  the  United  States;  that 
prior  to  IMarch,  1892,  the  American  Sugar  Refining  Co.  had  ob- 
tained control  of  all  refineries  in  the  United  States,  excepting  the 
four  located  in  Philadelphia,  and  that  of  the  Revere  Co.  in  Boston, 
the  latter  producing  about  two  per  cent  of  the  amount  refined  in 
this  country;  that  in  March,  1892,  the  American  Sugar  Refining 
Co.  entered  into  contracts  (on  different  dates)  with  the  stockholders 
of  each  of  the  Philadelphia  corporations  named,  whereby  it  pur- 
chased their  stock,  paying  therefor  by  transfers  of  stock  in  its  com- 
pany; that  the  American  Sugar  Refining  Co.  thus  obtained  possession 
of  the  Philadelphia  refineries  and  their  business;  that  each  of  the 
purchases  was  made  subject  to  the  American  Sugar  Refining  Co. 
obtaining  authority  to  increase  its  stock  $25,000,000;  that  this 
assent  was  subsequently  obtained  and  the  increase  made;  that  there 
was  no  understanding  or  concert  action  between  the  stocldiolders  of 
the  several  Philadelphia  companies  respecting  the  sales,  but  that 
those  of  each  company  acted  independently  of  those  of  the  others, 
and  in  ignorance  of  what  was  being  done  by  such  others;  that  the 
stockholders  of  each  company  acted  in  concert  with  each  other, 
understanding  and  intending  that  all  the  stock  and  property  of  the 
company  should  be  sold;  that  the  contract  of  sale  in  each  instance 
left  the  sellers  free  to  establish  other  refineries  and  continue  the 
business  if  they  should  see  fit  to  do  so,  and  contained  no  provision 
respecting  trade  or  commerce  in  sugar,  and  that  no  arrangement 
or  provision  on  this  subject  has  been  made  since;  that  since  the 
purchase  the  Delaware  Sugar  House  Refinery  has  been  operated  in 
conjunction  with  the  Spreckels  Refinery,  and  the  E.  C.  Knight 
Refinery  in  connection  with  the  Franklin,  this  combination  being 
made  apparently  for  reasons  of  economy  in  conducting  the  business; 
that  the  amount  of  sugar  refined  in  Philadelphia  has  been  increased 


CHAP.  II.]  UNITED    STATES    V.  E.  C.  KNIGHT    CO.  517 

since  the  purchases ;  that  the  price  has  been  sHghtly  advanced  since 
that  event,  but  is  still  lower  than  it  had  been  for  some  years  before, 
and  up  to  within  a  few  months  of  the  sales;  that  about  ten  per  cent 
of  the  sugar  refined  and  sold  in  the  United  States  is  refined  in  other 
refineries  than  those  controlled  by  the  American  Sugar  Refining 
Co. ;  that  some  additional  sugar  is  produced  in  Louisiana  and  some 
is  brought  from  Europe,  but  the  amount  is  not  large  in  either  in- 
stance. 

The  object  in  purchasing  the  Philadelphia  refineries  was  to  obtain 
a  greater  influence  or  more  perfect  control  over  the  business  of  re- 
fining and  selling  sugar  in  this  country. 

The  Circuit  Court  held  that  the  facts  did  not  show  a  contract, 
combination,  or  conspiracy  to  restrain  or  monopolize  trade  or  com- 
merce "among  the  several  States  or  with  foreign  nations,"  and  dis- 
missed the  bill.  60  Fed.  Rep.  306.  The  cause  was  taken  to  the 
Circuit  Court  of  Appeals  for  the  Third  Circuit,  and  the  decree 
affirmed.   60  Fed.  Rep.  934.  This  appeal  was  then  prosecuted. 

The  fundamental  question  is,  whether  conceding  that  the  existence 
of  a  monopoly  in  manufacture  is  established  by  the  evidence,  that 
monopol}^  can  be  directly  suppressed  under  the  act  of  Congress  in 
the  mode  attempted  by  this  bill. 

The  argument  is  that  the  power  to  control  the  manufacture  of 
refined  sugar  is  a  monopoly  over  a  necessary  of  life,  to  the  enjoy- 
ment of  which  by  a  large  part  of  the  population  of  the  United  States 
interstate  commerce  is  indispensable,  and  that,  therefore,  the  general 
government  in  the  exercise  of  the  power  to  regulate  commerce  may 
repress  such  monopoly  directly  and  set  aside  the  instruments  which 
have  created  it.  But  this  argument  camiot  be  confined  to  necessaries 
of  life  merely,  and  must  include  all  articles  of  general  consumption. 
Doubtless  the  power  to  control  the  manufacture  of  a  given  thing 
involves  in  a  certain  sense  the  control  of  its  disposition,  but  this  is 
a  secondary  and  not  the  primary  sense;  and  although  the  exercise 
of  that  power  may  result  in  bringing  the  operation  of  commerce  into 
play,  it  does  not  control  it,  and  affects  it  only  incidentally  and  indi- 
rectly. Commerce  succeeds  to  manufacture,  and  is  not  a  part  of  it. 
The  power  to  regulate  commerce  is  the  power  to  prescribe  the  rule 
by  which  commerce  shall  be  governed,  and  is  a  power  independent 
of  the  power  to  suppress  monopoh'.  But  it  may  operate  in  repres- 
sion of  monopoly  whenever  that  comes  within  the  rules  bj'  which 
commerce  is  governed  or  w^henever  the  transaction  is  itself  a  monop- 
oly of  commerce. 

It  will  be  perceived  how  far-reaching  the  proposition  is  that  the 
power  of  dealing  with  a  monopoly  directly  may  be  exercised  by  the 
general  government  whenever  interstate  or  international  commerce 
may  be  ultimately  affected.  The  regulation  of  commerce  applies  to 
the  subject  of  commerce  and  not  to  matters  of  internal  police. 


518  UNITED    STATES    V.  E.  C.   KNIGHT    CO.  [CH-\P.  II. 

Contracts  to  buy,  sell,  or  exchange  goods  to  be  transported  among 
the  several  States,  the  transportation  and  its  instrumentalities,  and 
articles  bought,  sold,  or  exdumged  for  the  purposes  of  such  transit 
among  the  States,  or  put  in  the  way  of  transit,  may  be  regulated, 
but  this  is  because  they  form  part  of  interstate  trade  or  comincrco. 
The  fact  that  an  article  is  manufactured  for  export  to  another  State 
does  not  of  itself  make  it  an  article  of  interstate  commerce,  and  the 
intent  of  the  manufacturer  does  not  determine  the  time  when  the 
article  or  product  passes  from  the  control  of  the  State  and  belongs 
to  commerce.  This  was  so  ruled  in  Coe  v.  Errol,  116  U.S.  517,  525, 
in  which  the  question  before  the  court  was  whether  certain  logs  cut 
at  a  place  in  New  Hampshire  and  hauled  to  a  river  town  for  the 
purpose  of  transportation  to  the  State  of  Maine  were  liable  to  be 
taxed  like  other  property  in  the  State  of  New  Hampshire.  Mr. 
Justice  Bradley,  delivering  the  opinion  of  the  court,  said:  "Docs 
the  owner's  state  of  mind  in  relation  to  the  goods,  that  is,  his  intent 
to  export  them,  and  his  partial  preparation  to  do  so,  exempt  them 
from  taxation?  This  is  the  precise  question  for  solution.  .  .  .  There 
must  be  a  point  of  time  when  thoy  cease  to  be  governed  exclusively 
by  the  domestic  law  and  begin  to  l)e  governed  and  protected  l)y  the 
national  law  of  commercial  regulation,  and  that  moment  seems  to 
us  to  be  a  legitimate  one  for  this  purpose,  in  which  they  commence 
their  final  movement  from  the  State  of  their  origin  to  that  of  their 
destination." 

Contracts,  combinations,  or  conspiracies  to  control  domestic  enter- 
prise in  manufacture,  agriculture,  mining,  production  in  all  its  forms, 
or  to  raise  or  lower  prices  or  wages,  might  unquestionably  tend  to 
restrain  external  as  well  as  domestic  trade,  but  the  restraint  would 
be  an  indirect  result,  however  inevitable  and  whatever  its  extent, 
and  such  result  would  not  necessarily  determine  the  object  of  the 
contract,  combination,  or  conspiracy. 

Again,  all  the  authorities  agree  that  in  order  to  vitiate  a  contract 
or  combination  it  is  not  essential  that  its  result  should  be  a  com- 
plete monopoly;  it  is  sufficient  if  it  really  tends  to  that  end  and  to 
deprive  the  public  of  the  advantages  which  flow  from  free  competi- 
tion. SHght  reflection  will  show  that  if  the  national  power  extends 
to  all  contracts  and  combinations  in  manufacture,  agriculture,  min- 
ing, and  other  productive  industries,  whose  ultimate  result  ma}^  effect 
external  commerce,  comparatively  little  of  business  operations  and 
affairs  \tould  be  left  for  state  control. 

It  was  in  the  light  of  well-settled  principles  that  the  act  of  July  2, 
1890,  was  framed.  Congress  did  not  attempt  thereby  to  assert  the 
power  to  deal  with  monopoly  directly  as  such;  or  to  limit  and  restrict 
"  the  rights  of  corporations  created  by  the  States  or  the  citizens  of  the 
States  in  the  acquisition,  control,  or  disposition  of  property;  or  to 
regulate  or  prescribe  the  price  or  prices  at  which  such  property  or 


CHAP.  II.]  •    UNITED    STATES    V.  E.  C.  KNIGHT    CO.  519 

the  products  thereof  should  be  sold;  or  to  make  criminal  the  acts 
of  persons  in  the  acquisition  and  control  of  property  which  the  States 
of  their  residence  or  creation  sanctioned  or  permitted.  Aside  from 
the  provisions  applicable  where  Congress  might  exercise  municipal 
power,  what  the  law  struck  at  was  combinations,  contracts,  and  con- 
spiracies to  monopolize  trade  and  commerce  among  the  several 
States  or  with  foreign  nations;  but  the  contracts  and  acts  of  the 
defendants  related  exclusive!}'  to  the  acquisition  of  the  Philadelphia 
refineries  and  the  business  of  sugar  refining  in  Pennsylvania,  and 
bore  no  direct  relation  to  commerce  between  the  States  or  with 
foreign  nations.  The  object  was  manifestly  private  gain  in  the  man- 
ufacture of  the  commodity,  but  not  through  the  control  of  interstate 
or  foreign  commerce.  It  is  true  that  the  bill  alleged  that  the  prod- 
ucts of  these  refineries  were  sold  and  distributed  among  the  several 
States,  and  that  all  the  companies  were  engaged  in  trade  or  com- 
merce with  the  several  States  and  with  foreign  nations;  but  this 
was  no  more  than  to  say  that  trade  and  commerce  served  manufac- 
ture to  fulfill  its  function.  Sugar  was  refined  for  sale,  and  sales  were 
probably  made  at  Philadelphia  for  consumption,  and  undoubtedly 
for  resale  by  the  first 'purchasers  throughout  Pennsylvania  and  other 
States,  and  refined  sugar  was  also  forwarded  by  the  companies  to 
other  States  for  sale.  Nevertheless  it  does  not  follow  that  an  attempt 
to  monopolize,  or  the  actual  monopoly  of,  the  manufacture  was  an 
attempt,  whether  executor}'  or  consummated,  to  monopolize  com- 
merce, even  though,  in  order  to  dispose  of  the  product,  the  instru- 
mentality of  commerce  was  necessarily  invoked.  There  was  nothing 
in  the  proofs  to  indicate  anj'  intention  to  put  a  restraint  upon  trade 
or  commerce,  and  the  fact,  as  we  have  seen,  that  trade  or  com- 
merce might  be  indirectly  affected  was  not  enough  to  entitle  com- 
plainants to  a  decree.  The  subject-matter  of  the  sale  was  shares  of 
manufacturing  stock,  and  the  relief  sought  was  the  surrender  of 
property  which  had  already  passed  and  the  suppression  of  the  alleged 
monopoly  in  manufacture  by  the  restoration  of  the  status  quo  before 
the  transfers;  yet  the  act  of  Congress  only  authorized  the  Circuit 
Courts  to  proceed  by  way  of  preventing  and  restraining  violations  of 
the  act  in  respect  to  contracts,  combinations,  or  conspiracies  in  re- 
straint of  interstate  or  international  trade  or  commerce. 

The  Circuit  Court  declined,  upon  the  pleadings  and  proofs,  to 
grant  the  relief  prayed,  and  dismissed  the  bill,  and  we  are  of  opinion 
that  the  Circuit  Court  of  Appeals  did  not  err  in  affirming  that 
decree. 

Decree  affirmed. 

Mr.  Justice  Harlan  dissented. 

Note.  —  For  other  cases  in  which  the  court  held  that  the  acts 
of  the  defendants  did  not  offend  against  the  Anti-Trust  Act  because 


520  UNITED    STATES   V.  FREIGHT    ASSOCIATION.  [cHAP.  II. 

the  effect,  if  any,  of  their  acts  upon  interstate  commerce  was  indirect 
and  incidental  see  Hopkins  v.  United  States,  171  U.S.  578;  Anderson 
V.  United  States,  171  U.S.  604;  Field  v.  Barber  Asphalt  Co.,  194  U.S. 
618;  Cincinnati  Co.  v.  Bay,  200  U.S.  179.  See  also  Board  of  Trade 
V.  Christie  Grain  &  Stock  Co.,  198  U.S.  230,  252. 

American  Banana  Co.  v.  United  Fruit  Co.,  213  U.S.  347.  The 
prohibitions  of  the  Anti-Trust  Act  do  not  extend  to  acts  done  in 
foreign  countries  even  though  done  by  citizens  of  the  United  States 
and  injuriously  affectmg  other  citizens  of  the  United  States. 


UNITED  STATES  v.   FREIGHT  ASSOCIATION. 

166  U.S.  290.     1897. 

Certain  competing  railroads  entered  into  an  agreement  "for  the 
purpose  of  mutual  protection  l)y  establishing  and  maintaining 
reasonable  rates,  rules  and  regulations  on  all  freight  traffic,  both 
through  and  local."  A  committee  was  created  to  adopt  rates,  which 
were  to  be  the  governing  rates  for  all  the  railroads.  Charging  a  rate 
not  so  adopted  subjected  the  railroad  making  the  charge  to  a  pen- 
alty. 

The  Government  asked  that,  under  the  provisions  of  the  Anti- 
Trust  Act,  the  defendants  be  enjoinetl  from  continuing  to  act  pur- 
suant to  the  terms  of  such  agreement. 

Mr.  Justice  Peckham.  [The  court  held  that  the  Anti-Trust  Act 
applied  to  common  carriers  by  railroad.] 

Second.  The  next  question  to  be  discussed  is  as  to  what  is  the 
true  construction  of  the  statute,  assuming  that  it  applies  to  common 
carriers  by  railroad.  What  is  the  meaning  of  the  language  as  used 
in  the  statute,  that  "every  contract,  combination  in  the  form  of 
trust  or  otherwise,  or  conspiracy  in  restraint  of  trade  or  commerce 
among  the  several  States  or  with  foreign  nations,  is  hereby  declared' 
to  be  illegal"?  Is  it  confined  to  a  contract  or  combination  which  is 
only  in  unreasonable  restraint  of  trade  or  commerce,  or  does  it 
include  what  the  language  of  the  act  plainly  and  in  terms  covers, 
all  contracts  of  that  nature? 

We  are  asked  to  regard  the  title  of  this  act  as  indicative  of  its 
purpose  to  include  only  those  contracts  which  were  unlawful  at 
common  law,  but  which  require  the  sanction  of  a  Federal  statute  in 
order  to  be  dealt  with  in  a  Federal  court.  It  is  said  that  when  terms 
which  are  known  to  the  common  law  are  used  in  a  Federal  statute 
those  terms  are  to  be  given  the  same  meaning  that  they  received 
at  common  law,  and  that  when  the  language  of  the  title  is  "to  pro- 
tect trade  and  commerce  against  unlawful  restraints  and  monopo- 
lies," it  means  those  restraints  and  monopohes  which  the  common 


CHAP.  II.]  UNITED    STATES    V.  FREIGHT    ASSOCIATION.  521 

law  regarded  as  unlawful,  and  which  were  to  be  prohibited  by  the 
Federal  statute.  We  are  of  opinion  that  the  language  used  in  the 
title  refers  to  and  includes  and  was  intended  to  include  those  re- 
straints and  monopolies  which  are  made  unlawful  in  the  body  of  the 
statute.  It  is  to  the  statute  itself  that  resort  must  be  had  to  learn 
the  meaning  thereof,  though  a  resort  to  the  title  here  creates  no 
doubt  about  the  meaning  of  and  does  not  alter  the  plain  language 
contained  in  its  text. 

It  is  now  with  much  amplification  of  argument  urged  that  the 
statute,  in  declaring  illegal  every  combination  in  the  form  of  trust 
or  otherwise,  or  conspiracy  in  restraint  of  trade  or  commerce,  does 
not  mean  what  the  language  used  therein  plainly  imports,  but  that 
it  only  means  to  declare  illegal  any  such  contract  which  is  in  un- 
reasonable  restraint  of  trade,  while  leaving  all  others  unaffected  by 
the  provisions  of  the  act;  that  the  common  law  meaning  of  the  term 
"contract  in  restraint  of  trade"  includes  only  such  contracts  as  are 
in  unreasonable  restraint  of  trade,  and  when  that  term  is  used  in  the 
Federal  statute  it  is  not  intended  to  include  all  contracts  in  restraint 
of  trade,  but  only  those  which  are  in  unreasonable  restraint  thereof. 

The  term  is  not  of  such  limited  signification.  Contracts  in  re- 
straint of  trade  have  been  known  and  spoken  of  for  hundreds  of 
years  both  in  England  and  in  this  country,  and  the  term  includes 
all  kinds  of  those  contracts  which  in  fact  restrain  or  may  restrain 
trade.  Some  of  such  contracts  have  been  held  void  and  unenforce- 
able in  the  courts  by  reason  of  their  restraint  being  unreasonable, 
while  others  have  been  held  vahd  because  they  were  not  of  that 
nature.  A  contract  may  be  in  restraint  of  trade  and  still  be  valid  at 
common  law.  Although  valid,  it  is  nevertheless  a  contract  in  re- 
straint of  trade,  and  would  be  so  described  either  at  common  law 
or  elsewhere.  By  the  simple  use  of  the  term  "contract  in  restraint  of 
trade,"  all  contracts  of  that  nature,  whether  valid  or  otherwise, 
would  be  included,  and  not  alone  that  kind  of  contract  which  was 
invalid  and  unenforceable  as  being  in  unreasonable  restraint  of 
trade.  When,  therefore,  the  body  of  an  act  pronounces  as  illegal 
every  contract  or  combination  in  restraint  of  trade  or  commerce 
among  the  several  States,  etc.,  the  plain  and  ordinary  meaning  of 
such  language  is  not  limited  to  that  kind  of  contract  alone  which  is 
in  unreasonable  restraint  of  trade,  but  all  contracts  are  included  in 
such  language,  and  no  exception  or  limitation  can  be  added  without 
placing  in  the  act  that  which  has  been  omitted  by  Congress. 

Proceeding,  however,  upon  the  theory  that  the  statute  did  not 
mean  what  its  plain  language  imported,  and  that  it  intended  in  its 
prohibition  to  denounce  as  illegal  only  those  contracts  which  were 
in  unreasonable  restraint  of  trade,  the  courts  below  have  made  an 
exhaustive  investigation  as  to  the  general  rules  which  guide  courts 
in  declaring  contracts  to  be  void  as  being  in  restraint  of  trade,  and 


522  UNITED    STATES   V.  FREIGHT    ASSOCIATION.         [CHAP.  II. 

therefore  against  the  pubhc  policy  of  the  country.  In  the  course  of 
their  discussion  of  that  subject  they  have  shown  that  there  has  been 
a  gradual  though  great  alteration  in  the  extent  of  the  liberty  granted 
to  the  vendor  of  property  in  agreeing,  as  part  consideration  for  his 
sale,  not  to  enter  into  the  same  kind  of  business  for  a  certain  time 
or  within  a  certain  territory.  So  long  as  the  sale  was  the  bona  fide 
consideration  for  the  promise  and  was  not  made  a  mere  cjxcuse  for 
an  invasion  of  the  rule  itself,  the  later  authorities,  both  in  England 
and  in  this  country,  exhibit  a  strong  tendency  towards  enabling  the 
parties  to  make  such  a  contract  in  relation  to  the  sale  of  property, 
including  an  agreement  not  to  enter  into  the  same  kind  of  business, 
as  they  may  think  proper,  and  this  with  the  view  to  granting  to  a 
vendor  the  freest  opportunity  to  oijtain  the  largest  consideiation  for 
the  sale  of  that  which  is  his  own.  A  contract  which  is  the  mere  ac- 
companiment of  the  sale  of  property,  and  thus  entered  into  for  the 
purpose  of  enhancing  the  price  at  which  the  vendor  sells  it,  which 
in  effect  is  collateral  to  such  sale,  and  where  the  main  purpose  of  the 
whole  contract  is  accomplished  by  such  sale,  might  not  be  included 
within  the  letter  or  spirit  of  the  statute  in  question.  But  we  cannot 
see  how  the  statute  can  be  limited,  as  it  has  been  l)}^  the  courts 
below,  without  reading  into  its  text  an  exception  which  alters  the 
natural  meaning  of  the  language  used,  and  that,  too,  upon  a  most 
material  point,  and  where  no  sufficient  reason  is  shown  for  believing 
that  such  alteration  would  make  the  statute  more  in  accord  with 
the  intent  of  the  law-making  body  that  enacted  it. 

The  great  stress  of  the  argument  for  the  defendants  on  this 
branch  of  the  case  has  been  to  show,  if  possible,  some  reason  in  the 
attendant  circumstances,  or  some  fact  existing  in  the  nature  of 
railroad  property  and  business  upon  which  to  found  the  claim,  that 
although  by  the  language  of  the  statute  agreements  or  combinations 
in  restraint  of  trade  or  commerce  are  included,  the  statute  really 
means  to  declare  illegal  only  those  contracts,  etc.,  which  are  in 
unreasonable  restraint  of  trade.  In  order  to  do  this  the  defendants 
call  attention  to  many  facts  which  they  have  already  referred  to  in 
their  argument,  upon  the  point  that  railroads  were  not  included  at 
all  in  the  statute.  They  again  draw  attention  to  the  fact  of  the 
peculiar  nature  of  railroad  property.  When  a  railroad  is  once  built, 
it  is  said,  it  must  be  kept  in  operation;  it  must  transport  propertj'', 
when  necessary  in  order  to  keep  its  business,  at  the  smallest  price 
and  for  the  narrowest  profit,  or  even  for  no  profit,  pro\ided  running 
expenses  can  be  paid,  rather  than  not  to  do  the  work;  that  railroad 
property  cannot  be  altered  for  use  for  any  other  purpose,  at  least 
without  such  loss  as  may  fairly  be  called  destructive;  that  compe- 
tition while,  perhaps,  right  and  proper  in  other  business,  simply 
leads  in  railroad  business  to  financial  ruin  and  insolvency,  and  to 
the  operation  of  the  road  by  receivers  in  the  interest  of  its  creditors 


CHAP.   II.]         UNITED    STATES    V.  FREIGHT    ASSOCIATION.'  523 

instead  of  in  that  of  its  owners  and  the  public;  that  a  contest  be- 
tween a  receiver  of  an  insolvent  corporation  and  one  which  is  still 
solvent  tends  to  ruin  the  latter  company,  while  being  of  no  benefit 
to  the  former;  that  a  receiver  is  only  bound  to  pay  operating  ex- 
penses, so  he  can  compete  with  the  solvent  company  and  oblige  it 
to  come  down  to  prices  incompatible  with  any  profit  for  the  work 
done,  and  until  ruin  overtakes  it  to  the  destruction  of  innocent 
stockliolders  and  the  impairment  of  the  public  interests. 

To  the  question  why  competition  should  necessarily  be  conducted 
to  such  an  extent  as  to  result  in  this  relentless  and  continued  war, 
to  eventuate  only  in  the  financial  ruin  of  one  or  all  of  the  companies 
indulging  in  it,  the  answer  is  made  that  if  competing  railroad  com- 
panies be  left  subject  to  the  sway  of  free  and  unrestricted  competi- 
tion the  results  above  foreshadowed  necessarily  happen  from  the 
nature  of  the  case;  that  competition  being  the  rule,  each  company 
will  seek  business  to  the  extent  of  its  power,  and  will  underbid  its 
rival  in  order  to  get  the  business,  and  such  underbidding  will  act 
and  react  upon  each  company  until  the  prices  are  so  reduced  as  to 
make  it  impossible  to  prosper  or  live  under  them;  that  it  is  too  much 
to  ask  of  human  nature  for  one  company  to  insist  upon  charges 
sufficiently  high  to  afford  a  reasonable  compensation,  and  while 
doing  so  to  see  its  patrons  leave  for  rival  roads  who  are  obtaining  its 
business  by  offering  less  rates  for  doing  it  than  can  be  afforded  and 
a  fair  profit  obtained  therefrom.  Sooner  than  experience  ruin  from 
mere  inanition,  efforts  will  be  made  in  the  direction  of  meeting  the 
underbidding  of  its  rival  until  both  shall  end  in  ruin.  The  only 
refuge,  it  is  said,  from  this  wretched  end  lies  in  the  power  of  com- 
peting roads  agreeing  among  themselves  to  keep  up  prices  for  trans- 
portation to  such  sums  as  shall  be  reasonable  in  themselves,  so  that 
companies  ma}''  be  allowed  to  save  themselves  from  themselves,  and 
to  agree  not  to  attack  each  other,  but  to  keep  up  reasonable  and 
living  rates  for  services  performed.  It  is  said  that  as  railroads  have 
a  right  to  charge  reasonable  rates  it  must  follow  that  a  contract 
among  themselves  to  keep  up  their  charges  to  that  extent  is  valid. 
Viewed  in  the  light  of  all  these  facts  it  is  broadh^  and  confidentlj' 
asserted  that  it  is  impossible  to  believe  that  Congress  or  any  other 
intelligent  and  honest  legislative  body  could  ever  have  intended  to 
include  all  contracts  or  combinations  in  restraint  of  trade,  and  as  a 
consequence  thereof  to  prohibit  competing  railways  from  agreeing 
among  themselves  to  keep  up  prices  for  transportation  to  such  a 
rate  as  should  be  fair  and  reasonable. 

These  arguments  it  must  be  confessed  bear  with  much  force  upon 
the  policy  of  an  act  which  should  prevent  a  general  agreement  upon 
the  question  of  rates  among  competing  railroad  companies  to  the 
extent  simply  of  maintaining  those  rates  A\hich  were  reasonable  and 
fair. 


524  UMTED    STATES    V.   FREIGHT    ASSOCIATION.  [cHAP.   IF. 

There  is  another  side  to  this  question,  however,  and  it  may  not 
be  amiss  to  refer  to  one  or  two  facts  which  tend  to  somewhat  modify 
and  alter  the  Hght  in  which  the  subject  should  be  regarded.  If  only 
that  kind  of  contract  which  is  in  unreasonable  restraint  of  trade  be 
within  the  meaning  of  the  statute,  and  declared  therein  to  be  illegal, 
it  is  at  once  apparent  that  the  subject  of  what  is  a  reasonable  rate 
is  attended  with  great  uncertainty.  What  is  a  proper  standard  by 
which  to  judge  the  fact  of  rea.sonable  rates?  Must  the  rate  be  so 
high  as  to  enable  the  return  for  the  whole  busine.ss  done  to  amount 
to  a  sum  sufficient  to  afford  the  shareholder  a  fair  and  reasonable 
profit  upon  his  investment?  If  so,  what  is  a  fair  and  reasonable 
profit?  That  depends  sometimos  upon  the  risk  incurred,  and  the 
rate  itself  differs  in  diflercnt  localities:  which  is  the  one  to  which 
reference  is  to  be  made  as  the  standard?  Or  is  the  reasonableness  of 
the  profit  to  be  limited  to  a  fair  return  upon  the  capital  that  would 
have  been  sufficient  to  build  and  ecjuip  the  road,  if  honestly  ex- 
pended? Or  is  still  another  standard  to  be  created,  and  the  reason- 
ableness of  the  charges  tried  by  the  cost  of  the  carriage  of  the  article 
and  a  reasonable  profit  allowed  on  that?  And  in  such  case  would 
contribution  to  a  sinking  fund  to  make  repairs  upon  the  roadbed 
and  renewal  of  cars,  etc.,  be  assumed  as  a  proper  item?  Or  is  the 
reasonableness  of  the  charge  to  be  tested  by  reference  to  the  charges 
for  transportation  of  the  same  kind  of  property  made  by  other  roads 
similarly  situated?  If  the  latter,  a  combination  among  such  roads 
as  to  rates  would,  of  course,  furnish  no  means  of  answering  the  (lues- 
tion.  It  is  quite  apparent,  therefore,  that  it  is  exceedingly  difficult 
to  formulate  even  the  terms  of  the  rule  itself  which  should  govern 
in  the  matter  of  determining  what  would  be  reasonable  rates  for 
transportation.  While  even  after  the  standard  should  be  determined 
there  is  such  an  infinite  variety  of  facts  entering  into  the  question 
of  what  is  a  reasonable  rate,  no  matter  what  standard  is  adopted, 
that  any  individual  shipper  would  in  most  cases  be  apt  to  abandon 
the  effort  to  show  the  unreasonable  character  of  a  charge,  sooner 
than  hazard  the  great  expense  in  time  and  money  necessary  to 
prove  the  fact,  and  at  the  same  time  incur  the  ill-will  of  the  road 
itself  in  all  his  future  dealings  with  it.  To  say,  therefore,  that  the 
act  excludes  agreements  which  are  not  in  unreasonable  restraint  of 
trade,  and  which  tend  simply  to  keep  up  reasonable  rates  for  trans- 
portation, is  substantiallj^  to  leave  the  question  of  reasonableness  to 
the  companies  themselves. 

It  must  also  be  remembered  that  railways  are  public  corporations 
organized  for  public  purposes,  granted  valuable  franchises  and  priv- 
ileges, among  which  the  right  to  take  the  private  property  of  the 
citizen  in  invitum  is  not  the  least,  Cherokee  Nation  v.  Southern 
Kansas  Railway  Co.,  135  U.S.  641,  657;  that  many  of  them  are  the 
donees  of  large  tracts  of  public  lands  and  of  gifts  of  money  by  mu- 


CHAP.  II.]         UNITED    STATES    V.  FREIGHT    ASSOCIATION.  525 

nicipal  corporations,  and  that  they  all  primarily  owe  duties  to  the 
public  of  a  higher  nature  even  than  that  of  earning  large  dividends 
for  their  shareholders.  The  business  which  the  railroads  do  is  of 
a  public  nature,  closely  affecting  ahnost  all  classes  in  the  com- 
munity —  the  farmer,  the  artisan,  the  manufacturer  and  the  trader. 
It  is  of  such  a  public  nature  that  it  may  well  be  doubted,  to  say  the 
least,  whether  any  contract  which  imposes  any  restraint  upon  its 
business  would  not  be  prejudicial  to  the  public  interest. 

We  recognize  the  argument  upon  the  part  of  the  defendants  that 
restraint  upon  the  business  of  railroads  will  not  be  prejudicial  to 
the  public  interests  so  long  as  such  restraint  provides  for  reasonable 
rates  for  transportation  and  prevents  the  deadly  competition  so 
liable  to  result  in  the  ruin  of  the  roads  and  to  thereby  impair  their 
usefulness  to  the  public,  and  in  that  way  to  prejudice  the  public 
interest.  But  it  must  be  remembered  that  these  results  are  by  no 
means  admitted  with  mianimity;  on  the  contrary,  they  are  earnestly 
and  warmly  denied  on  the  part  of  the  public  and  by  those  who 
assume  to  defend  its  interests  both  in  and  out  of  Congress.  Compe- 
tition, they  urge,  is  a  necessity  for  the  purpose  of  securmg  in  the 
end  just  and  proper  rates. 

It  was  said  in  Gihhs  v.  Baltimore  Gas  Company,  130  U.S.  396,  at 
page  408,  by  Mr.  Chief  Justice  Fuller,  as  follows:  "The  suppljdng 
of  illuminating  gas  is  a  business  of  a  public  nature  to  meet  a  public 
necessity.  It  is  not  a  business  like  that  of  an  ordinary  corporation 
engaged  in  the  manufacture  of  articles  that  may  be  furnished  by 
individual  effort.  New  Orleaiis  Gas  Co.  v.  Louisiana  Light  Co.,  115 
U.S.  650;  Louisville  Gas  Co.  v.  Citizens'  Gas  Co.,  115  U.S.  683; 
Shepard  v.  Milwaukee  Gas  Co.,  6  Wisconsin,  539;  Chicago  Gas  Light 
&  Coke  Co.  V.  People's  Gas  Light  &  Coke  Co.,  121  Illinois,  530;  St. 
Louis  V.  St.  Louis  Gas  Light  Co.,  70  Missouri,  69.  Hence,  while  it 
is  justly  urged  that  those  rules  which  say  that  a  given  contract  is 
against  public  policy,  should  not  be  arbitrarily  extended  so  as  to 
interfere  with  the  freedom  of  contract,  Printing,  etc.,  Registering  Co. 
V.  Sampson,  L.R.  19  Eq.  462,  yet  in  the  instance  of  business  of  such 
a  character  that  it  presumably  cannot  be  restrained  to  any  extent 
whatever  without  prejudice  to  the  public  interest,  courts  decline  to 
enforce  or  sustain  contracts  imposing  such  restraint,  however  partial, 
because  in  contravention  of  public  polic^^  This  subject  is  much 
considered,  and  the  authorities  cited  in  West  Virginia  Transporta- 
tion Co.  V.  Ohio  River  Pipe  Line  Co.,  22  West  Va.  600;  Chicago,  etc., 
Gas  Co.  V.  People's  Gas  Co.,  121  Illinois,  530;  Western  Ihiion  Tele- 
graph Co.  V.  American  Union  Telegraph  Co.,  65  Georgia,  160." 

It  is  true  that  in  the  Gibhs  case  there  was  a  special  statute  which 
prohibited  the  company  from  entering  into  any  consolidation,  com- 
bination or  contract  with  any  other  gas  company  whatever,  and  it 
was  provided  that  any  attempt  to  do  so  or  to  make  such  combina- 


526  UNITED    STATES    V.  FREIGHT    ASSOCIATION.  [rilAP.   II. 

tion  or  contract  should  be  utterly  null  and  void.  The  above  extract 
from  the  opinion  of  the  court  is  made  for  the  purpose  of  showing  the 
difference  which  exists  between  a  private  and  a  public  corporation 
—  that  kind  of  a  public  corporation  which,  while  doinK  i)U.sine.ss  for 
remuneration,  is  yet  so  connected  in  interest  with  the  public  as  to 
give  a  public  character  to  its  business  —  and  it  is  seen  that  while, 
in  the  absence  of  a  statute  prohil)iting  them,  contracts  of  private 
individuals  or  corporations  touching  upon  restraints  in  trade  must 
be  unie^usonable  in  their  nature  to  be  held  void,  different  considera- 
tions obtain  in  the  case  of  public  corporations  like  those  of  railroads 
where  it  well  may  be  that  any  restraint  upon  a  business  of  that 
character  as  affecting  its  rates  of  transportation  must  thereby  be 
prejudicial  to  the  public  interests. 

The  i)laintiffs  are,  however,  under  no  obligation  in  order  to  main- 
tain this  action  to  show  that  by  the  common  law  all  agreements 
among  competing  railroad  companies  to  keep  up  rates  to  such  as 
are  reiusonable  were  void  as  in  restraint  of  trade  orconunerce.  There 
are  many  cases  which  look  in  that  direction  if  they  do  not  precisely 
decide  that  point.  Some  of  them  are  referred  to  in  the  opinion  in 
the  Baltimore  Gas  Company  case,  above  cited.  The  case  of  the  Mogul 
Steanhshrp  Company  v.  Mdhegor,  21  Q.B.D.  .544;  23  Q.B.D.  508; 
1892,  App.  C'as.  2"),  has  l)een  cited  by  the  courts  below  as  holding  in 
principle  that  contracts  of  this  nature  are  valid  at  connnon  law. 
The  agreement  held  valid  there  was  an  agreement  for  lowering  rates 
of  transportation  among  the  parties  thereto,  and  it  was  entered 
into  for  the  j^urpose  of  driving  out  of  tra<le  rival  steamships  in  order 
that  therciifter  the  rates  might  l)e  advanced.  The  I^nglish  courts 
lield  that  the  agreement  was  not  a  consj)iracy,  and  that  it  was  valid, 
although  the  result  aimed  at  was  to  drive  a  rival  out  of  the  field, 
because  so  long  as  the  injury  to  such  rival  was  not  the  sole  reason 
for  the  agreement,  but  self-interest  the  predominating  motive,  there 
was  nothing  wrong  in  law  with  an  agreement  of  that  kind.  But 
assuming  that  agreements  of  this  nature  are  not  void  at  common 
law  and  that  the  various  cases  cited  by  the  learned  courts  below 
show  it,  the  answer  to  the  statement  of  their  validity  now  is  to  be 
found  in  the  terms  of  the  statute  under  consideration.  The  provisions 
of  the  Interstate  Commerce  Act  relating  to  reasonable  rates,  discrim- 
inations, etc.,  do  not  authorize  such  an  agreement  as  this,  nor  do 
they  authorize  any  other  agreements  which  would  be  inconsistent 
with  the  provisions  of  this  act. 

The  general  reasons  for  holding  agreements  of  this  nature  to  be 
invalid  even  at  common  law,  on  the  part  of  railroad  companies  are 
quite  strong,  if  not  entirely  conclusive. 

Considering  the  public  character  of  such  corporations,  the  privi- 
leges and  franchises  which  they  have  received  from  the  public  in 
order  that  they  might  transact  business,  and  bearing  in  mind  how 


CHAP.  II.]         UNITED    STATES    V.  FREIGHT    ASSOCIATION.  527 

closely  and  immediately  the  question  of  rates  for  transportation 
affects  the  whole  public,  it  may  be  urged  that  Congress  had  in  mind 
all  the  difficulties  which  we  have  before  suggested  of  proving  the 
unreasonableness  of  the  rate,  and  might,  in  consideration  of  all  the 
circumstances,  have  deliberately  decided  to  prohibit  all  agreements 
and  combinations  in  restraint  of  trade  or  commerce,  regardless  of  the 
question  whether  such  agreements  were  reasonable  or  the  reverse. 

It  is  true  that,  as  to  a  majority  of  those  living  along  its  line,  each 
railroad  is  a  monopoly.  Upon  the  subject  now  mider  consideration  it 
is  well  said  by  Judge  Oliver  P.  Shiras,  United  States  District  Judge, 
Northern  District  of  Iowa,  in  his  very  able  dissenting  opinion  in  this 
case  in  the  United  States  Circuit  Court  of  Appeals,  as  follows:  — 

"As  to  the  majority  of  the  community  living  along  its  line,  each 
railway  company  has  a  monopoly  of  the  business  demanding  trans- 
portation as  one  of  its  elements.  By  reason  of  this  fact  the  action 
of  this  corporation  in  establishing  the  rates  to  be  charged  largely 
influences  the  net  profit  coming  to  the  farmer,  the  manufacturer  and 
the  merchant,  from  the  sale  of  the  products  of  the  farm,  the  work- 
shop and  manufactory,  and  of  the  merchandise  purchased  and  re- 
sold, and  also  largel}^  influences  the  price  to  be  paid  by  every  one 
who  consumes  any  of  the  property  transported  over  the  line  of 
railway.  There  is  no  other  line  of  business  carried  on  in  our  midst 
which  is  so  intimately  connected  with  the  public  as  that  conducted 
by  the  railways  of  the  country.  ...  A  railwaj^  corporation  engaged 
in  the  transportation  of  the  persons  and  property  of  the  commu- 
nity is  always  carrying  on  a  public  business  which  at  all  times 
directly  affects  the  public  welfare.  All  contracts  or  combinations 
entered  into  between  railway  corporations  intended  to  regulate  the 
rates  to  be  charged  the  public  for  the  service  rendered,  must  of 
necessity  affect  the  public  interest.  By  reason  of  this  marked  dis- 
tinction existing  between  enterprises  inherently  public  in  their  char- 
acter and  those  of  a  private  nature,  and  further  by  reason  of  the 
difference  between  private  persons  and  corporations  engaged  in 
private  pursuits,  who  owe  no  direct  or  primary  duty  to  the  pubhc, 
and  public  corporations  created  for  the  express  purpose  of  carrying 
on  public  enterprises,  and  which,  in  consideration  of  the  public 
powers  exercised  in  their  behalf,  are  under  obligation  to  carry  on  the 
work  entrusted  to  their  management  primarily  in  the  interest  and 
for  the  benefit  of  the  community,  it  seems  clear  to  me  that  the  same 
test  is  not  applicable  to  both  classes  of  business  and  corporations  in 
determining  the  validity  of  contracts  and  combinations  entered  into 
by  those  engaged  therein.  ...  In  the  opinion  of  the  court  are  found 
citations  from  the  reports  of  the  Interstate  Commerce  Commission 
in  which  are  depicted  the  evils  that  are  occasioned  to  the  railway 
companies  and  the  public  by  warfares  over  rate  charges,  and  the 
advantages  that  are  gained  in  many  directions  by  proper  conference 


528  UNITED    STATES    V.  FREIGHT    ASSOCIATION.         [CHAP.  II. 

and  concert  of  action  among  the  competing  lines.  It  may  be  entirely 
true  that  as  we  proceed  in  the  developnunit  of  tlie  policy  of  puljlic 
control  over  railway  traffic,  methods  will  be  devised  and  put  in 
operation  by  legislative  enactment  whereby  railway  companies  and 
the  public  may  be  protected  against  the  evils  arising  from  unre- 
stricted competition  and  from  rate  wars  which  unsettle  the  business 
of  the  community,  but  I  fail  to  perceive  the  force  of  the  argument 
that  Ijecause  railway  companies  through  their  own  action  cause  evils 
to  themselves  and  the  public  by  sudden  changes  or  reductions  in 
tariff  rates  they  must  be  permitted  to  depri\e  tiie  comnuniity  of  the 
benefit  of  competition  in  securing  reasonable  rates  for  the  trans- 
portation of  the  products  of  the  country.  Competition,  free  and 
unrestricted,  is  the  general  rule  which  governs  all  the  ordinary 
business  pursuits  and  transiictions  of  life.  Evils,  as  well  a.s  benefits, 
result  therefrom.  In  the  fierce  heat  of  competition  the  stronger 
competitor  may  crush  out  the  weaker;  fluctuations  in  prices  may 
be  caused  that  result  in  wreck  and  disaster;  yet,  balancing  the  bene- 
fits as  against  the  evils,  the  law  of  comiK'tition  remains  as  a  control- 
ling element  hi  the  business  world.  That  free  and  unrestricted  com- 
petition in  the  matter  of  railroad  charges  may  be  productive  of 
evils  does  not  militate  against  the  fact  that  such  is  the  law  now 
governing  the  subject.  No  law  can  be  enacted  nor  sj-^stem  be  de- 
vised for  the  control  of  human  affairs  that  in  its  enforcement  does 
not  produce  some  evil  results,  no  matter  how  beneficial  its  general 
purpose  may  be.  There  are  benefits  and  there  are  evils  which  result 
from  the  operatidn  of  the  law  of  free  competition  between  railway 
companies.  The  time  may  come  when  the  companies  will  l)e  relieved 
from  the  operation  of  this  law,  but  they  cannot,  l>y  coml)ination 
and  agreements  among  themselves,  bring  about  this  change.  The 
fact  that  the  provisions  of  the  Interstate  Commerce  Act  may  have 
changed  in  many  respects  the  conduct  of  the  companies  in  the 
carrying  on  of  the  public  business  they  are  engaged  in  does  not 
show  that  it  was  the  intent  of  Congress,  in  the  enactment  of  that 
statute,  to  clothe  railway  companies  witii  the  right  to  combine  to- 
gether for  the  purpose  of  avoiding  the  effects  of  competition  on  the 
subject  of  rates." 

The  whole  opinion  is  a  remarkably  strong  presentation  of  the 
views  of  the  learned  judge  who  wrote  it. 

Still,  again,  it  is  answered  that  the  effects  of  free  competition 
among  railroad  companies,  as  described  by  the  counsel  for  the  com- 
panies themselves  in  the  course  of  their  argument,  are  greatly  exag- 
gerated. According  to  that  argument,  the  moment  an  agreement  of 
this  nature  is  prohibited  the  railroads  commence  to  cut  their  rates, 
and  they  cease  only  with  their  utter  financial  ruin,  leaving,  perhaps, 
one  to  raise  rates  indefinitely  when  its  rivals  have  been  driven  awaj'. 
It  is  said  that  this  is  a  most  overdrawn  statement,  and  that  while 


CHAP.  II.]         UNITED    STATES    V.  FREIGHT    ASSOCIATIOX.  529 

absolutely  free  competition  may  have  in  some  instances  and  for  a 
time  resulted  in  injury  to  some  of  the  railroads,  it  is  not  at  all  clear 
that  the  general  result  has  been  other  than  beneficial  to  the  whole 
pubUc,  and  not  in  the  long  run  detrimental  to  the  prosperity  of  the 
roads.  It  is  matter  of  common  loiowledge  that  agreements  as  to 
rates  have  been  continually  made  of  late  years,  and  that  com- 
plaints of  each  company  in  regard  to  the  violation  of  such  agree- 
ments by  its  rivals  have  been  frequent  and  persistent.  Rate  wars 
go  on  notwithstanding  any  agreement  to  the  contrary,  and  the  strug- 
gle for  business  among  competing  roads  keeps  on,  and  in  the  nature 
of  things  will  keep  on,  any  alleged  agreement  to  the  contrary  not- 
withstanding, and  it  is  only  by  the  exercise  of  good  sense  and  b}" 
the  presence  of  a  common  interest  that  railroads,  without  entering 
into  any  affirmative  agreement  in  regard  thereto,  will  keep  within 
the  limit  of  exacting  a  fair  and  reasonable  return  for  services  ren- 
dered. These  agreements  have  never  been  found  really  effectual  for 
any  extended  period. 

The  Interstate  Commerce  Commission,  from  whose  reports  quo- 
tations have  been  quite  freely  made  by  counsel  for  the  purpose  of 
proving  the  views  of  its  learned  members  in  regard  to  this  subject, 
has  never  distinctly  stated  that  agreements  among  competing  rail- 
roads to  maintain  prices  are  to  be  commended,  or  that  the  general 
effect  is  to  be  regarded  as  beneficial.  They  have  stated  in  their 
fourth  annual  report  that  competition  may  degenerate  into  rate 
w^ars,  and  that  such  wars  are  as  unsettling  to  the  business  of  the 
country  as  they  are  mischievous  to  'the  carriers,  and  that  the  spirit 
of  existing  law  is  against  them.  They  then  add:  '"'Agreements  be- 
tween railroad  companies  which  from  time  to  time  they  have  entered 
into  with  a  view  to  prevent  such  occurrences  have  never  been  found 
effectual,  and  for  the  very  sufficient  reason,  that  the  mental  reserva- 
tions in  forming  them  have  been  quite  as  numerous  and  more  influ- 
ential than  the  written  stipulations."  It  would  seem  true,  therefore, 
that  there  is  no  guaranty  of  financial  health  to  be  found  in  entering 
into  agreements  for  the  maintenance  of  rates,  nor  is  financial  ruin 
or  insolvency  the  necessarj^  result  of  their  absence. 

The  claim  that  the  company  has  the  right  to  charge  reasonable 
rates,  and  that,  therefore,  it  has  the  right  to  enter  into  a  combina- 
tion with  competing  roads  to  maintain  such  rates,  cannot  be  ad- 
mitted. The  conclusion  does  not  follow  from  an  admission  of  the 
premise.  What  one  company  may  do  in  the  way  of  charging  rea- 
sonable rates  is  radically  different  from  entering  into  an  agreement 
with  other  and  competing  roads  to  keep  up  the  rates  to  that  point. 
If  there  be  any  competition  the  extent  of  the  charge  for  the  service 
will  be  seriously  affected  b}^  that  fact.  Competition  will  itself  bring 
charges  down  to  what  may  be  reasonable,  while  in  the  case  of  an 
agreement  to  keep  prices  up,  competition  is  allowed  no  play;  it  is 


530  UNITED    STATES    V.  FREIGHT    ASSOCIATION,  (cHAP.   II. 

shut  out,  and  the  rate  is  practically  fixed  by  the  companies  them- 
selves by  virtue  of  the  agreement,  so  long  as  they  abide  by  it. 

As  a  result  of  this  review  of  the  situation,  we  find  two  very  widely 
divergent  views  of  the  effects  which  might  be  expected  to  result 
from  declaring  illegal  all  contracts  in  restraint  of  trade,  etc.;  one 
side  predicting  financial  disiister  and  ruin  to  competing  railroads, 
including  thereby  the  ruin  of  shareholders,  the  destruction  of  im- 
mensely valuable  properties,  and  the  consef|uent  prejudice  to  the 
public  interest;  while  on  the  other  side  predictions  efiually  earnest 
are  maile  that  no  such  mournful  results  will  follow,  and  it  is  urged 
that  there  is  a  necessity,  in  order  that  the  public  interest  may  be 
fairly  and  justly  protected,  to  allow  free  and  oyxm  competition  among 
railroads  ujion  the  subject  of  the  rates  for  the  transportation  of 
persons  and  property. 

The  arguments  which  have  lx»en  addressed  to  us  against  the  in- 
clusion of  all  contracts  in  restraint  of  trade,  as  provided  for  by  the 
language  of  the  act,  have  been  biused  upon  the  alleged  presumption 
that  Congress,  notwithstanding  the  langujige  of  the  act,  could  not 
have  intended  to  embrace  all  contracts,  but  only  such  contracts  as 
were  in  unreasonable  restraint  of  trade.  Under  these  circumstances 
we  are,  therefore,  asked  to  hold  that  the  act  of  Congress  excepts 
contracts  which  are  not  in  unreasonable  restraint  of  trade,  and  which 
only  keep  rates  up  to  a  reasonable  price,  notwithstanding  the  lan- 
guage of  the  act  makes  no  such  exception.  In  other  words,  we  are 
asked  to  read  into  the  act  l)y  way  of  judicial  legislation  an  exception 
that  is  not  placed  there  by  the  lawmaking  branch  of  the  Covern- 
ment,  and  this  is  to  be  done  upon  the  theory  that  the  impolicy  of 
such  legislation  is  so  clear  that  it  cannot  be  supposed  Congress  in- 
tended the  natural  import  of  the  language  it  used.  This  we  cannot 
and  ought  not  to  do.  That  impolicy  is  not  so  clear,  nor  are  the 
reasons  for  the  exception  .so  potent  as  to  permit  us  to  interpolate  an 
exception  into  the  language  of  the  act,  and  to  thus  materially  alter 
its  meaning  and  effect.  It  may  be  that  the  policy  evidenced  by  the 
passage  of  the  act  itself  will,  if  carried  out,  result  in  disaster  to  the 
roads  and  in  a  failure  to  secure  the  advantages  sought  from  such  leg- 
islation. Whether  that  will  be  the  result  or  not  we  do  not  know  and 
cannot  predict.  These  considerations  are,  however,  not  for  us.  If 
the  act  ought  to  read  as  contended  for  by  defendants,  Congress  is 
the  body  to  amend  it  and  not  this  court,  by  a  process  of  judicial 
legislation  wholly  unjustifiable.  Large  numbers  do  not  agree  that 
the  view  taken  by  defendants  is  sound  or  true  in  substance,  and 
Congress  may  and  very  probably  did  share  in  that  belief  in  passing 
the  act.  The  public  policy  of  the  Ciovernment  is  to  be  found  in  its 
statutes,  and  when  they  have  not  directly  spoken,  then  in  the  de- 
cisions of  the  courts  and  the  constant  practice  of  the  government 
officials;  but  when  the  lawinaking  power  speaks  upon  a  particular 


CHAP.  II.]         UNITED    STATES    V.  FREIGHT    ASSOCIATION.  531 

subject,  over  which  it  has  constitutional  power  to  legislate,  public 
policy  in  such  a  case  is  what  the  statute  enacts.  If  the  law  prohibits 
any  contract  or  combination  in  restraint  of  trade  or  commerce,  a 
contract  or  combination  made  in  violation  of  such  law  is  void, 
whatever  may  have  been  theretofore  decided  by  the  com'ts  to  have 
been  the  public  policy  of  the  country  on  that  subject. 

Mr.  Chief  Justice  Fuller,  Mr.  Justice  Harl.\n,  ]\Ir.  Justice 
Brewer,  and  Mr.  Justice  Brown  concurred. 

Mr.  Justice  Field,  Mr.  Justice  Gray,  Mr.  Justice  Shiras,  and 
Mr.  Justice  White  dissented.  Mr.  Justice  White  wrote  the  dis- 
senting opinion,  in  the  course  of  which  he  said :  — 

The  theory  upon  which  the  contract  is  held  to  be  illegal  is  that 
even  though  it  be  reasonable,  and  hence  valid,  under  the  general 
principles  of  law,  it  is  yet  void,  because  it  conflicts  with  the  act  of 
Congress  already  referred  to.  Now,  at  the  outset,  it  is  necessary  to 
understand  the  full  import  of  this  conclusion.  As  it  is  conceded  that 
the  contract  does  not  unreasonably  restrain  trade,  and  that  if  it 
does  not  so  unreasonably  restrain,  it  is  valid  under  the  general  law, 
the  decision,  substantially,  is  that  the  act  of  Congress  is  a  departure 
from  the  general  principles  of  law,  and  by  its  terms  destroys  the 
right  of  individuals  or  corporations  to  enter  into  very  many  reason- 
able contracts.  But  this  proposition,  I  submit,  is  tantamount  to  an 
assertion  that  the  act  of  Congress  is  itself  unreasonable.  The  diffi- 
culty of  meeting,  by  reasoning,  a  premise  of  this  nature  is  frankly 
conceded,  for,  of  course,  where  the  fundamental  proposition  upon 
which  the  whole  contention  rests  is  that  the  act  of  Congress  is  un- 
reasonable, it  would  seem  conducive  to  no  useful  purpose  to  invoke 
reason  as  applicable  to  and  as  controlling  the  construction  of  a  stat- 
ute which  is  admitted  to  be  beyond  the  pale  of  reason.  The  question, 
then,  is,  is  the  act  of  Congress  relied  on  to  be  so  interpreted  as  to 
give  it  a  reasonable  meaning,  or  is  it  to  be  construed  as  being  un- 
reasonable and  as  \dolative  of  the  elementary  principles  of  justice? 

Note.  —  The  doctrine  of  this  case  was  reaffirmed  in  United  States 
V.  Joint  Traffic  Association,  171  U.S.  505.  Mr.  Justice  Peckham 
again  wrote  the  opinion,  and  the  division  of  the  court  was  the  same 
as  in  the  principal  case,  except  that  Mr.  Justice  Field  was  no  longer 
a  member  of  the  court  and  his  successor,  Mr.  Justice  McKenna, 
took  no  part  in  the  decision. 

In  Shawnee  Compress  Co.  v.  Anderson,  209  U.S.  423,  Mr.  Justice 
McKenna  said  (p.  434):  "It  has  been  decided  that  not  only  un- 
reasonable but  all  direct  restraints  of  trade  are  prohibited,  the  law 
being  thereby  distinguished  from  the  common  law." 

See  also,  Addijston  Pipe  Co.  v.  United  States,  175  U.S.  211;  Mon- 
tague V.  Lowry,  193  U.S.  38;  Chattanooga  Foundnj  v.  Atlanta,  203 
U.S.  390;  Standard  Sanitary  Mfg.  Co.  v.  United  States,  226  U.S.  20. 


532  NORTHERN'    SECURITIES    CO.  V.  UNITED    STATES.       [cHAP.   II. 

NORTHERN  SECURITIES  CO.  v.  UNITED  STATES. 

193  U.S.  197.     1904. 

The  Great  Northern  Railway  Company,  a  Minnesota  corpora- 
tion, owned  and  oixu-ated  a  line  of  railway  extending;  from  Superior, 
Duluth  and  St.  Paul  to  Everett,  Seattle  and  Portland,  with  a 
l)ranch  line  to  Helena.  The  Northern  Pacific  Railway  Company,  a 
Wisconsin  corporation,  owned  and  operated  a  line  of  railway  ex- 
tending; from  Ashland,  Duluth  and  St.  Paul  to  Helena,  Spokane, 
Seattle,  Tacoma  and  Portland.  The  two  were  engaged  in  active 
competition  for  freight  and  piissenger  traffic. 

In  1901.  James  J.  Hill,  and  as.sociate  stockholders  in  the  (Ireat 
Northern  Railway  Company,  and  J.  Pierpont  Morgan,  and  asso- 
ciate stockholders  in  the  Northern  Pacific  Railway  (\)mpany,  entered 
into  a  combination  to  form,  under  the  laws  of  New  Jersey,  a  hold- 
ing corporation,  to  be  called  the  Northern  Securities  Company,  to 
which,  in  exchange  for  its  own  capital  stock  upon  a  certain  basis, 
was  to  be  turned  over  the  capital  stock,  or  a  controlling  interest  in 
the  capital  stock,  of  the  two  railroad  corporations,  with  power  in 
the  holding  corporation  to  vote  such  stock  and  to  act  in  all  respects 
as  the  owner  thereof. 

It  was  alleged  and  found  that  their  purpose  was  to  make  the 
stockholders  of  each  system  jointly  interested  in  both  systems,  and 
practicall}'  to  pool  the  earnings  of  both  for  the  beneht  of  the  former 
stockholders  of  each,  and  to  vest  the  .selection  of  the  directors  and 
officers  of  each  system  in  a  common  body,  to  wit,  the  holding  cor- 
poration, with  not  only  the  power  but  the  duty  to  pursue  a  policy 
which  would  promote  the  interests,  not  of  one  system  at  the  expense 
of  the  other,  but  of  both  at  the  expense  of  the  public.  All  induce- 
ment for  competition  Ix^tween  the  two  systems  was  to  be  removed, 
a  virtual  consolidation  effected,  and  a  monopoly  of  the  interstate 
and  foreign  commerce  formerly  carried  on  by  the  two  systems  as 
independent  competitors  established. 

The  Northern  Securities  Company  was  organized.  By  its  certifi- 
cate of  incorporation,  one  of  its  objects  was  stated  to  lie  "to  ac- 
quire by  purchase,  subscription  or  otherwise,  and  to  hold  as  invest- 
ment, any  lionds  or  other  securities  or  evidences  of  imlebtedness, 
or  any  shares  of  capital  stock  created  or  issued  by  any  other  cor- 
poration or  corporations,  association  or  associations,  of  the  State 
of  New  Jersey,  or  of  any  other  State,  Territory  or  countn." 
Through  the  issue  of  its  stock  it  acquired  more  than  nine-tenths 
of  the  stock  of  the  Northern  Pacific,  and  more  than  three-fourths 
of  the  stock  of  the  Great  Northern. 

Harlan,  J.  The  stockholders  of  these  two  competing  companies 
disappeared,  as  such,  for  the  moment,  but  immediately  reappeared 


CHAP.  II.]       NORTHERN    SECURITIES    CO.  V.  UNITED    STATES.  533 

as  stockholders  of  the  holding  company  which  was  thereafter  to 
guard  the  interests  of  both  sets  of  stockholders  as  a  unit,  and  to 
manage,  or  cause  to  be  managed,  both  lines  of  railroad  as  if  held  in 
one  ownership.  Necessarily  by  this  combination  or  arrangeitlent  the 
holding  company  in  the  fullest  sense  dominates  the  situation  in  the 
interest  of  those  who  were  stockholders  of  the  constituent  com- 
panies; as  much  so,  for  every  practical  purpose,  as  if  it  had  been 
itself  a  railroad  corporation  which  had  built,  owned,  and  operated 
both  lines  for  the  exclusive  benefit  of  its  stockholders.  Necessarily, 
also,  the  constituent  companies  ceased,  under  such  a  combination, 
to  be  in  active  competition  for  trade  and  commerce  along  their 
respective  lines,  and  have  become,  practically,  one  powerful  con- 
solidated corporation,  by  the  name  of  a  holding  corporation  the 
principal,  if  not  the  sole,  object  for  the  formation  of  which  was  to 
carry  out  the  purpose  of  the  original  combination  under  which 
competition  between  the  constituent  companies  would  cease.  Those 
who  were  stockholders  of  the  Great  Northern  and  Northern  Pacific 
and  became  stockholders  in  the  holding  company  are  now  interested 
in  preventing  all  competition  between  the  two  lines,  and  as  owners 
of  stock  or  of  certificates  of  stock  in  the  holding  company,  they  will 
see  to.  it  that  no  competition  is  tolerated.  They  will  take  care  that 
no  persons  are  chosen  directors  of  the  holding  company  who  will 
permit  competition  between  the  constituent  companies.  The  result 
of  the  combination  is  that  all  the  earnings  of  the  constituent  com- 
panies make  a  common  fund  in  the  hands  of  the  Northern  Securities 
Company,  to  be  distributed,  not  upon  the  basis  of  the  earnings  of 
the  respective  constituent  companies,  each  acting  exclusively  in  its 
own  interest,  but  upon  the  basis  of  the  certificates  of  stock  issued 
by  the  holding  company.  No  scheme  or  device  could  more  certainly 
come  within  the  words  of  the  act  —  "combination  in  the  form  of  a 
trust  or  otherwise  ...  in  restraint  of  commerce  among  the  several 
States  or  with  foreign  nations," — or  could  more  effectively  and 
certainly  suppress  free  competition  between  the  constituent  com- 
panies. This  combination  is,  within  the  meaning  of  the  act,  a 
"trust";  but  if  not,  it  is  a  combination  in  restraint  of  interstate  and 
international  commerce;  and  that  is  enough  to  bring  it  under  the 
condemnation  of  the  act.  The  mere  existence  of  such  a  combination 
and  the  power  acquired  by  the  holding  company  as  its  trustee, 
constitute  a  menace  to,  and  a  restraint  upon,  that  freedom  of  com- 
merce which  Congress  intended  to  recognize  and  protect,  and  which 
the  public  is  entitled  to  have  protected.  If  such  combination  be  not 
destroyed,  all  the  advantages  that  would  naturally  come  to  the 
public  under  the  operation  of  the  general  laws  of  competition,  as 
between  the  Great  Northern  and  Northern  Pacific  Railway  com- 
panies, w^ill  be  lost,  and  the  entire  commerce  of  the  immense  territory 
in  the  northern  part  of  the  United  States  between  the  Great  Lakes 


534  NORTHERN'    SECURITIES    CO.  V.  UNITED    STATES.       [cHAP.  II. 

and  the  Pacific  at  Puget  Sound  will  l)C  at  the  men  y  of  a  .single 
liolding  corporation,  organized  in  a  State  distant  from  the  i)eople  of 
that  territory. 

Is  the  act  to  be  construed  a.s  forbidding  every  combination  or 
conspiracy  in  restraint  of  trade  or  coininerce  among  the  States  or 
with  foreign  nations?  Or,  docs  it  eml)race  only  such  restraints  as 
are  unrca.sonable  in  their  nature?  Is  the  motive  with  which  a  for- 
bidden combination  or  conspiracy  was  formed  at  all  material  when 
it  appears  that  the  necessary  tendency  of  the  particular  combina- 
tion or  conspiracy  in  (luestion  is  to  restrict  or  suppress  free  c()m|K»- 
tition  Ix'twccii  competing  railroads  engaged  in  coininncc  .-nnoim  the 
States?  . 

(The  comi,  after  reviewing  the  decisions,  stated,  tiiai,  among  the 
propositions  established  thereby,  were  the  following:] 

That  the  act  is  not  limited  to  restraints  of  interstate  and  interna- 
tional trade  or  commerce  that  are  unrejisonablc  in  their  nature, 
but  emliraces  all  direct  restraints  imposed  by  any  combination, 
conspiracy  or  monopoly  upon  such  tra<le  or  commerce; 

That  Congiess  luus  the  power  to  establish  rules  by  which  inter- 
state and  international  commerce  shall  l)<»  governed,  anrl,  by  the 
Anti-Trust  Act,  has  prescribetl  the  rule  of  free  competition  among 
those  engaged  in  such  commerce; 

That  ercrji  combination  or  conspiracy  which  would  extinguish 
competition  between  otherwise  competing  railroads  engaged  in  inter- 
state trade  or  commerce,  and  which  would  in  that  way  restrain  such 
trade  or  commerce,  is  made  illegal  by  the  act; 

That  the  natural  elTect  of  comp(>tition  is  to  increase  commerce, 
and  an  agreement  who.se  direct  efY(M't  is  to  j)revent  this  play  of  com- 
petition restrains  instead  of  promotes  trade  and  commerce; 

That  to  vitiate  a  combination,  such  as  the  act  of  Congress  con- 
denms,  it  need  not  be  .shown  that  the  combination,  in  fact,  results 
or  will  result  in  a  total  suppression  of  trade  or  in  a  complete  mo- 
nopoly, but  is  only  essential  to  show  that  by  its  necessary  operation 
it  tends  to  restrain  interstate  or  international  trade  or  commerce  or 
tends  to  create  a  monopoly  in  such  trade  or  commerce  and  to  de- 
prive the  public  of  the  advantages  that  flow  from  free  competition. 

Many  suggestions  were  made  in  argument  based  upon  the  thought 
that  the  Anti-Trust  Act  would  in  the  end  prove  to  be  mischievous 
in  its  consequences.  Disaster  to  business  and  wide-spread  financial 
ruin,  it  has  been  intimated,  will  follow  the  execution  of  its  provi.sions. 
Such  predictions  were  made  in  all  the  cases  heretofore  arising  under 
that  act.  But  they  have  not  been  verified.  It  is  the  historj^  of  monop- 
olies in  this  country  and  in  England  that  predictions  of  ruin  are 
habitually  made  by  them  when  it  is  attempted,  by  legislation,  to 
restrain  their  operations  and  to  protect  the  public  against  their 
exactions. 


CHAP.  II.]       NORTHERN    SECURITIES    CO.  V.  UNITED    STATES.  535 

But  even  if  the  court  shared  the  gloomy  forebodings  in  which  the 
defendants  indulge,  it  could  not  refuse  to  respect  the  action  of  the 
legislative  branch  of  the  Government  if  what  it  has  done  is  within 
the  hmits  of  its  constitutional  power.  The  suggestions  of  disaster  to 
business  have,  we  apprehend,  their  origin  in  the  zeal  of  parties  who 
are  opposed  to  the  policy  underlying  the  act  of  Congress  or  are 
interested  in  the  result  of  this  particular  case;  at  any  rate,  the  sug- 
gestions imply  that  the  court  may  and  ought  to  refuse  the  enforce- 
ment of  the  provisions  of  the  act  if,  in  its  judgment,  Congress  was 
not  wise  in  prescribing  as  a  rule  by  which  the  conduct  of  interstate 
and  international  commerce  is  to  be  governed,  that  every  combina- 
tion, whatever  its  form,  in  restraint  of  such  commerce  and  the 
monopohzing  or  attempting  to  monopohze  such  commerce  shall  be 
illegal.  These,  plainly,  are  questions  as  to  the  policy  of  legislation 
which  belong  to  another  department,  and  this  court  has  no  function 
to  supervise  such  legislation  from  the  standpoint  of  wisdom  or  policy. 
We  need  only  say  that  Congress  has  authority  to  declare,  and  by 
the  language  of  its  act,  as  interpreted  in  prior  cases,  has  in  effect 
declared,  that  the  freedom  of  interstate  and  international  commerce 
shall  not  be  obstructed  or  disturbed  by  any  combination,  conspiracy 
or  monopoly  that  will  restrain  such  commerce,  by  preventing  the 
free  operation  of  competition  among  interstate  carriers  engaged  in 
the  transportation  of  passengers  and  freight.  This  court  cannot  dis- 
regard that  declaration  unless  Congress,  in  passing  the  statute  in 
question,  be  held  to  have  transgressed  the  limits  prescribed  for  its 
action  by  the  Constitution. 

It  was  said  in  argument  that  the  circumstances  under  which  the 
Northern  Securities  Company  obtained  the  stock  of  the  constituent 
companies  imported  simply  an  investment  in  the  stock  of  other 
corporations,  a  purchase  of  that  stock;  which  investment  or  pur- 
chase, it  is  contended,  was  not  forbidden  by  the  charter  of  the  com- 
pany and  could  not  be  made  illegal  by  any  act  of  Congress.  This 
view  is  wholly  fallacious,  and  does  not  comport  with  the  actual 
transaction.  There  was  no  actual  investment,  in  any  substantial 
sense,  by  the  Northern  Securities  Company  in  the  stock  of  the  two 
constituent  companies.  If  it  was,  in  form,  such  a  transaction,  it  was 
not,  in  fact,  one  of  that  kind.  However  that  company  may  have 
acquired  for  itself  any  stock  in  the  Great  Northern  and  Northern 
Pacific  Railway  companies,  no  matter  how  it  obtained  the  means 
to  do  so,  all  the  stock  it  held  or  acquired  in  the  constituent  companies 
was  acquired  and  held  to  be  used  in  suppressing  competition  be- 
tween those  companies.  It  came  into  existence  only  for  that  pur- 
pose. If  any  one  had  full  knowledge  of  what  was  designed  to  be 
accomphshed,  and  as  to  what  was  actually  accomplished,  by  the 
combination  in  question,  it  was  the  defendant  Morgan.  In  his  tes- 
timony he  was  asked,  "Why  put  the  stocks  of  both  these  [constituent 


536  NORTHERX    SECURITIES    CO.  V.  UNITED    STATES.       [cil.\.P.   II. 

companies]  into  one  holding  eoinptiny?"  He  frankly  an.-^wered:  "In 
the  first  place,  this  holding  company  was  simply  a  question  of  cu8- 
todian,  because  it  had  no  other  alliances."  That  (Usclosed  the  actual 
nature  of  the  transaction,  which  wjis  only  to  organize  the  Northern 
Securities  Company  m^  a  holding  company,  in  whose  hands,  not  as 
a  real  purchaser  or  absolute  owner,  but  simply  as  custodian,  were 
to  be  placed  the  stocks  of  the  constituent  companies  —  such  cus- 
todian to  represent  the  combination  formed  between  the  share- 
holders of  the  constituent  companies,  the  direct  and  neces.saiy  effect 
of  such  combination  being,  as  already  indicated,  to  restrain  and 
monopolize  interstate  commerce  by  suppressing  or  (to  use  the  words 
of  this  court  in  United  States  v.  Joint  Traffic  Association)  "smother- 
ing" comix-^tition  l)etween  the  lines  of  two  railway  curriers. 

Mr.  Justice  Brown,  Mr.  Justice  McKenn.\,  and  Mr.  Justice  Day 
concurred. 

Mr.  Justice  Brewer,  concurring  in  the  result. 

I  cannot  assent  to  all  that  is  said  in  the  opinion  just  announced, 
and  believe  that  the  importance  of  the  ca.se  and  the  questions  in- 
volved justify  a  brief  statement  of  my  views. 

First,  let  me  say  that  while  I  was  with  the  majority  of  the  court 
in  the  decision  in  I'nited  States  v.  Freight  Association,  106  I'.S.  290, 
followed  by  the  ciises  of  Ihiitcd  States  v.  JoitU  Traffic  Association, 
171  U.S.  505,  Addyston  Pipe  &  Steel  Company  v.  United  States,  175 
U.S.  211,  and  Montague  &  Co.  v.  Loiiry,  198  U.S.  38,  decided  at  the 
present  term,  and  while  a  further  examination  (which  has  been 
induced  by  the  able  and  exhaustive  arguments  of  counsel  in  the 
present  case)  has  not  disturbed  the  conviction  that  those  cases 
were  rightly  decided,  I  think  that  in  some  respects  the  reasons 
given  for  the  judgments  cannot  be  sustained.  Instead  of  holding 
that  the  Anti-Trust  Act  included  all  contracts,  reasonable  or  un- 
reasonable, in  restraint  of  interstate  trade,  the  ruling  should  have 
been  that  the  contracts  there  presented  were  unreasonable  restraints 
of  interstate  trade,  and  as  such  within  the  scope  of  the  act.  That 
act,  as  appears  from  its  title,  was  leveled  at  only  "  unlawful  restraints 
and  monopoUes."  Congress  did  not  intend  to  reach  and  destroy 
those  minor  contracts  in  partial  restraint  of  trade  which  the  long 
course  of  decisions  at  common  law  had  affirmed  were  reasonable  and 
ought  to  be  upheld.  The  purpose  rather  was  to  place  a  statutory 
prohibition  with  prescribed  penalties  and  remedies  upon  those  con- 
tracts which  were  in  direct  restraint  of  trade,  unreasonable  and 
against  public  policy.  Whenever  a  departure  from  common  law 
rules  and  definitions  is  claimed,  the  purpose  to  make  the  departure 
should  be  clearly  shown.  Such  a  purpose  does  not  appear  and  such 
a  departure  was  not  intended. 

Further,  the  general  language  of  the  act  is  also  limited  by  the 
power  which  each  individual  has  to  manage  his  own  property  and 


CHAP.  II.]       NORTHERN    SECURITIES    CO.  V.  UNITED    STATES.  537 

determine  the  place  and  manner  of  its  investment.  Freedom  of  ac- 
tion in  these  respects  is  among  the  inahenable  rights  of  every  citizen. 
If,  applying  this  thought  to  the  present  case,  it  appeared  that  Mr. 
Hill  was  the  owner  of  a  majority  of  the  stock  in  the  Great  Northern 
Railway  Company  he  could  not  b}^  any  act  of  Congress  be  deprived 
of  the  right  of  investing  his  surplus  means  in  the  purcha.se  of  stock 
of  the  Northern  Pacific  Railway  Company,  although  such  purchase 
might  tend  to  vest  in  him  through  that  ownership  a  control  over 
both  companies.  In  other  words,  the  right,  which  all  other  citizens 
had,  of  purchasing  Northern  Pacific  stock  could  not  be  denied  to 
him  by  Congress  because  of  his  ownership  of  stock  in  the  Great 
Northern  Company.  Such  was  the  ruling  in  Pearsall  v.  Great 
Northern  Railway,  161  U.S.  646,  in  which  this  court  said  (p.  671), 
in  reference  to  the  right  of  the  stockholders  of  the  Great  Northern 
Company  to  purchase  the  stock  of  the  Northern  Pacific  Railway 
Company:  "Doubtless  these  stockholders  could  lawfully  acquire  by 
individual  purchases  a  majority,  or  even  the  whole  of  the  stock  of 
the  reorganized  company,  and  thus  possibly  obtain  its  ultimate 
control ;  but  the  companies  would  still  remain  separate  corporations 
with  no  interests,  as  such,  in  common." 

But  no  such  investment  by  a  single  individual  of  his  means  is 
here  presented.  There  was  a  combination  by  several  individuals 
separately  owning  stock  in  two  competing  railroad  companies  to 
place  the  control  of  both  in  a  single  corporation.  The  purpose  to 
combine  and  by  combination  destroy  competition  existed  before  the 
organization  of  the  corporation,  the  Securities  Company.  That 
corporation,  though  nominally  having  a  capital  stock  of  $400,000,- 
000,  had  no  means  of  its  own;  S30,000  in  cash  was  put  into  its 
treasury,  but  simply  for  the  expenses  of  organization.  The  organ- 
izers might  just  as  well  have  made  the  nominal  stock  a  thousand 
milhons  as  four  hundred,  and  the  corporation  would  have  been  no 
richer  or  poorer.  A  corporation,  while  by  fiction  of  law  recognized 
for  some  purposes  as  a  person  and  for  purposes  of  jurisdiction  as 
a  citizen,  is  not  endowed  with  the  inalienable  rights  of  a  natural 
person.  It  is  an  artificial  person,  created  and  existing  only  for  the 
convenient  transaction  of  business.  In  this  case  it  was  a  mere  instru- 
mentality by  which  separate  railroad  properties  were  combined 
under  one  control.  That  combination  is  as  direct  a  restraint  of  trade 
by  destrojdng  competition  as  the  appointment  of  a  committee  to 
regulate  rates.  The  prohibition  of  such  a  combination  is  not  at  all 
inconsistent  with  the  right  of  an  individual  to  purchase  stock.  The 
transfer  of  stock  to  the  Securities  Company  was  a  mere  incident, 
the  manner  in  which  the  combination  to  destroy  competition  and 
thus  unlaw^fully  restrain  trade  was  carried  out. 

If  the  parties  interested  in  these  two  railroad  companies  can, 
through  the  instrumentality  of  a  holding  corporation,  place  both 


538  NORTHERN    SECURITIES    CO.  V.  UNITED    STATES.       [cHAP.   II. 

under  one  control,  then  in  like  manner,  as  was  conceded  on  the  argu- 
ment by  one  of  the  coun.sel  for  the  upiK'Hiuits,  could  the  control  of 
all  the  railroad  companies  in  the  country  be  placed  in  a  «inj;le  cor- 
poration. Nor  need  thi.s  arrangement  for  control  stop  with  what 
has  already  been  done.  The  holders  of  $2()1.0(K),(X)()  of  stock  in  the 
Northern  Securities  Company  might  organize  another  corporation 
to  hold  their  stock  in  that  company,  and  the  new  corporation  hold- 
ing the  majority  of  the  stock  in  the  Northern  Securities  Conipany 
and  acting  in  olx'dience  to  the  wishes  of  a  majority  of  its  stock- 
hoUlers  would  control  the  action  of  the  Securities  Company  and 
through  it  the  action  of  the  two  railroad  compiuiies,  and  this  process 
might  be  extended  until  a  single  corporation  whose  stock  was  owned 
by  three  or  four  parties  would  ix*  in  practical  control  of  both  roads, 
or,  having  i)efore  us  the  po.ssibilities  of  combination,  the  control  of 
the  whole  transportation  system  of  the  country.  I  cannot  believe 
that  to  be  a  rcjisonable  or  lawful  restraint  of  trade. 

It  must  also  Ix;  rememlx^red  that  under  present  conditions  a 
single  railroad  is,  if  not  a  legal,  largely  a  practical,  monopoly,  and 
the  arrangement  by  which  the  control  of  these  two  comiH'ting  roads 
was  merged  in  a  single  corporation  broadens  and  extends  such  mo- 
nopoly. I  cannot  look  upon  it  as  other  than  an  unreasonable  com- 
bination in  restraint  of  interstate  conunerce  —  one  in  conliict  with 
state  law  and  within  the  letter  and  spirit  of  the  statute  and  the 
power  of  Congress.  Therefore  I  concur  in  the  judgment  of  affirm- 
ance. 

I  have  felt  constrained  to  make  these  observations  for  fear  that 
the  broad  and  sweeping  language  of  the  opinion  of  tlu^  court  might 
tend  to  unsettle  legitimate  business  enterprises,  stifle  or  retard 
wholesome  business  activities,  encourage  improper  disregard  of 
reasonable  contracts  and  invite  unnecessary  litigation. 

The  decree  affirmed  enjoined  the  Northern  Securities  Company 
from  voting  the  stock  which  it  held  in  the  two  railroad  corporations; 
and  enjoined  the  two  railroad  corporations  from  pa\ing  any  divi- 
dends on  such  stock  to  the  Northern  Securities  Company.  But  it 
permitted  the  Northern  Securities  Company  to  transfer  such  stock 
to  the  holders  of  its  own  stock  which  had  been  issued  in  exchange 
or  payment  for  the  railroad  stocks. 

Mr.  Justice  White  dissented.  He  was  of  opinion  that  Congress 
had  no  constitutional  power  to  regulate  the  ownership  of  stock  in 
state  corporations,  even  if  such  corporations  may  be  in  part  en- 
gaged in  interstate  commerce.  In  the  course  of  his  opinion  he  said : 
"It  has  been  decided  by  this  court  that,  as  the  Anti-Trust  Act 
forbids  any  restraint,  it  therefore  embraces  even  reasonable  con- 
tracts or  agreements." 


CHAP.  II.]       NORTHERN    SECURITIES    CO.  V.  UNITED    STATES.  539 

Chief  Justice  Fuller,  Mr.  Justice  Peckham,  and  Mr.  Justice 
Holmes  concurred  in  this  dissent. 

Mr.  Justice  Holmes,  dissenting. 

The  question  to  be  decided  is  whether,  under  the  act  of  July  2, 
1890,  chap.  647,  26  Stat.  209,  it  is  unlawful,  at  any  stage  of  the 
process,  if  several  men  unite  to  form  a  corporation  for  the  purpose 
of  buying  more  than  half  the  stock  of  each  of  two  competing  in- 
terstate railroad  companies,  if  they  form  the  corporation,  and  the 
corporation  buys  the  stock.  I  will  suppose  further  that  every  step 
is  taken,  from  the  beginning,  with  the  single  intent  of  ending  com- 
petition between  the  companies.  I  make  this  addition  not  because 
it  may  not  be  and  is  not  disputed  but  because,  as  I  shall  try  to  show, 
it  is  totally  unimportant  mider  any  part  of  the  statute  with  which 
we  have  to  deal. 

The  statute  of  which  we  have  to  find  the  meaning  is  a  criminal 
statute.  The  two  sections  on  which  the  Government  relies  both 
make  certain  acts  crimes.  That  is  their  immediate  purpose  and 
that  is  what  they  say.  It  is  vain  to  insist  that  this  is  not  a  criminal 
proceeding.  The  words  cannot  be  read  one  way  in  a  suit  which 
is  to  end  in  fine  and  imprisonment  and  another  w^ay  in  one  which 
seeks  an  injunction.  The  construction  which  is  adopted  in  this 
case  must  be  adopted  in  one  of  the  other  sort.  I  am  no  friend  of 
artificial  ihterpretations  because  a  statute  is  of  one  kind  rather  than 
another,  but  all  agree  that  before  a  statute  is  to  be  taken  to  punish 
that  which  always  has  been  lawful  it  must  express  its  intent  in 
clear  words.  So  I  say  we  must  read  the  words  before  us  as  if  the 
question  were  whether  two  small  exporting  grocers  should  go  to 
jail. 

Again  the  statute  is,  of  a  very  sweeping  and  general  character. 
It  hits  "every"  contract  or  combination  of  the  prohibited  sort, 
great  or  small,  and  "every"  person  who  shall  monopolize  or  at- 
tempt to  monopolize,  in  the  sense  of  the  act,  "any  part"  of  the 
trade  or  commerce  among  the  several  States.  There  is  a  natural 
inclination  to  assume  that  it  was  directed  against  certain  great 
combinations  and  to  read  it  in  that  light.  It  does  not  say  so.  On 
the  contrary,  it  says  "every,"  and  "any  part."  Still  less  was  it 
directed  specially  against  railroads.  There  even  was  a  reasonable 
doubt  whether  it  included  railroads  until  the  point  was  decided  by 
this  court. 

Finally,  the  statute  must  be  construed  in  such  a  way  as  not 
merely  to  save  its  constitutionality  but,  so  far  as  is  consistent  with 
a  fair  interpretation,  not  to  raise  grave  doubts  on  that  score.  I 
assume,  for  the  purposes  of  discussion,  although  it  would  be  a  great 
and  serious  step  to  take,  that  in  some  case  that  seemed  to  it  to 
need  heroic  measures.  Congress  might  regulate  not  only  commerce, 
but  instruments  of  commerce  or  contracts  the  bearing  of  which 


540  NORTHERN    SECURITIES    CO.  V.  UNITED    STATES.       [cHAP.  II. 

upon  commerce  woukl  be  only  indirect.  But  it  is  clear  that  the 
mere  fact  of  an  indirect  effect  upon  commerce  not  shown  to  \jc 
certain  and  very  great,  would  not  justify  such  a  law.  The  point 
decided  in  United  States  v.  E.  C.  Knight  Co.,  156  U.S.  1,  17,  wa-s 
that  "the  fact  that  trade  or  coinnierce  might  1)0  indirectly  affected 
was  not  enough  to  entitle  complainants  to  a  decree."  Conuncrce 
depends  upon  population,  but  Congress  could  not,  on  that  ground, 
undertake  to  regulate  marriage  and  divorce.  If  the  act  U-fore  us 
is  to  be  carried  out  according  to  what  seems  to  me  the  logic  of  the 
argument  for  the  Government,  which  I  do  not  believe  that  it  will 
be,  I  can  sec  no  part  of  the  conduct  of  life  with  which  on  similar 
principles  Congress  might  not  intei-fere. 

This  act  is  con.strued  by  the  (  K^vernment  to  affect  the  purcha.'^ors 
of  shares  in  two  railroatl  companies  because  of  the  efl'ect  it  may 
have,  or,  if  you  like,  is  certain  to  have,  upon  the  competition  of 
these  roads.  If  such  a  remote  result  of  the  exercise  of  an  ordinary 
incident  of  property  and  personal  freedom  is  enough  to  make  that 
exerci.se  unlawful,  there  is  hardly  any  transaction  concerning  com- 
merce between  the  States  that  may  not  be  made  a  crime  by  the 
finding  of  a  jury  or  a  court.  The  pereonal  ascendency  of  one  man 
may  be  such  that  it  would  give  to  his  advice  the  effect  of  a  com- 
mand, if  he  owned  but  a  single  .share  in  each  road.  The  tendency 
of  his  presence  in  the  stockiiolders'  meeting  might  be  certain  to 
prevent  competition,  and  thus  his  advice,  if  not  his  mere  existence, 
become  a  crime. 

I  state  these  general  considerations  as  matters  which  I  should 
have  to  take  into  account  before  I  could  agree  to  affirm  the  decree 
appealed  from,  but  I  do  not  need  them  for  my  own  opinion,  because 
when  I  read  the  act  I  cannot  feel  sufficient  doubt  as  to  the  meaning 
of  the  words  to  need  to  fortify  my  conclusion  by  any  generalities. 
Their  meaning  seems  to  me  plain  on  their  face. 

The  first  .section  makes  "Every  contract,  combination  in  the 
form  of  trust  or  otherwise,  or  conspiracy  in  restraint  of  trade  or 
commerce  among  the  several  States,  or  with  foreign  nations,"  a 
misdemeanor,  punishable  by  fine,  imprisonment  or  both.  Much 
trouble  is  matle  by  substituting  other  phrases  assumed  to  be  equiv- 
alent, which  then  are  reasoned  from  as  if  they  were  in  the  act.  The 
court  below  argued  as  if  maintaining  competition  w^ere  the  expressed 
object  of  the  act.  The  act  says  nothing  about  competition.  I  stick 
to  the  exact  words  used.  The  words  hit  two  cla.sses  of  cases,  and 
only  two  —  Contracts  in  restraint  of  trade  and  combinations  or 
conspiracies  in  restraint  of  trade,  and  we  have  to  consider  what 
these  respectively  are.  Contracts  in  restraint  of  trade  are  dealt 
with  and  defined  by  the  common  law.  They  are  contracts  with  a 
stranger  to  the  contractor's  business  (although  in  some  cases  carn.^- 
ing  on  a  similar  one),  which  wholly  or  partially  restrict  the  freedom 


CHAP.   II.]       NORTHERN    SECURITIES    CO.  V.  UNITED    STATES.  541 

of  the  contractor  in  carrjang  on  that  business  as  otherwise  he 
would.  The  objection  of  the  common  law  to  them  was  primarily 
on  the  contractor's  own  account.  The  notion  of  monopoly  did  not 
come  in  unless  the  contract  covered  the  whole  of  England.  Mitchel 
V.  Reynolds,  1  P.  Wms.  181.  Of  course  this  objection  did  not  apply 
to  partnerships  or  other  forms,  if  there  were  any,  of  substituting 
a  community  of  interest  where  there  had  been  competition.  There 
was  no  objection  to  such  combinations  merely  as  in  restraint  of 
trade,  or  otherwise  unless  they  amounted  to  a  monopoly.  Contracts 
in  restraint  of  trade,  I  repeat,  were  contracts  with  strangers  to  the  con- 
tractor's business,  and  the  trade  restrained  was  the  contractor's  own. 
Combinations  or  conspiracies  in  restraint  of  trade,  on  the  other 
hand,  were  combinations  to  keep  strangers  to  the  agreement  out  of 
the  business.  The  objection  to  them  was  not  an  objection  to  their 
effect  upon  the  parties  making  the  contract,  the  members  of  the 
combination  or  firm,  but  an  objection  to  their  intended  effect  upon 
strangers  to  the  firm  and  their  supposed  consequent  effect  upon  the 
public-at  large.  In  other  words,  they  were  regarded  as  contrary  to 
public  policy  because  they  monopolized  or  attempted  to  monopolize 
some  portion  of  the  trade  or  commerce  of  the  realm.  See  United 
States  V.  E.  C.  Knight  Co.,  156  U.S.  1.  All  that  is  added  to  the 
first  section  by  §  2  is  that  like  penalties  are  imposed  upon  every 
single  person  who,  without  combination,  monopolizes  or  attempts 
to  monopolize  commerce  among  the  States;  and  that  the  liability 
is  extended  to  attempting  to  monopolize  any  part  of  such  trade  or 
commerce.  It  is  more  important  as  an  aid  to  the  construction  of 
§  1  than  it  is  on  its  own  account.  It  shows  that  whatever  is  criminal 
when  done  by  way  of  combination  is  equally  criminal  if  done  by  a 
single  man.  That  I  am  right  in  my  interpretation  of  the  words  of 
§  1  is  shown  by  the  words  "in  the  form  of  trust  or  otherwise."  The 
prohibition  was  suggested  by  the  trusts,  the  objection  to  which,  as 
every  one  knows,  was  not  the  union  of  former  competitors,  but  the 
sinister  power  exercised  or  supposed  to  be  exercised  by  the  coml^ina- 
tion  in  keeping  rivals  out  of  the  business  and  ruining  those  who 
already  were  in.  It  was  the  ferocious  extreme  of  competition  with 
others,  not  the  cessation  of  competition  among  the  partners,  that 
was  the  evil  feared.  Further  proof  is  to  be  found  in  §  7,  giving  an 
action  to  any  person  injured  in  his  business  or  property  by  the  for- 
bidden conduct.  This  cannot  refer  to  the  parties  to  the  agreement 
and  plainly  means  that  outsiders  who  are  injured  hi  their  attempt 
to  compete  with  a  trust  or  other  similar  combination  may  recover 
for  it.  Montague  &  Co.  v.  Loiorij,  193  U.S.  38.  How  effective  the 
section  may  be  or  how  far  it  goes,  is  not  material  to  my  point.  My 
general  summary  of  the  two  classes  of  cases  which  the  act  affects  is 
confirmed  by  the  title,  which  is  "An  Act  to  protect  Trade  and 
Commerce  against  unlawful  Restraints  and  Monopolies." 


542  NORTHERN    SECURITIES    CO.  V.  UNITED    STATES.       [cHAI'.   11. 

What  I  now  ask  is  under  which  of  the  foregoing  classes  this  case 
is  supposed  to  come,  and  that  ([uestion  must  be  answered  ;us  defi- 
nitely and  precisely  as  if  we  were  dealing  with  the  indictments  wliich 
logically  ought  to  follow  this  decision.  The  provision  of  the  statute 
against  contracts  in  restraint  of  tratle  has  been  held  to  apply  to 
contracts  between  railroads,  otherwise  remaining  independent,  by 
which  they  restrictetl  their  respective  freedom  as  to  rates.  This  re- 
striction by  contract  with  a  stranger  to  the  contractor's  business  is 
the  ground  of  the  decision  in  United  States  v.  Joint  Traffic  Associa- 
tion, 171  I'.S.  505,  following  and  affirming  United  States  v.  Trans- 
Missouri  Freifjht  Association,  1G()  U.S.  290.  I  accept  those  decisions 
absolutely,  not  only  as  binding  upon  me,  but  as  (hn-isions  which  I 
have  no  desire  to  criticize  or  abridge.  But  the  provision  has  not  lx>en 
decided,  and,  it  seems  to  me,  could  not  be  decided  without  per- 
version of  plain  language,  to  apply  to  an  arrangement  by  which 
com|K'tition  is  ended  through  comnumity  of  interest  —  an  arrange- 
ment which  leaves  the  parties  without  external  restriction.  That 
provision,  taken  alone,  does  not  require  that  all  existing  competi- 
tions shall  be  maintained.  It  does  not  look  iirimarily,  if  at  all,  to 
competition.  It  sim|)ly  refjuires  that  a  party's  freedom  in  trade  be- 
tween the  States  shall  not  be  cut  down  by  contract  with  a  stranger. 
So  far  as  that  phrase  goes,  it  is  lawful  to  abolish  competition  by  any 
form  of  union.  It  would  seem  to  me  impossible  to  say  that  the 
words  "every  contract  in  restraint  of  trade  is  a  crime  punishal)le 
with  imprisonment,"  would  send  the  members  of  a  partnership  be- 
tween, or  a  consolidation  of,  two  trading  corporations  to  prison  — 
still  more  impossible  to  say  that  it  forbade  one  man  or  corporation  to 
purchase  as  nuich  stock  as  he  liked  in  l)oth.  Yet  those  words  would 
have  that  effect  if  this  clause  of  §  1  applies  to  the  defendants  here. 
For  it  cannot  be  too  carefully  remembered  that  that  clause  applies 
to  "every"  contract  of  the  forbidden  kind  —  a  consideration  which 
was  the  turning  point  of  the  Ti-ans-Missouri  Freight  Association's  case. 

If  the  statute  applies  to  this  ca.se  it  must  be  because  the  parties, 
or  some  of  them,  have  formed,  or  because  the  Northern  Securities 
Company  is,  a  combination  in  restraint  of  trade  among  the  States, 
or,  what  comes  to  the  same  thing  in  my  opinion,  because  the  de- 
fendants, or  some  or  one  of  them,  are  monopolizing  or  attempting 
to  monopolize  some  part  of  the  commerce  between  the  States.  But 
the  mere  reading  of  those  words  shows  that  they  are  used  in  a 
limited  and  accurate  sense.  According  to  popular  speech,  every  con- 
cern monopolizes  whatever  business  it  does,  and  if  that  business  is 
trade  between  two  States  it  monopohzes  a  part  of  the  trade  among 
the  States.  Of  course  the  statute  does  not  forbid  that.  It  docs  not 
mean  that  all  business  must  cease.  A  single  railroad  down  a  narrow 
valley  or  through  a  mountain  gorge  monopolizes  all  the  railroad 
transportation  through  that  valley  or  gorge.   Indeed  every  railroad 


CHAP.  II.]       NORTHERN    SECURITIES    CO.  V.  UNITED    STATES.  543 

monopolizes,  in  a  popular  sense,  the  trade  of  some  area.  Yet  I  sup- 
pose no  one  would  say  that  the  statute  forbids  a  combination  of 
men  into  a  corporation  to  build  and  run  such  a  railroad  between  the 
States. 

I  assume  that  the  Minnesota  charter  of  the  Great  Northern  and 
the  Wisconsin  charter  of  the  Northern  Pacific  both  are  valid.  Sup- 
pose that,  before  either  road  was  built,  Mimiesota,  as  part  of  a  sys- 
tem of  transportatijn  between  the  States,  had  created  a  railroad 
company  authorized  singly  to  build  all  the  lines  in  the  States  now 
actually  built,  owned  or  controlled  by  either  of  the  two  existing; 
companies.  I  take  it  that  that  charter  would  have  been  just  as  good 
as  the  present  one,  even  if  the  statutes  which  we  are  considering 
had  been  in  force.  In  whatever  sense  it  would  have  created  a  mo- 
nopoly the  present  charter  does.  It  would  have  been  a  large  one, 
but  the  act  of  Congress  makes  no  discrimination  according  to  size. 
Size  has  nothing  to  do  with  the  matter.  A  monopoly  of  "any  part" 
of  commerce  among  the  States  is  unlawful.  The  supposed  company 
would  have  owned  lines  that  might  have  been  competing  —  prob- 
ably the  present  one  does.  But  the  act  of  Congress  will  not  be  con- 
strued to  mean  the  universal  disintegration  of  society  into  single 
men,  each  at  war  with  all  the  rest,  or  even  the  prevention  of  all 
further  combinations  for  a  common  end. 

There  is  a  natural  feeling  that  somehow  or  other  the  statute  meant 
to  strike  at  combinations  great  enough  to  cause  just  anxiety  on  the 
part  of  those  who  love  their  country  more  than  money,  while  it 
viewed  such  little  ones  as  I  have  supposed  with  just  indifference. 
This  notion,  it  may  be  said,  somehow  breathes  from  the  pores  of 
the  act,  although  it  seems  to  be  contradicted  in  every  way  by  the 
words  in  detail.  And  it  has  occurred  to  me  that  it  might  be  that 
when  a  combination  reached  a  certain  size  it  might  have  attributed 
to  it  more  of  the  character  of  a  monopoly  merely  by  virtue  of  its 
size  than  would  be  attributed  to  a  smaller  one.  I  am  quite  clear 
that  it  is  only  in  connection  with  monopolies  that  size  could  play 
any  part.  But  my  answer  has  been  indicated  already.  In  the  first 
place  size  in  the  case  of  railroads  is  an  inevitable  incident,  and  if  it 
were  an  objection  under  the  act,  the  Great  Northern  and  the  North- 
ern Pacific  already  were  too  great  and  encountered  the  law.  In  the 
next  place  in  the  case  of  railroads  it  is  e\adent  that  the  size  of  the 
combination  is  reached  for  other  ends  than  those  which  would  make 
them  monopolies.  The  combinations  are  not  formed  for  the  purpose 
of  excluding  others  from  the  field.  Finally,  even  a  small  railroad 
will  have  the  same  tendency  to  exclude  others  from  its  narrow  area 
that  great  ones  have  to  exclude  others  from  a  greater  one,  and  the 
statute  attacks  the  small  monopolies  as  well  as  the  great.  The  very 
words  of  the  act  make  such  a  distinction  impossible  in  this  case  and 
it  has  not  been  attempted  in  express  terms. 


544  NORTHERN    SECURITIES    CO.  V.  UNITED    STATES.       [CHAP.  II. 

If  the  charter  which  I  have  imagined  above  woukl  liave  iK'on 
good  notwithstanding  tlic  monopoly,  in  a  popular  sense,  which  it 
created,  one  next  is  led  to  ask  whether  and  why  a  combination  or 
consolidation  of  existing  roads,  although  in  actual  conifx'tition,  into 
one  company  of  exactly  the  same  powers  and  extent,  would  be  any 
more  obnoxious  to  the  law.  Although  it  was  decided  in  Lonisrille  A 
Nashville  Railroad  Co.  v.  Kentudcy,  161  U.S.  077,  701,  that  since 
the  statute,  as  before,  the  States  have  the  power  to  regulate?  the 
matter,  it  was  said,  in  the  argument,  that  such  a  con.solidation  would 
be  unlawful,  and  it  seems  to  me  that  the  Attorney  (leneral  wixs 
compelled  to  say  so  in  order  to  maintain  his  citse.  But  I  think  that 
logic  would  not  let  him  stop  there,  or  short  of  denying  the  power  of 
a  State  at  the  present  time  to  authorize  one  company  to  construct 
and  own  two  parallel  lines  that  might  comix^te.  The  monopoly 
would  be  the  same  as  if  the  roads  were  con.solidated  after  they  had 
begun  to  compete  —  and  it  is  on  the  footing  of  monopoly  that  I 
now  am  supposing  the  objection  made.  But  to  meet  the  objection 
to  the  prevention  of  comjx'tition  at  the  same  time,  I  will  suppose 
that  three  parties  apply  to  a  State  for  charters;  one  for  each  of  two 
new  and  possibly  comi)eting  lines  resjx^ctively,  and  one  for  both  of 
these  lines,  and  that  the  charter  is  granted  to  the  last.  I  think  that 
charter  would  be  good,  and  I  think  the  whole  argument  to  the  con- 
trary rests  on  a  popular  instead  of  an  accurate  and  legal  conception 
of  what  the  word  "monopolize"  in  the  statute  means.  I  repeat, 
that  in  my  opinion  there  is  no  attempt  to  monopolize,  and  what, 
as  I  have  said,  in  my  judgment  amounts  to  the  same  thing,  that 
there  is  no  combination  in  restraint  of  trade,  until  something  is 
done  with  the  intent  to  exclude  strangers  to  the  combination  fiom 
competing  with  it  in  some  pai't  of  the  business  which  it  cames  on. 

Unless  I  am  entii-ely  wrong  in  my  understanding  of  what  a  "com- 
bination in  restraint  of  trade"  means,  then  the  same  monopoly  may 
be  attempted  and  effected  by  an  individual,  and  is  made  equally 
illegal  in  that  case  by  §  2.  But  I  do  not  expect  to  hear  it  maintained 
that  Mr.  Morgan  could  be  sent  to  prison  for  bu>ing  as  many  shares 
as  he  liked  of  the  Great  Northern  and  the  Northern  Pacific,  even  if 
he  bought  them  both  at  the  same  time  and  got  more  than  half  the 
stock  of  each  road. 

There  is  much  that  was  mentioned  in  argument  which  I  pass  by. 
But  in  view  of  the  great  importance  attached  by  both  sides  to  the 
supposed  attempt  to  suppress  competition,  I  must  say  a  word  more 
about  that.  I  said  at  the  outset  that  I  should  assume,  and  I  do 
assume,  that  one  purpose  of  the  purchase  was  to  suppress  competi- 
tion between  the  two  roads.  I  appreciate  the  force  of  the  argument 
that  there  are  independent  stockholders  in  each ;  that  it  cannot  be 
presumed  that  the  respective  boards  of  directors  will  propose  any 
illegal  act;  that  if  they  should  they  could  be  restrained,  and  that  all 


CHAP.  II.]      NOKTHERN    SECURITIES    CO.  V.  UNITED    STATES.  545 

that  has  been  done  as  yet  is  too  remote  from  the  illegal  result  to  be 
classed  even  as  an  attempt.  Not  every  act  done  in  furtherance  of 
an  unlawful  end  is  an  attempt  or  contrary  to  the  law.  There  must 
be  a  certain  nearness  to  the  result.  It  is  a  question  of  proximity 
and  degree.  Commonwealth  v.  Peaslee,  177  Massachusetts,  267,  272. 
So,  as  I  have  said,  is  the  amenability  of  acts  in  furtherance  of  inter- 
ference with  commerce  among  the  States  to  legislation  by  Congress. 
So,  according  to  the  intimation  of  this  court,  is  the  question  of  lia- 
bility under  the  present  statute.  Hopkins  v.  United  States,  171  U.S. 
578;  Anderso7i  v.  United  States,  171  U.S.  604.  But  I  assume  further, 
for  the  purposes  of  discussion,  that  what  has  been  done  is  near 
enough  to  the  result  to  fall  under  the  law,  if  the  law  prohibits  that 
result,  although  that  assumption  very  nearly  if  not  quite  contra- 
dicts the  decision  in  United  States  v.  E.  C.  Knight  Co.,  156  U.S.  1. 
But  I  say  that  the  law  does  not  prohibit  the  result.  If  it  does  it 
must  be  because  there  is  some  further  meaning  than  I  have  yet  dis- 
covered in  the  words  "combinations  in  restraint  of  trade."  I  think 
that  I  have  exhausted  the  meaning  of  those  words  in  what  I  have 
already  said.  But  they  certainly  do  not  require  all  existing  competi- 
tions to  be  kept  on  foot,  and,  on  the  principle  of  the  Trans-Missouri 
Freight  Association's  case,  invalidate  the  continuance  of  old  con- 
tracts by  which  former  competitors  united  in  the  past. 

A  partnership  is  not  a  contract  or  combination  in  restraint  of 
trade  between  the  partners  unless  the  well  known  words  are  to  be 
given  a  new  meaning  invented  for  the  purposes  of  this  act.  It  is  true 
that  the  suppression  of  competition  was  referred  to  in  United  States  v. 
Trans-Missouri  Freight  Association,  166  U.S.  290,  but,  as  I  have  said, 
that  was  in  connection  with  a  contract  vAih.  a  stranger  to  the  defend- 
ant's business  —  a  true  contract  in  restraint  of  trade.  To  suppress 
competition  in  that  way  is  one  thing,  to  suppress  it  by  fusion  is  an- 
other. The  law,  I  repeat,  says  nothing  about  competition,  and  only 
prevents  its  suppression  by  contracts  or  combinations  in  restraint  of 
trade,  and  such  contracts  or  combinations  derive  their  character  as 
restraining  trade  from  other  features  than  the  suppression  of  com- 
petition alone.  To  see  whether  I  am  wrong,  the  illustrations  put  in 
the  argument  are  of  use.  If  I  am,  then  a  partnership  between  two 
stage  drivers  who  had  been  competitors  in  driving  across  a  state 
line,  or  two  merchants  once  engaged  in  rival  commerce  among  the 
States  whether  made  after  or  before  the  act,  if  now  continued,  is 
a  crime.  For,  again  I  repeat,  if  the  restraint  on  the  freedom  of  the 
members  of  a  combination  caused  by  their  entering  into  partnership 
is  a  restraint  of  trade,  every  such  combination,  as  well  the  small  as 
the  great,  is  within  the  act. 

In  view  of  my  interpretation  of  the  statute  I  do  not  go  further 
into  the  question  of  the  power  of  Congress.  That  has  been  dealt 
with  by  my  brother  White  and  I  concur  in  the  main  with  his  views. 


546  NORTHERN    SECURITIES    CO.  V.  UNITED    STATES.       [cHAP.  II. 

I  am  happy  to  know  that  only  a  minority  of  my  brethren  adopt  an 
inter[)relation  of  the  law  which  in  my  opinion  vvoukl  make  eternal 
the  helium  omnium  contra  omnes  and  disintegrate  .society  so  far  a.s 
it  could  into  individual  atoms.  If  that  were  its  intent  I  should 
regard  calling  such  a  law  a  regulation  of  commerce  as  a  mere  pre- 
tense. It  would  be  an  attempt  to  reconstruct  society.  I  am  not 
concerned  with  the  wisdom  of  such  an  attempt,  but  I  believe  that 
Congress  was  not  entrusted  by  the  Constitution  with  the  power  to 
make  it  and  I  am  deeply  persuaded  that  it  lias  not  tried. 

Chief  Justice  Fuller,  Mr.  Justice  White,  and  Mr.  Justice  Peck- 
ham  concurred  in  this  dissent. 

Note.  —  In  United  States  v.  Union  Pacific  R.R.  Co.,  226  U.S.  61, 
the  court  held  that  the  Anti-Trust  Act  was  violated  where  the 
Union  Pacific  R.R.  Co.  acquired  a  dominating  influence  over  the 
conduct  of  the  business  of  the  Southern  Pacific  Co.,  a  competing 
railroad  company,  through  the  ownership,  by  a  corporation  cont  rolled 
by  the  Union  Pacific,  of  46  per  cent  of  the  stock  of  the  Southern 
Pacific.   In  the  course  of  its  opinion  the  court  said  (p.  88) :  — 

"It  is  urged  that  this  competitive  traffic  was  infinitesimal  when 
compared  with  the  gross  amount  of  the  business  transacted  by  both 
roads,  and  so  small  as  only  to  amount  to  that  incidental  restraint  of 
trade  which  ought  not  to  be  held  to  be  within  the  law;  but  we 
think  the  testimony  amply  shows  that,  while  these  roads  did  a  great 
deal  of  business  for  which  they  did  not  compete  and  that  the  com- 
petitive business  was  a  comparatively  small  part  of  the  sum  total  of 
all  traffic,  state  and  interstate,  carried  over  them,  nevertheless  such 
competing  traffic  was  large  in  volume,  amounting  to  many  millions 
of  dollars.  Before  the  transfer  of  the  stock  this  traffic  was  the  subject 
of  active  competition  between  these  systems,  but  by  reason  of  the 
power  arising  from  such  transfer  it  has  since  been  placed  under  a 
common  control.  It  was  by  no  means  a  negligible  part,  but  a  large 
and  valuable  part,  of  interstate  commerce  which  was  thus  directly 
affected." 

In  United  States  v.  Union  Pacific  R.R.  Co.,  226  U.S.  470,  the  court 
held  that  a  sale  of  the  stock  of  the  Southern  Pacific  to  the  share- 
holders of  the  Union  Pacific,  substantially  in  proportion  to  their 
respective  holdings  (or  a  distribution  thereof,  by  way  of  a  dividend) 
would  not  constitute  a  disposition  of  the  shares  in  compliance  with 
the  opinion  of  the  court  reported  in  226  U.S.  61. 


CHAP.  II.]  SWIFT    &    CO.  y.  UNITED    STATES.  547 

SWIFT  &  CO.  V.  UNITED  STATES. 

196  U.S.  375.     1905. 

Mr.  Justice  Holmes.  This  is  an  appeal  from  a  decree  of  the  Cir- 
cuit Court,  on  demurrer,  granting  an  injunction  against  the  appel- 
lants' commission  of  alleged  violations  of  the  act  of  July  2,  1890, 
chap.  647,  26  Stat.  209,  *'to  protect  trade  and  commerce  against  un- 
lawful restraints  and  monopolies."  It  will  be  necessary  to  consider 
both  the  bill  and  the  decree.  The  bill  is  brought  against  a  number  of 
corporations,  firms  and  indi\dduals  of  different  States  and  makes  the 
following  allegations:  1.  The  defendants  (appellants)  are  engaged  in 
the  business  of  buying  live  stock  at  the  stock  j'-ards  in  Chicago, 
Omaha,  St.  Joseph,  Kansas  City,  East  St.  Louis  and  St.  Paul,  and 
slaughtering  such  live  stock  at  their  respective  plants  in  places 
named,  in  different  States,  and  converting  the  live  stock  into  fresh 
meat  for  human  consumption.  2.  The  defendants  "are  also  en- 
gaged in  the  business  of  selling  such  fresh  meats,  at  the  several  places 
where  they  are  so  prepared,  to  dealers  and  consumers  in  divers 
States  and  Territories  of  the  said  United  States  other  than  those 
wherein  the  said  meats  are  so  prepared  and  sold  as  aforesaid,  and 
in  the  District  of  Columbia,  and  in  foreign  countries,  and  shipping 
the  same  meats,  when  so  sold  from  the  said  places  of  their  prepara- 
tion, over  the  several  lines  of  transportation  of  the  several  railroad 
companies  serving  the  same  as  common  carriers,  to  such  dealers  and 
consumers,  pursuant  to  such  sales."  3.  The  defendants  also  are 
engaged  in  the  business  of  shipping  such  fresh  meats  to  their  respec- 
tive agents  at  the  principal  markets  in  other  States,  etc.,  for  sale  by 
those  agents  in  those  markets  to  dealers  and  consumers.  4.  The 
defendants  together  control  about  six-tenths  of  the  whole  trade  and 
commerce  in  fresh  meats  among  the  States,  Territories  and  District 
of  Columbia,  and,  5,  but  for  the  acts  charged  would  be  in  free  com- 
petition with  one  another. 

6.  In  order  to  restrain  competition  among  themselves  as  to  the 
purchase  of  live  stock,  defendants  have  engaged  in,  and  intend  to 
continue,  a  combination  for  requiring  and  do  and  will  require  their 
respective  purchasing  agents  at  the  stock  yards  mentioned,  where 
defendants  buy  their  live  stock  (the  same  being  stock  produced  and 
owned  principally  in  other  States  and  shipped  to  the  yards  for  sale), 
to  refrain  from  bidding  against  each  other,  ''except  perfunctorily  and 
without  good  faith,"  and  by  this  means  compelling  the  owners  of  such 
stock  to  sell  at  less  prices  than  they  would  receive  if  the  bidding 
really  was  competitive. 

7.  For  the  same  purposes  the  defendants  combine  to  bid  up, 
through  their  agents,  the  prices  Of  live  stock  for  a  few  days  at  a  time, 
"so  that  the  market  reports  will  show  prices  much  higher  than  the 


548  SWIFT    &    CO.  V.  UNITED    STATES.  [CHAP.  II. 

state  of  the  trade  will  warrant,"  thereby  inducing  stock  owners  in 
other  States  to  make  large  shipments  to  the  stock  yards  to  their 
disadvantage. 

8.  For  the  same  purposes,  and  to  monopolize  the  comiiicrcc  pro- 
tected by  the  statute,  the  defendants  combine  "to  arbitrarily,  from 
time  to  time  raise,  lower,  and  fix  prices,  and  to  maintain  uniform 
prices  at  which  they  will  sell"  to  dealers  throughout  the  States. 
This  is  effected  by  secret  periodical  meetings,  wheic  arc  fixed  prices 
to  be  enforced  until  changed  at  a  substHjuent  meeting.  The  prices 
are  maintained  directly,  and  by  collusivcly  restricting  the  meat 
shipped  by  the  defendants,  whenever  conducive  to  the  result,  by 
imposing  penalties  for  deviations,  by  establishing  a  uniform  rule  for 
the  giving  of  credit  to  dealers,  etc.,  and  by  notifying  one  another  of 
the  delinquencies  of  such  dealers  and  keeping  a  black  Ust  of  delin- 
quents, and  refusing  to  sell  meats  to  them. 

9.  The  defendants  also  combine  to  make  uniform  charges  for  cart- 
age for  the  delivery  of  meats  sold  to  dealers  and  consuniers  in  the 
markets  throughout  the  States,  etc.,  shipped  to  them  by  the  defend- 
ants through  the  defendants'  agents  at  the  markets,  when  no  charges 
would  have  been  made  but  for  the  combination. 

10.  Intending  to  monopolize  the  said  commerce  and  to  prevent 
competition  therein,  the  defendants  "have  all  and  each  engaged  in 
and  will  continue"  arrangements  with  the  railroads  whereby  the 
defendants  received,  by  means  of  rebates  and  other  devices,  rates 
less  than  the  la^\'ful  rates  for  transportation,  and  were  exclusively  to 
enjoy  and  share  this  unlawful  advantage  to  the  exclusioii  of  competi- 
tion and  the  pu])lic.  By  force  of  the  consequent  inability  of  com- 
petitors to  engage  or  continue  in  such  commerce,  the  defendants  are 
attempting  to  monopolize,  have  monopolized,  and  will  monopolize 
the  commerce  in  live  stock  and  fresh  meats  among  the  States  and  Ter- 
ritories, and  with  foreign  countries,  and,  11,  the  defendants  are,  and 
have  been  in  conspiracy  with  each  other,  with  the  railroad  companies 
and  others  unknown,  to  obtain  a  monopoly  of  the  sbpply  and  dis- 
tribution of  fresh  meats  throughout  the  United  States,  etc.  And  to 
that  end  defendants  artificially  restrain  the  commerce  and  put  arbi- 
trary regulations  in  force  affecting  the  same  from  the  shipment  of 
the  hve  stock  from  the  plains  to  the  final  distribution  of  the  meats  to 
the  consumers. 

To  sum  up  the  bill  more  shortly,  it  charges  a  combination  of  a 
dominant  proportion  of  the  dealers  in  fresh  meat  throughout  the 
United  States  not  to  bid  against  each  other  in  the  live  stock  markets 
of  the  different  States,  to  bid  up  prices  for  a  few  days  in  order  to 
induce  the  cattle  men  to  send  their  stock  to  the  stock  yards,  to  fix 
prices  at  which  they  will  sell,  and  to  that  end  to  restrict  shipments  of 
meat  when  necessary,  to  establish  a  uniform  rule  of  credit  to  dealers 
and  to  keep  a  black  list,  to  make  uniform  and  improper  charges  for 


CHAP.  II.]  SWIFT    &    CO.  V.  UNITED    STATES.  549 

cartage,  and  finally,  to  get  less  than  lawful  rates  from  the  railroads 
to  the  exclusion  of  competitors.  It  is  true  that  the  last  charge  is  not 
clearly  stated  to  be  a  part  of  the  combination.  But  as  it  is  alleged 
that  the  defendants  have  each  and  all  made  arrangements  with  the 
railroads,  that  they  were  exclusively  to  enjoy  the  unlawful  advan- 
tage, and  that  their  intent  in  what  they  did  was  to  monopolize  the 
commerce  and  to  prevent  competition,  and  in  view  of  the  general 
allegation  to  which  we  shall  refer,  we  think  that  we  have  stated  cor- 
rectly the  purport  of  the  bill.  It  will  be  noticed  further  that  the  in- 
tent to  monopolize  is  alleged  for  the  first  time  in  the  eighth  section 
of  the  bill  as  to  raising,  lowering  and  fixing  prices.  In  the  earlier 
sections,  the  intent  alleged  is  to  restrain  competition  among  them- 
selves. But  after  all  the  specific  charges  there  is  a  general  allegation 
that  the  defendants  are  conspiring  with  one  another,  the  railroads 
and  others,  to  monopolize  the  supply  and  distribution  of  fresh  meats 
throughout  the  United  States,  etc.,  as  has  been  stated  above,  and  it 
seems  to  us  that  this  general  allegation  of  intent  colors  and  applies 
to  all  the  specific  charges  of  the  bill. 

Although  the  combination  alleged  embraces  restraint  and  monop- 
oly of  trade  within  a  single  State,  its  effect  upon  commerce  among 
the  States  is  not  accidental,  secondary,  remote  or  merely  probable. 
On  the  allegations  of  the  bill  the  latter  commerce  no  less,  perhaps 
even  more,  than  commerce  within  a  single  State  is  an  object  of  at- 
tack. See  Leloup  v.  Port  of  Mobile,  127  U.S.  640,  647;  Crutcher  v. 
Kentucky,  141  U.S.  47,  59;  Allen  v.  Pullman  Co.,  191  U.S.  171,  179, 
180.  Moreover,  it  is  a  direct  object,  it  is  that  for  the  sake  of  which 
the  several  specific  acts  and  courses  of  conduct  are  done  and  adopted. 
Therefore  the  case  is  not  like  United  States  v.  E.  C.  Knight  Co.,  156 
U.S.  1,  where  the  subject  matter  of  the  combination  was  manufac- 
ture and  the  direct  object  monopoly  of  manufacture  within  a  State. 
However  likely  monopoly  of  commerce  among  the  States  in  the 
article  manufactured  was  to  follow  from  the  agreement  it  was  not  a 
necessary  consequence  nor  a  primary  end.  Here  the  subject  matter 
is  sales  and  the  very  point  of  the  combination  is  to  restrain  and 
monopolize  commerce  among  the  States  in  respect  of  such  sales. 
The  two  cases  are  near  to  each  other,  as  sooner  or  later  always  must 
happen  where  lines  are  to  be  drawn,  but  the  line  between  them  is 
distinct.  Montague  &  Co.  v.  Lowry,  193  U.S.  38. 

So,  again,  the  line  is  distinct  between  this  case  and  Hopkins  v. 
United  States,  171  U.S.  578.  All  that  was  decided  there  was  that  the 
local  business  of  commission  merchants  was  not  commerce  among 
the  States,  even  if  what  the  brokers  were  employed  to  sell  was  an 
object  of  such  commerce.  The  brokers  were  not  like  the  defendants 
before  us,  them.selves  the  buyers  and  sellers.  They  only  furnished 
certain  facilities  for  the  sales.  Therefore,  there  again  the  effects  of 
the  combination  of  brokers  upon  the  commerce  was  only  indirect  and 


550  SWIFT    &    CO.  V.  UNITED    STATES.  [c'lIAP.  II, 

not  within  the  act.  Whether  the  eiuse  would  huve  Ix-'cn  different  if 
the  combination  liad  resuUcd  in  exorbitant  charjijes,  was  left  open. 
In  Anderson  v.  United  States,  171  U.S.  604,  the  defendants  were 
buyers  and  sellers  at  the  stock  yards,  but  their  agreement  was 
merely  not  to  employ  brokers,  or  to  recognize  yard-traders,  who  were 
not  members  of  their  association.  Any  yard-trader  could  lu-come  a 
member  of  the  association  on  complying  with  the  conditions,  and 
there  was  said  to  be  no  feature  of  monopoly  in  the  case.  It  was  held 
that  the  combination  did  not  directly  regulate  commerce  between 
the  States,  and,  being  formed  with  a  ditTerent  intent,  wius  not  within 
the  act.  The  present  case  is  more  like  Montague  tt  Co.  v.  Loury, 
193  U.S.  38. 

For  the  foregoing  reasons  we  are  of  opinion  that  the  carrj'ing  out 
of  the  scheme  alleged,  by  the  means  set  forth,  properly  may  be  en- 
joined, ami  that  the  bill  cannot  l>e  dismissed. 

So  far  it  has  not  been  nece.ssaiy  to  consider  whether  the  facts 
charged  in  any  single  paragraph  constitute  commerce  among  the 
States  or  show  an  interference  with  it.  There  can  be  no  doubt,  we 
apprehend,  as  to  the  collective  efTect  of  all  the  facts,  if  true,  and  if  the 
defendants  entertain  the  intent  alleged.  We  pa.ss  now  to  the  i)artic- 
ulars,  and  will  consider  the  corresponding  parts  of  the  injunction  at 
the  same  time.  The  first  question  arii^es  on  the  sixth  section.  That 
charges  a  combination  of  independent  dealers  to  restrict  the  com- 
petition of  their  agents  when  purchasing  stock  for  them  in  the  stock 
yards.  The  purchasers  and  their  slaughtering  establishments  are 
largely  in  different  States  from  those  of  the  stock  yards,  and  the 
sellers  of  the  cattle,  perhaps  it  is  not  too  much  to  assume,  largely  in 
different  States  from  either.  The  intent  of  the  combination  is  not 
merely  to  restrict  competition  among  the  parties,  but,  as  we  have 
said,  by  force  of  the  general  allegation  at  the  end  of  the  bill,  to  aid  in 
an  attempt  to  monopolize  commerce  among  the  States. 

It  is  said  that  this  charge  is  too  vague  and  that  it  does  not  set 
forth  a  case  of  commerce  among  the  States.  Taking  up  the  latter 
objection  first,  commerce  among  the  States  is  not  a  technical  legal 
conception,  but  a  practical  one,  drawn  from  the  course  of  business. 
When  cattle  are  sent  for  sale  from  a  place  in  one  State,  with  the  ex- 
pectation that  they  will  end  their  transit,  after  purchase,  in  another, 
and  when  in  effect  they  do  so,  with  only  the  interruption  necessary 
to  find  a  purchaser  at  the  stock  yards,  and  when  this  is  a  typical, 
constantly  recurring  course,  the  current  thus  existing  is  a  current 
of  commerce  among  the  States,  and  the  purcha.se  of  the  cattle  is  a 
part  and  incident  of  such  commerce,  ^\^lat  we  say  is  true  at  least  of 
such  a  purchase  by  residents  in  another  State  from  that  of  the  seller 
and  of  the  cattle.  And  we  need  not  trouble  ourselves  at  this  time  as 
to  whether  the  statute  could  be  escaped  by  any  arrangement  as  to 
the  place  where  the  sale  in  point  of  law  is  consmnmated.  See  Nor- 


CHAP.  II.]         SWIFT  &  CO.  V.   UNITED  STATES.  551 

folk  &  Western  Ry.  v.  Sims,  191  U.S.  441.  But  the  sixth  section  of 
the  bill  charges  an  interference  with  such  sales,  a  restraint  of  the 
parties  by  mutual  contract  and  a  combination  not  to  compete  in 
order  to  monopohze.  It  is  immaterial  if  the  section  also  embraces 
domestic  transactions. 

It  should  be  added  that  the  cattle  in  the  stock  yard  are  not  at  rest 
even  to  the  extent  that  was  held  sufficient  to  warrant  taxation  in 
American  Steel  &  Wire  Co.  v.  Speed,  192  U.S.  500.  But  it  may  be 
that  the  question  of  taxation  does  not  depend  upon  whether  the 
article  taxed  may  or  may  not  be  said  to  be  in  the  course  of  commerce 
between  the  States,  but  depends  upon  whether  the  tax  so  far  affects 
that  commerce  as  to  amount  to  a  regulation  of  it.  The  injunction 
against  tal-dng  part  in  a  combination,  the  effect  of  which  will  be  a 
restraint  of  trade  among  the  States  by  directing  the  defendants' 
agents  to  refrain  from  bidding  against  one  another  at  the  sales  of 
live  stock,  is  justified  so  far  as  the  subject  matter  is  concerned. 

The  injunction,  however,  refers  not  to  trade  among  the  States  in 
cattle,  concerning  which  there  can  be  no  question  of  original  pack- 
ages, but  to  trade  in  fresh  meats,  as  the  trade  forbidden  to  be  re- 
strained, and  it  is  objected  that  the  trade  in  fresh  meats  described  in 
the  second  and  third  sections  of  the  bill  is  not  commerce  among  the 
States,  because  the  meat  is  sold  at  the  slaughtering  places,  or  when 
sold  elsewhere  may  be  sold  in  less  than  the  original  packages.  But 
the  allegations  of  the  second  section,  even  if  they  import  a  technical 
passing  of  title  at  the  slaughtering  places,  also  import  that  the 
sales  are  to  persons  in  other  States,  and  that  the  shipments  to  other 
States  are  part  of  the  transaction  —  "pursuant  to  such  sales"  — 
and  the  third  section  imports  that  the  same  things  which  are  sent 
to  agents  are  sold  by  them,  and  sufficiently  indicates  that  some  at 
least  of  the  sales  are  of  the  original  packages.  Moreover,  the  sales 
are  by  persons  in  one  State  to  persons  in  another.  But  we  do  not 
mean  to  imply  that  the  rule  which  marks  the  point  at  which  state 
taxation  or  regulation  becomes  permissible  necessarily  is  beyond  the 
scope  of  interference  by  Congress  in  cases  where  such  interference  is 
deemed  necessary  for  the  protection  of  commerce  among  the  States. 
Nor  do  we  mean  to  intimate  that  the  statute  under  consideration  is 
limited  to  that  point.  Beyond  what  we  have  said  above,  we  leave 
those  questions  as  we  find  them.  They  were  touched  upon  in  the 
Northern  Securities  Company^s  Case,  193  U.S.  197. 


552  STANDARD    OIL    CO.  V.  UNITED    STATES.  [CHAP.  II. 

STANDARD  OIL  CO.   v.   UNITED  STATES. 

221  U.S.  1.     1911. 

The  Standard  Oil  Company  of  Ohio  was  formed  in  1870,  and 
acquired  the  assets  of  three  separate  partnerships  theretofore 
engaged  in  the  business  of  refining  crude  oil  and  shipping  its 
products  in  interstate  commerce.  The  former  partnei-s  became  its 
stockholders.  Thereafter  various  properties  were  accjuired  cither 
by  the  said  corporation,  or  by  trustees  acting  in  behalf  of  the 
stockliolders  of  said  corporation,  with  the  result  that  said  corpora- 
tion and  trustees  came  to  control  a  great  part  —  alleged  by  the 
Government  to  be  90  per  cent  —  of  the  business  in  the  United 
States  of  producing,  shipping,  refining  and  selling  petroleum  and 
its  products. 

In  1882  the  stock  of  the  Standard  Oil  Company  of  Ohio,  and  the 
properties  held  by  the  said  trustees,  were  transferred  to  certain 
trustees,  who  issued  certificates  of  beneficial  interest.  The  trustees 
thereafter  acquired  other  properties  having  a  value  in  the  petroleum 
business.  Quo  warranto  proceedings  were  commenced  in  Ohio 
against  the  Standard  Oil  Company  of  Ohio  which  resulted  in  the 
entry  by  the  Supreme  Court  of  Ohio,  on  March  2,  1892,  of  a  decree 
adjudging  the  trust  agreement  to  be  void,  not  only  because  the 
Standard  Oil  Company  of  Ohio  was  a  party  to  the  same,  but  also 
because  the  agreement  in  and  of  itself  was  in  restraint  of  trade  and 
amounted  to  the  creation  of  an  unlawful  monopoly.  In  1897,  the 
Attorney  General  of  Ohio  instituted  contempt  proceedings  in  the 
quo  warranto  case  based  upon  the  claim  that  the  trust  had  not  been 
dissolved  as  required  by  the  decree  in  that  case. 

In  1899  the  stock  of  the  Standard  Oil  Company  of  New  Jersey 
was  increased  from  S10,000,000  to  $1 10,000,000,  and  it  acciuired 
the  properties  formerly  held  l)y  the  said  trustees. 

The  government  alleged  that  improper  means  had  been  used  to 
ensure  success  in  the  conduct  of  the  business  of  the  Standard  Oil 
Company  of  Ohio,  the  Standard  Oil  Trustees,  and  the  Standard  Oil 
Company  of  New  Jersey.  It  enumerated:  rebates,  preferences  and 
other  discriminatory  practises  in  favor  of  the  combination  by  rail- 
road companies;  restraint  and  monopolization  by  control  of  pipe 
lines,  and  unfair  practises  against  competing  pipe  lines;  contracts 
^vith  competitors  in  restraint  of  trade;  unfair  methods  of  competi- 
tion, such  as  local  price  cutting  at  the  points  where  necessary  to 
suppress  competition;  espionage  of  the  business  of  competitors,  the 
operation  of  bogus  independent  companies,  and  pa3Tnent  of  rebates 
on  oil,  with  the  like  intent;  the  division  of  the  United  States  into 
districts  and  the  limiting  of  the  operations  of  the  various  subsidiary 
corporations  as  to  such  districts  so  that  competition  in  the  sale  of 


CHAP.  II.]  STANDARD    OIL    CO.  V.  UNITED    STATES.  553 

petroleum  products  between  such  corporations  had  been  entirely 
eliminated  and  destroyed. 

In  its  answer,  the  Standard  Oil  Company  of  New  Jersey  denied 
that  a  combination  of  independent  or  competing  concerns  or  cor- 
porations was  affected  either  by  the  formation  of  the  Trust  in  1882, 
or  by  its  own  acquisitions  in  1899. 

The  court  below  entered  a  decree  which  required  the  Standard 
Oil  Company  of  New  Jersey  to  transfer  back,  to  the  stockholders 
of  the  various  subsidiary  corporations,  the  stocks  which  had  been 
turned  over  to  it  in  exchange  for  its  stock. 

Mr.  Chief  Justice  White.  The  debates  [in  Congress]  show  that 
doubt  as  to  whether  there  was  a  common  law  of  the  United  States 
which  governed  the  subject  in  the  absence  of  legislation  was  among 
the  influences  leading  to  the  passage  of  the  act.  They  conclusively 
show,  however,  that  the  main  cause  which  led  to  the  legislation  was 
the  thought  that  it  was  required  by  the  economic  condition  of  the 
times,  that  is,  the  vast  accumulation  of  wealth  in  the  hands  of  cor- 
porations and  individuals,  the  enormous  development  of  corporate 
organization,  the  facility  for  combination  which  such  organizations 
afforded,  the  fact  that  the  facility  was  being  used,  and  that  combina- 
tions known  as  trusts  were  being  multiplied,  and  the  widespread 
impression  that  their  power  had  been  and  would  be  exerted  to  op- 
press individuals  and  injure  the  public  generally.  Although  debates 
may  not  be  used  as  a  means  for  interpreting  a  statute  {United  States 
V.  Trans-Missouri  Freight  Association,  166  U.S.  318,  and  cases  cited) 
that  rule  in  the  nature  of  things  is  not  violated  by  resorting  to  de- 
bates as  a  means  of  ascertaining  the  environment  at  the  time  of  the 
enactment  of  a  particular  law,  that  is,  the  history  of  the  period  when 
it  was  adopted. 

There  can  be  no  doubt  that  the  sole  subject  with  which  the  first 
section  deals  is  restraint  of  trade  as  therein  contemplated,  and  that 
the  attempt  to  monopolize  and  monopolization  is  the  subject  with 
which  the  second  section  is  concerned.  It  is  certain  that  those  terms, 
at  least  in  their  rudimentary  meaning,  took  their  origin  in  the  com- 
mon law,  and  were  also  familiar  in  the  law  of  this  country  prior  to 
and  at  the  time  of  the  adoption  of  the  act  in  question. 

We  shall  endeavor  then,  first  to  seek  their  meaning,  not  by  in- 
dulging in  an  elaborate  and  learned  analysis  of  the  English  law  and 
of  the  law  of  this  country,  but  by  making  a  very  brief  reference  to  the 
elementary  and  indisputable  conceptions  of  both  the  English  and 
American  law  on  the  subject  prior  to  the  passage  of  the  Anti-Trust 
Act. 

a.  It  is  certain  that  at  a  very  remote  period  the  words  "contract 
in  restraint  of  trade"  in  England  came  to  refer  to  some  voluntary 
restraint  put  by  contract  by  an  individual  on  his  right  to  carry  on 
his  trade  or  calling.  Originally  all  such  contracts  were  considered  to 


554  STANDARD    OIL    CO.  V.  UNITED    STATES.  [cHAP.  II. 

be  illegal,  because  it  was  deemed  they  were  injurious  to  the  public 
as  well  as  to  the  individuals  who  made  them.  In  the  interest  of  the 
freedom  of  individuals  to  contract  this  iloctiine  was  modified  .so  that 
it  was  only  when  a  restraint  by  contract  was  so  general  as  to  be 
coterminous  with  the  kingdom  that  it  was  treated  as  void.  That  is 
to  say,  if  the  restraint  was  partial  in  its  operation  and  was  otherwise 
rea.sonablc  the  contract  was  held  to  be  valid. 

b.  Monopolies  were  defined  by  Lord  Coke  as  follows:  — 

"*A  monopoly  is  an  institution,  or  allowance  by  the  king  by  his 
grant,  commission,  or  otherwise  to  any  person  or  persons,  bodies 
politic  or  corporate,  of  or  for  the  sole  bu>nng,  selling,  making,  work- 
ing, or  u.sing  of  anything,  wherein'  any  person  or  persons,  bodies 
politic  or  corporate,  are  sought  to  be  restrained  of  any  fr(M>dom  or 
liberty  that  they  had  before,  or  hindered  in  their  lawful  trade.' 
(3  Inst.  181,  chap.  85.)" 

Hawkins  thus  defined  them:  — 

"'A  monopoly  is  an  allowance  by  the  king  to  a  particular  person 
or  persons  of  the  sole  buying,  selling,  making,  working,  or  using  of 
anything  whereby  the  subject  in  general  is  restrained  from  the  free- 
dom of  manufacturing  or  trading  which  he  had  before.'  (Hawk. 
P.C.  bk.  l,chap.  29.)" 

The  frequent  granting  of  monopolies  and  the  struggle  which  led 
to  a  denial  of  the  power  to  create  them,  that  is  to  say,  to  the  estab- 
lishment that  they  were  incompatible  with  the  English  constitution 
is  known  to  all  and  need  not  be  reviewed.  The  e\ils  which  led  to  the 
pul)lic  outcry  against  monopolies  and  to  the  final  denial  of  the  power 
to  make  them  may  be  thus  summarily  stated:  1.  The  power  which 
the  monopoly  gave  to  the  one  who  enjoyed  it  to  fix  the  price  and 
thereby  injure  the  public;  2.  The  power  which  it  engendered  of 
enabling  a  limitation  on  production;  and,  3.  The  danger  of  tleterio- 
ration  in  quality  of  the  monopolized  article  which  it  was  deemed  was 
the  inevitable  resultant  of  the  monopolistic  control  over  its  produc- 
tion and  sale.  As  monopoly  as  thus  conceived  embraced  only  a 
consequence  arising  from  an  exertion  of  sovereign  power,  no  express 
restrictions  or  prohil)itions  obtained  against  the  creation  by  an  in- 
dividual of  a  monopoly  as  such.  But  as  it  was  considered,  at  least 
so  far  as  the  necessaries  of  life  were  concerned,  that  individuals  by 
the  abuse  of  their  right  to  contract  might  be  able  to  usurp  the  power 
arbitrarily  to  enhance  prices,  one  of  the  wrongs  arising  from  monop- 
oly, it  came  to  be  that  laws  were  passed  relating  to  offenses  such  as 
forestalling,  regrating  and  engrossing  by  which  prohibitions  were 
placed  upon  the  power  of  individuals  to  deal  under  such  circum- 
stances and  conditions  as,  according  to  the  conception  of  the  times, 
created  a  presumption  that  the  dealings  were  not  simpl}'  the  honest 
exertion  of  one's  right  to  contract  for  his  own  benefit  unaccompanied 
by  a  wrongful  motive  to  injure  others,  but  were  the  consequence  of  a 


CHAP.  II.]  STANDARD    OIL    CO.  V.  UNITED    STATES.  655 

contract  or  course  of  dealing  of  such  a  character  as  to  give  rise  to  the 
presumption  of  an  intent  to  injure  others  through  the  means,  for 
instance,  of  a  monopohstic  increase  of  prices.  This  is  illustrated  by 
the  definition  of  engrossing  found  in  the  statute,  5  and  6  Edw.  VI, 
chap.  14,  as  follows:  — 

"Whatsoever  person  or  persons  .  .  .  shall  engross  or  get  into  his 
or  their  hands  by  bujdng,  contracting,  or  promise-taking,  other  than 
by  demise,  grant,  or  lease  of  land,  or  tithe,  any  corn  growing  in  the 
fields,  or  any  other  corn  or  grain,  butter,  cheese,  fish,  or  other  dead 
victual,  whatsoever,  within  the  realm  of  England,  to  the  intent  to  sell 
the  same  again,  shall  be  accepted,  reputed,  and  taken  an  unlawful 
engrosser  or  engrossers." 

As  by  the  statutes  providing  against  engrossing  the  quantity  en- 
grossed was  not  required  to  be  the  whole  or  a  proximate  part  of  the 
whole  of  an  article,  it  is  clear  that  there  was  a  wide  difference  be- 
tween monopoly  and  engrossing,  etc.  But  as  the  principal  wrong 
which  it  was  deemed  would  result  from  monopoly,  that  is,  an  en- 
hancement of  the  price,  was  the  same  wrong  to  which  it  was  thought 
the  prohibited  engrossment  would  give  rise,  it  came  to  pass  that 
monopoly  and  engrossing  were  regarded  as  virtually  one  and  the 
same  thing.  In  other  words,  the  prohibited  act  of  engrossing  be- 
cause of  its  inevitable  accomplishment  of  one  of  the  evils  deemed  to 
be  engendered  by  monopoly,  came  to  be  referred  to  as  being  a  mo- 
nopoly or  constituting  an  attempt  to  monopolize.  Thus  Pollexpen, 
in  his  argument  in  East  India  Company  v.  Sandys,  Skin.  165,  169, 
said :  — 

"By  common  law,  he  said  that  trade  is  free,  and  for  that  cited 
3  Inst.  81;  F.B.  65;  1  Roll.  4;  that  the  common  law  is  as  much 
against  'monopoly'  as  'engrossing';  and  that  they  differ  only,  that 
a  'monopoly'  is  by  patent  from  the  king,  the  other  is  by  the  act  of 
the  subject  between  party  and  party;  but  that  the  mischiefs  are  the 
same  from  both,  and  there  is  the  same  law  against  both.  Moore, 
673;  11  Rep.  84.  The  sole  trade  of  anything  is  'engrossing'  ex  rei 
natura,  for  whosoever  hath  the  sole  trade  of  buying  and  selling  hath 
'engrossed'  that  trade;  and  whosoever  hath  the  sole  trade  to  any 
country,  hath  the  sole  trade  of  buying  and  selling  the  produce  of 
that  country,  at  his  own  price,  which  is  an  'engrossing.'" 

And  by  operation  of  the  mental  process  which  led  to  considering 
as  a  monopoly  acts  which  although  they  did  not  constitute  a  mo- 
nopoly were  thought  to  produce  some  of  its  baneful  effects,  so  also 
because  of  the  impediment  or  burden  to  the  due  course  of  trade  which 
they  produced,  such  acts  came  to  be  referred  to  as  in  restraint  of 
trade.  This  is  shown  by  my  Lord  Coke's  definition  of  monopoly 
as  being  "an  institution  or  allowance  .  .  .  whereby  any  person  or 
persons,  bodies  politic  or  corporate,  are  sought  to  be  restrained  of 
any  freedom  or  liberty  that  they  had  before  or  hindered  in  their  law- 


556  STANDARD    OIL    CO.  V.  UNITED    STATES.  [cHAP.  II. 

ful  trade."  It  is  illustrated  also  by  the  definition  which  Hawkins 
gives  of  monopoly  wherein  it  is  said  that  the  effect  of  monopoly  is 
to  restrain  the  citizen  "from  the  freedom  of  manufacturiiif^  or  trad- 
ing which  he  had  before."  And  see  especially  the  opinion  of  Pauker, 
C.J.,  in  Mitchel  v.  Reynolds,  (1711)  1  P.  Williams,  181,  where  a 
classification  is  made  of  monopoly  which  brings  it  generically  within 
the  description  of  restraint  of  trade. 

Generalizing  these  considerations,  the  situation  is  this:  1.  That 
by  the  coromon  law  monopolies  were  unlawful  liecause  of  their  re- 
striction upon  individual  freedom  of  contract  and  their  injurv'  to  the 
public.  2.  That  as  to  necessaries  of  life  the  freedom  of  the  individual 
to  deal  was  restricted  where  the  nature  and  character  of  the  dealing 
was  such  as  to  engender  the  presumption  of  intent  to  l)ring  about  at 
least  one  of  the  injuries  which  it  was  deemed  would  result  from  mo- 
nopoly, that  is,  an  undue  enhancement  of  price.  3.  That  to  protect 
the  freedom  of  contract  of  the  individual  not  only  in  his  own  interest, 
but  principally  in  the  interest  of  the  common  weal,  a  contract  of  an 
individual  by  which  he  put  an  unreasonable  restraint  upon  himself 
as  to  carrying  on  his  trade  or  business  was  void.  And  that  at  com- 
mon law  the  evils  consequent  upon  engrossing,  etc.,  caused  those 
things  to  be  treated  as  coming  within  monopoly  and  sometimes  to  be 
called  monopoly  and  the  same  considerations  caused  monopoly,  be- 
cause of  its  operation  and  effect,  to  be  brought  within  and  spoken  of 
generally  as  impeding  the  due  course  of  or  being  in  restraint  of  trade. 

From  the  development  of  more  accurate  economic  conceptions 
and  the  changes  in  conditions  of  society  it  came  to  be  recognized  that 
the  acts  prohibited  by  the  engrossing,  forestalling,  etc.,  statutes  did 
not  have  the  harmful  tendency  which  they  were  presumed  to  have 
when  the  legislation  concerning  them  was  enacted,  and  therefore 
did  not  justify  the  presumption  which  had  previously  l^eon  deduced 
from  them,  but,  on  the  contrary,  such  acts  tended  to  fructify  and 
develop  trade.  See  the  statutes  of  12th  George  III,  chap.  71,  en- 
acted in  1772,  and  statute  of  7  and  8  Victoria,  chap.  24,  enacted  in 
1844,  repealing  the  prohibitions  against  engrossing,  forestalling,  etc., 
upon  the  express  ground  that  the  prohibited  acts  had  come  to  be 
considered  as  favorable  to  the  development  of  and  not  in  restraint 
of  trade.  It  is  remarkable  that  nowhere  at  common  law  can  there 
be  found  a  prohibition  against  the  creation  of  monopoly  by  an  indi- 
vidual. This  would  seem  to  manifest,  either  consciously,  or  intui- 
tively, a  profound  conception  as  to  the  ine^^table  operation  of  eco- 
nomic forces  and  the  equipoise  or  balance  in  favor  of  the  protection 
of  the  rights  of  individuals  which  resulted.  That  is  to  say,  as  it  was 
deemed  that  monopoly  in  the  concrete  could  only  arise  from  an  act 
of  sovereign  power,  and,  such  sovereign  power  being  restrained,  pro- 
hibitions as  to  indi\dduals  were  directed,  not  against  the  creation  of 
monopoly,  but  were  only  appUed  to  such  acts  in  relation  to  particular 


CHAP.  II.]  STANDARD    OIL    CO.  V.  UNITED    STATES.  557 

subjects  as  to  which  it  was  deemed,  if  not  restrained,  some  of  the 
consequences  of  monopoly  might  result.  After  all,  this  was  but  an 
instinctive  recognition  of  the  truisms  that  the  course  of  trade  could 
not  be  made  free  by  obstructing  it,  and  that  an  individual's  right  to 
trade  could  not  be  protected  by  destroying  such  right. 

From  the  review  just  made  it  clearly  results  that  outside  of  the 
restrictions  resulting  from  the  want  of  power  in  an  individual  to 
voluntarily  and  unreasonably  restrain  his  right  to  carry  on  his  trade 
or  business  and  outside  of  the  want  of  right  to  restrain  the  free  course 
of  trade  by  contracts  or  acts  which  implied  a  wrongful  purpose,  free- 
dom to  contract  and  to  abstain  from  contracting  and  to  exercise 
every  reasonable  right  incident  thereto  became  the  rule  in  the  Eng- 
lish law.  The  scope  and  effect  of  this  freedom  to  trade  and  contract 
is  clearly  shown  by  the  decision  in  Mogul  Steamship  Co.  v.  McGregor, 
(1892)  A.C.  25.  While  it  is  true  that  the  decision  of  the  House  of 
Lords  in  the  case  in  question  was  announced  shortly  after  the  pas- 
sage of  the  Anti-Trust  Act,  it  serves  reflexly  to  show  the  exact  state 
of  the  law  in  England  at  the  time  the  Anti-Trust  statute  was  enacted. 

In  this  country  also  the  acts  from  which  it  was  deemed  there  re- 
sulted a  part  if  not  all  of  the  injurious  consequences  ascribed  to 
monopoly,  came  to  be  referred  to  as  a  monopoly  itself.  In  other 
words,  here  as  had  been  the  case  in  England,  practical  common 
sense  caused  attention  to  be  concentrated  not  upon  the  theoretically 
correct  name  to  be  given  to  the  condition  or  acts  which  gave  rise  to 
a  harmful  result,  but  to  the  result  itself  and  to  the  remedying  of  the 
evils  which  it  produced.  The  statement  just  made  is  illustrated  by 
an  early  statute  of  the  Pro\'ince  of  Massachusetts,  that  is,  chap.  31 
of  the  laws  of  1778-1779,  by  which  monopoly  and  forestalling  were 
expressly  treated  as  one  and  the  same  thing. 

It  is  also  true  that  while  the  principles  concerning  contracts  in 
restraint  of  trade,  that  is,  voluntary  restraint  put  by  a  person  on  his 
right  to  pursue  his  calling,  hence  only  operating  subjectively,  came 
generally  to  be  recognized  in  accordance  with  the  English  rule,  it 
came  moreover  to  pass  that  contracts  or  acts  which  it  was  considered 
had  a  monopolistic  tendency,  especially  those  which  were  thought 
to  unduly  diminish  competition  and  hence  to  enhance  prices  —  in 
other  words,  to  monopolize  —  came  also  in  a  generic  sense  to  be 
spoken  of  and  treated  as  they  had  been  in  England,  as  restricting  the 
due  course  of  trade,  and  therefore  as  being  in  restraint  of  trade.  The 
dread  of  monopoly  as  an  emanation  of  governmental  power,  while 
it  passed  at  an  early  date  out  of  mind  in  this  countiy,  as  a  result 
of  the  structure  of  our  Government,  did  not  serve  to  assuage  the 
fear  as  to  the  evil  consequences  which  might  arise  from  the  acts  of 
individuals  producing  or  tending  to  produce  the  consequences  of 
monopoly.  It  resulted  that  treating  such  acts  as  we  have  said  as 
amounting  to  monopoly,  sometimes  constitutional  restrictions,  again 


558  STANDARD    OIL    CO.  V.  UNITED    STATES.  [CHAP.  II. 

legislative  enactments  or  judicial  decisions,  served  to  enforce  and 
illustrate  the  purpose  to  prevent  the  occurrence  of  the  evils  recog- 
nized in  the  mother  country  as  consequent  up(jn  monoi)oly,  hy  pro- 
viding against  contracts  or  acts  of  individuals  or  comhinati(Mis  of 
individuals  or  cori)urations  deemed  to  \)c  conducive  to  such  results. 

It  will  be  found  that  as  modem  conditions  arose  the  trend  of  legis- 
lation and  judicial  decision  came  more  and  more  to  adapt  the  rec- 
ognized restrictions  to  new  manifestations  of  eonduct  or  of  dealing 
which  it  was  thought  justified  the  inference  of  intent  to  do  the 
wrongs  which  it  had  lx»en  the  purpose  to  prevent  from  the  lx>ginning. 
The  evolution  is  clearly  pointed  out  in  National  Cotton  Oil  Co.  v. 
Texas,  197  U.S.  11.'),  and  Shawnee  Compress  Co.  v.  Anderson,  209 
U.S.  42.3;  and,  indeed,  will  l)c  found  to  l)c  illustrattnl  in  various 
aspects  by  the  decisions  of  this  court  which  have  Ixjen  concerned  with 
the  enforcement  of  the  act  we  are  now  considering. 

Without  going  into  detail  and  i)ut  ver>'  l)riefly  surve^nng  the  whole 
field,  it  may  l)e  with  accuracy  said  that  the  dread  of  enhancement  of 
prices  and  of  other  wrongs  which  it  was  thought  would  flow  from  the 
undue  limitation  on  competitive  conditions  caused  by  contracts  or 
other  acts  of  individuals  or  corporations,  led,  as  a  matter  of  public 
policy,  to  the  prohibition  or  treating  ju^  illegal  all  contracts  or  acts 
which  were  unreasonably  restrictive  of  competitive  conditions, 
either  from  the  nature  or  character  of  the  contract  or  act  or  where 
the  surrounding  circumstances  were  such  as  to  justify  the  conclusion 
that  they  had  not  been  entered  into  or  performe(l  with  the  legiti- 
mate purpose  of  reasonably  forwarding  personal  interest  and  de- 
veloping trade,  but  on  the  contrary  were  of  such  a  character  as  to 
give  rise  to  the  inference  or  presumption  that  they  had  been  entered 
into  or  done  with  the  intent  to  do  wrong  to  the  general  public  and 
to  limit  the  right  of  indi\-iduals,  thus  restraining  the  free  flow  of 
commerce  and  tending  to  bring  about  the  evils,  such  as  enhance- 
ment of  prices,  which  were  considered  to  be  against  public  policy. 
It  is  equally  true  to  say  that  the  sur\'ey  of  the  legislation  in  this 
country  on  this  subject  from  the  beginning  will  show,  depending  as 
it  did  upon  the  economic  conceptions  which  obtained  at  the  time 
when  the  legislation,was  adopted  or  judicial  decision  was  rendered, 
that  contracts  or  acts  were  at  one  time  deemed  to  be  of  such  a  char- 
acter as  to  justify  the  inference  of  wrongful  intent  which  were  at 
another  period  thought  not  to  be  of  that  character.  But  this  again, 
as  we  have  seen,  simply  followed  the  line  of  development  of  the  law 
of  England. 

Let  us  consider  the  language  of  the  first  and  second  sections, 
guided  by  the  principle  that  where  words  are  employed  in  a  statute 
which  had  at  the  time  a  well-knowTi  meaning  at  common  law  or  in 
the  law  of  this  country  they  are  presumed  to  have  been  used  in  that 
sense  unless  the  context  compels  to  the  contrary.    Swearingen  v. 


CHAP.  II.]  STANDAED    OIL    CO.  V.  UNITED    STATES.  559 

United  States,  161  U.S.  446;  United  States  v.  Wong  Kim  Ark,  169 
U.S.  649;  Keck  v.  United  States,  172  U.S.  446;  Kepner  v.  United 
States,  195  U.S.  100,  126. 

As  to  the  first  section,  the  words  to  be  interpreted  are:  "Every 
contract,  combination  in  the  form  of  trust  or  otherwise,  or  con- 
spiracy in  restraint  of  trade  or  commerce  ...  is  hereby  declared  to 
be  illegal."  As  there  is  no  room  for  dispute  that  the  statute  was  in- 
tended to  formulate  a  rule  for  the  regulation  of  interstate  and  foreign 
commerce,  the  question  is  what  was  the  rule  which  it  adopted? 

In  view  of  the  common  law  and  the  law  in  this  country  as  to  re- 
straint of  trade,  which  we  have  reviewed,  and  the  illuminating  effect 
which  that  history  must  have  under  the  rule  to  which  we  have  re- 
ferred, we  think  it  results: 

a.  That  the  context  manifests  that  the  statute  was  drawn  in  the 
light  of  the  existing  practical  conception  of  the  law  of  restraint  of 
trade,  because  it  groups  as  within  that  class,  not  only  contracts 
which  were  in  restraint  of  trade  in  the  subjective  sense,  but  all  con- 
tracts or  acts  which  theoretically  were  attempts  to  monopolize,  yet 
which  in  practice  had  come  to  be  considered  as  in  restraint  of  trade 
in  a  broad  sense. 

h.  That  in  view  of  the  many  new  forms  of  contracts  and  com- 
binations which  were  being  evolved  from  existing  economic  condi- 
tions, it  was  deemed  essential  by  an  all-embracing  enumeration  to 
make  sure  that  no  form  of  contract  or  combination  by  which  an  un- 
due restraint  of  interstate  or  foreign  commerce  was  brought  about 
could  save  such  restraint  from  condemnation.  The  statute  under 
this  view  evidenced  the  intent  not  to  restrain  the  right  to  make  and 
enforce  contracts,  whether  resulting  from  combination  or  otherwise, 
which  did  not  unduly  restrain  interstate  or  foreign  commerce,  but 
to  protect  that  commerce  from  being  restrained  by  methods,  whether 
old  or  new,  which  would  constitute  an  interference  that  is  an  undue 
restraint. 

c.  And  as  the  contracts  or  acts  embraced  in  the  provision  were  not 
expressly  defined,  since  the  enumeration  addressed  itself  simply  to 
classes  of  acts,  those  classes  being  broad  enough  to  embrace  every 
conceivable  contract  or  combination  which  could  be  made  concern- 
ing trade  or  commerce  or  the  subjects  of  such  commerce,  and  thus 
caused  any  act  done  by  any  of  the  enumerated  methods  anywhere 
in  the  whole  field  of  human  activity  to  be  illegal  if  in  restraint  of 
trade,  it  inevitably  follows  that  the  provision  necessarily  called  for 
the  exercise  of  judgment  which  required  that  some  standard  should 
be  resorted  to  for  the  purpose  of  determining  whether  the  prohibi- 
tions contained  in  the  statute  had  or  had  not  in  any  given  case  been 
violated.  Thus  not  specifying  but  indubitably  contemplating  and 
requiring  a  standard,  it  follows  that  it  was  intended  that  the  stand- 
ard of  reason  which  had  been  applied  at  the  common  law  and  in  this 


569  STANDARD    OIL    CO.  V.  UNITED    STATES.  [aiAP.  II. 

country  in  dealing  with  subjects  of  the  character  einhraced  by 
the  statute,  was  intended  to  be  the  measure  u.sed  for  the  pur- 
pose of  determining  whether  in  a  given  case  a  particular  act  had 
or  had  not  brought  about  the  wrong  against  which  the  statute 
provided. 

And  a  consideration  of  the  text  of  the  second  section  serves  to 
establish  that  it  was  intended  to  supplement  the  first  and  to  make 
sure  that  by  no  possible  guise  could  the  public  policy  embodietl  in 
the  first  section  be  frustrated  or  evaded.  The  prohibitions  of  the 
second  embrace  "Every  person  who  shall  monopolize,  or  attemi)t  to 
monopolize,  or  combine  or  conspire  with  any  other  p<^'rson  or  persons, 
to  monopolize  any  part  of  the  trade  or  commerce  among  the  several 
states,  or  with  foreign  nations,  .  .  ."  By  reference  to  the  terms  of  §  8 
it  is  certain  that  the  woril  person  clearly  implies  a  corporation  as 
well  as  an  individual. 

The  commerce  referred  to  by  the  words  "any  part"  construed  in 
the  light  of  the  manifest  purpose  of  the  statute  has  both  a  geo- 
graphical and  a  distril)utive  significance,  that  is  it  includes  any 
jwrtion  of  the  United  States  and  any  one  of  the  classes  of  tilings 
forming  a  part  of  interstate  or  foreign  commerce. 

Undoubtedly,  the  words  "to  monopolize"  and  "monopolize"  as 
used  in  the  section  reach  every  act  bringing  about  the  prohibited 
results.  The  anil)iguity,  if  any.  is  involved  in  determining  what  is 
intended  by  monopolize.  But  this  ambiguity  is  readily  dispelled  in 
the  light  of  the  previous  history  of  the  law  of  restraint  of  trade  to 
which  we  have  referred  and  the  indication  which  it  gives  of  the 
practical  evolution  by  which  monopoly  and  the  acts  which  produce 
the  same  result  as  monopoly,  that  is,  an  undue  restraint  of  the  course 
of  trade,  all  came  to  be  spoken  of  as,  and  to  he  indeed  synonymous 
with,  restraint  of  trade.  In  other  words,  ha\nng  by  the  first  section 
forbidden  all  means  of  monopolizing  trade,  that  is,  unduly  restrain- 
ing it  by  means  of  every  contract,  combination,  etc.,  the  second  sec- 
tion seeks,  if  possible,  to  make  the  prohibitions  of  the  act  all  the  more 
complete  and  perfect  by  embracing  all  attempts  to  reach  the  end 
prohibited  by  the  first  section,  that  is,  restraints  of  trade,  by  any 
attempt  to  monopolize,  or  monopolization  thereof,  even  although 
the  acts  by  which  such  results  are  attempted  to  Ix"  brought  about 
or  are  brought  about  be  not  embraced  within  the  general  enumeration 
of  the  first  section.  And,  of  course,  when  the  second  section  is  thus 
harmonized  with  and  made  as  it  was  intended  to  l)e  the  complement 
of  the  first,  it  becomes  obvdous  that  the  criteria  to  be  resorted  to  in 
any  given  case  for  the  purpose  of  ascertaining  whether  violations  of 
the  section  have  been  committed,  is  the  rule  of  reason  guided  by  the 
established  law  and  by  the  plain  duty  to  enforce  the  prohibitions  of 
the  act  and  thus  the  public  policy  which  its  restrictions  were  obvi- 
ously enacted  to  subserve.   And  it  is  worthy  of  observation,  as  we 


CHAP.  II.]  STANDARD    OIL    CO.  V.  UNITED    STATES.  561 

have  previously  remarked  concerning  the  common  law,  that  al- 
though the  statute  by  the  comprehensiveness  of  the  enumerations 
embodied  in  both  the  first  and  second  sections  makes  it  certain  that 
its  purpose  was  to  prevent  undue  restraints  of  every  kind  or  nature, 
nevertheless  by  the  omission  of  any  direct  prohibition  against  mo- 
nopoly in  the  concrete  it  indicates  a  consciousness  that  the  freedom 
of  the  individual  right  to  contract  when  not  unduly  or  improperly 
exercised  was  the  most  efficient  means  for  the  prevention  of  mo- 
nopoly, since  the  operation  of  the  centrifugal  and  centripetal  forces 
resulting  from  the  right  to  freely  contract  was  the  means  by  which 
monopoly  would  be  inevitably  prevented  if  no  extraneous  or  sover- 
eign power  imposed  it  and  no  right  to  make  unlawful  contracts  hav- 
ing a  monopolistic  tendency  were  permitted.  In  other  words  that 
freedom  to  contract  was  the  essence  of  freedom  from  undue  restraint 
on  the  right  to  contract. 

In  substance,  the  propositions  urged  by  the  Government  are  re- 
ducible to  this:  That  the  language  of  the  statute  embraces  every 
contract,  combination,  etc.,  in  restraint  of  trade,  and  hence  its  text 
leaves  no  room  for  the  exercise  of  judgment,  but  simply  imposes  the 
plain  duty  of  appl^dng  its  prohibitions  to  eveiy  case  within  its  literal 
language.  The  error  involved  lies  in  assuming  the  matter  to  be  de- 
cided. This  is  true  because  as  the  acts  which  may  come  under  the 
classes  stated  in  the  first  section  and  the  restraint  of  trade  to  which 
that  section  applies  are  not  specifically  enumerated  or  defined,  it  is  ob- 
vious that  judgment  must  in  every  case  be  called  into  play  m  order 
to  determine  whether  a  particular  act  is  embraced  within  the  statu- 
tory classes,  and  whether  if  the  act  is  within  such  classes  its  nature  or 
effect  causes  it  to  be  a  restraint  of  trade  within  the  intendment  of 
the  act.  To  hold  to  the  contrary  would  require  the  conclusion  either 
that  every  contract,  act  or  combination  of  any  kind  or  nature, 
whether  it  operated  a  restraint  on  trade  or  not,  was  within  the  statute, 
and  thus  the  statute  would  be  destructive  of  all  right  to  contract  or 
agree  or  combine  in  any  respect  whatever  as  to  subjects  embraced  in 
interstate  trade  or  commerce,  or  if  this  conclusion  were  not  reached, 
then  the  contention  would  require  it  to  be  held  that  as  the  statute 
did  not  define  the  things  to  which  it  related  and  excluded  resort  to 
the  only  means  by  which  the  acts  to  which  it  relates  could  be  ascer- 
tained— the  light  of  reason  —  the  enforcement  of  the  statute  was  im- 
possible because  of  its  uncertainty.  The  merely  generic  enumeration 
which  the  statute  makes  of  the  acts  to  which  it  refers  and  the  absence 
of  any  definition  of  restraint  of  trade  as'  used  in  the  statute  leaves 
room  for  but  one  conclusion,  which  is,  that  it  was  expressly  designed 
not  to  unduly  limit  the  application  of  the  act  by  precise  definition, 
but  while  clearly  fixing  a  standard,  that  is,  by  defining  the  ulterior 
boundaries  w^hich  could  not  be  transgressed  with  impunity,  to  leave 
it  to  be  determined  by  the  light  of  reason,  guided  by  the  principles  of 


562  STANDARD    OIL    CO.  V.  UNITED    STATES.  [ciIAP.  II. 

law  and  the  duty  to  apply  and  enforce  the  pul)Ue  poHcy  emlxxlied 
in  the  statute,  in  every  i;iven  ca.se  whether  any  particular  act  or 
contract  was  within  the  contemplation  of  the  statute. 

But,  it  is  said,  jwrsuasive  as  these  views  may  l>e,  they  may  not  be 
here  applied,  because  the  previous  decisions  of  this  court  have  given 
to  the  statute  a  meaning?  which  expressly  excludes  the  construction 
which  must  result  from  the  reasoning  stated.   The  cases  are  i'nited 
States  V.  Freight  Association,  IGG  U.S.  290,  and  United  States  v.  Joint 
Traffic  As.wciation,  171  U.S.  505.  Both  the  ca'^es  involved  the  legality 
of  combinations  or  as.sociations  of  railnxuls  engaged  in  interstate 
commerce  for  the  purpose  of  controlling  the  conduct  of  the  parties 
to  the  a.ssociation  or  combination  in  nuuiy  particulars.    The  asso- 
ciation or  combination  wjus  a.s.sailed  in  each  Ciise  as  l)eing  in  viola- 
tion of  the  statute.  It  was  held  that  they  were.  It  is  undoubted  that 
in  the  opinion  in  each  Ciise  general  language  was  nuulc  use  of,  which, 
when  separated  from  its  context,  would  justify  the  conclusion  that 
it  was  decided  that  reason  could  not  l)e  resorted  to  for  the  purpose  of 
determining  whether  the  acts  complained  of  were  within  the  statute. 
It  is,  however,  also  true  that  the  nature  and  character  of  the  contract 
or  agreement  in  each  case  was  fully  referred  to  and  suggestions  as  to 
their  unreasonableness  pointed  out  in  order  to  indicate  that  they 
were  within  the  prohil/itions  of  the  statute.   As  the  cases  cannot 
by  any  possil)le  conception  be  treated  as  authoritative  without  the 
certitude  that  reason  was  resorted  to  for  the  purpose  of  deciding 
them,  it  follows  as  a  matter  of  course  that  it  must  have  lx»en  held  by 
the  light  of  reason,  since  the  conclusion  could  not  have  been  other- 
wise reached,  that  the  assailed  cotitracts  or  agreements  were  within 
the  general  enumeration  of  the  statute,  and  that  their  operation  and 
effect  brought  about  the  restraint  of  trade  which  the  statute  pro- 
hibited.  This  being  inevitable,  the  deduction  can  in  reason  only  be 
this:  That  in  the  ca'^es  relied  upon  it  having  been  found  that  the  acts 
complained  of  were  within  the  statute  and  operated  to  produce  the 
injuries  which  the  statute  forbade,  that  resort  to  reason  was  not 
permissible  in  order  to  allow  that  to  be  done  which  the  statute  pro- 
hibited.  This  being  true,  the  rulings  in  the  cases  relied  upon  when 
rightly  appreciated  were  therefore  this  and  nothing  more:  That  as 
considering  the  contracts  or  agreements,  their  necessary  effect  and 
the  character  of  the  parties  by  whom  they  were  made,  they  were 
clearly  restraints  of  trade  within  the  purview  of  the  statute,  they 
could  not  be  taken  out  of  that  category  by  indulging  in  general  rea- 
soning as  to  the  expediency  or  non-expediency  of  having  made  fhe 
contracts  or  the  wisdom  or  want  of  wisdom  of  the  statute  which 
prohibited  their  being  made.   That  is  to  say,  the  cases  but  decided 
that  the  nature  and  character  of  the  contracts,  creating  as  they  did 
a  conclusive  presumption  which  brought  them  vvithin  the  statute, 
such  result  was  not  to  be  disregarded  by  the  substitution  of  a  judicial 


CHAP.  II.]  STANDARD    OIL    CO.  V.  UNITED    STATES.  563 

appreciation  of  what  the  law  ought  to  be  for  the  plain  judicial  duty 
of  enforcing  the  law  as  it  was  made. 

But  aside  from  reasoning  it  is  true  to  say  that  the  cases  relied  upon 
do  not  when  rightly  construed  sustain  the  doctrine  contended  for  as 
established  by  all  of  the  numerous  decisions  of  this  court  which  have 
applied  and  enforced  the  Anti-Trust  Act,  since  they  all  in  the  very 
nature  of  things  rest  upon  the  premise  that  reason  was  the  guide  by 
which  the  provisions  of  the  act  were  in  every  case  interpreted.  In- 
deed intermediate  the  decision  of  the  two  cases,  that  is,  after  the 
decision  in  the  Freight  Association  Case  and  before  the  decision  in 
the  Jaiut  Traffic  Case,  the  case  of  Hopkins  v.  United  States,  171  U.S. 
578,  was  decided,  the  opinion  being  delivered  by  Mr.  Justice  Peck- 
ham,  who  wrote  the  opinions  in  both  the  Freight  Association  and  the 
Joint  Traffic  Cases.  And,  referring  in  the  Hopkins  Case  to  the  broad 
claim  made  as  to  the  rule  of  interpretation  announced  in  the  Freight 
Association  Case,  it  was  said  (p.  592):  ''To  treat  as  condemned  by 
the  act  all  agreements  under  which,  as  a  result,  the  cost  of  conduct- 
ing an  interstate  commercial  business  may  be  increased  would  en- 
large the  application  of  the  act  far  beyond  the  fair  meaning  of  the 
language  used.  There  must  be  some  direct  and  immediate  effect 
upon  interstate  commerce  in  order  to  come  within  the  act."  And  in 
the  Joint  Traffic  Case  this  statement  was  expressly  reiterated  and 
approved  and  illustrated  by  example;  like  limitation  on  the  general 
language  used  in  Freight  Association  and  Joint  Traffic  Cases  is  also 
the  clear  result  of  Bement  v.  National  Harrow  Co.,  186  U.S.  70,  92, 
and  especially  of  Cincinnati  Packet  Co.  v.  Bay,  200  U.S.  179. 

If  the  criterion  by  which  it  is  to  be  determined  in  all  cases  whether 
every  contract,  combination,  etc.,  is  a  restraint  of  trade  within  the 
intendment  of  the  law,  is  the  direct  or  indirect  effect  of  the  acts  in- 
volved, then  of  course  the  rule  of  reason  becomes  the  guide,  and  the 
construction  which  we  have  given  the  statute,  instead  of  being  re- 
futed by  the  cases  relied  upon,  is  by  those  cases  demonstrated  to  be 
correct.  This  is  true,  because  as  the  construction  which  we  have  de- 
duced from  the  history  of  the  act  and  the  analysis  of  its  text  is 
simply  that  in  every  case  where  it  is  claimed  that  an  act  or  acts  are 
in  violation  of  the  statute  the  rule  of  reason,  in  the  light  of  the  prin- 
ciples of  law  and  the  public  policy  which  the  act  embodies,  must  be 
applied.  From  this  it  follows,  since  that  rule  and  the  result  of  the 
test  as  to  direct  or  indirect,  in  their  ultimate  aspect,  come  to  one 
and  the  same  thing,  that  the  difference  between  the  two  is  therefore 
only  that  which  obtains  between  things  which  do  not  differ  at  all. 

If  it  be  true  that  there  is  this  identity  of  result  between  the  rule 
intended  to  be  applied  in  the  Freight  Association  Case,  that  is,  the 
rule  of  direct  and  indirect,  and  the  rule  of  reason  which  under  the 
statute  as  we  construe  it  should  be  here  applied,  it  may  be  asked  how 
was  it  that  in  the  opinion  in  the  Freight  Association  Case  much  con- 


564  STANDARD    OIL    CO.  V.  UXITED    STATED.  (cHAP.  II. 

sideration  was  p:iven  to  the  subject  of  whether  the  agreement  or  cora- 
Ijiiuition  which  wns  involved  in  that  case  could  Ik-  taken  out  of  the 
prohibitions  of  the  st:itute  upon  the  theory  of  its  n*asonablene88. 
The  question  is  pertinent  and  mu.st  \)C  fully  and  frankly  met,  for  if 
it  be  now  deemed  that  the  Freight  Association  Case  wjis  mistakenly 
decided  or  too  broadly  stated,  the  doctrine  which  it  amiouncetl  should 
be  either  expressly  overruled  or  limited. 

The  confusion  which  gives  rise  to  the  question  results  from  failing 
to  distinguish  lx»tween  the  want  of  power  to  take  a  case  which  by  its 
ter'.ns  or  the  circumstances  which  surrounded  it,  considering  among 
such  circumstances  the  character  of  the  parties,  is  plainly  within  the 
statute,  out  of  the  operation  of  the  statute  by  resort  to  rea.son  in 
effect  to  establish  that  the  contract  ought  not  to  lx>  trei.ted  as  within 
the  statute,  and  the  duty  in  ever>'  case  where  it  l)ecome8  necessary 
from  the  nature  and  character  of  the  parties  to  decide  whether  it 
was  within  the  statute  to  pjiss  upon  that  question  by  the  light  of 
rciison.  This  distinction,  we  think,  .«?erves  to  point  out  what  in  its 
ultimate  conception  was  the  thought  underlN-ing  the  reference  to  the 
rule  of  reason  made  in  the  Freight  Association  Case,  esj^ecially  when 
such  reference  is  interpreted  by  the  context  of  the  opinion  and  in  the 
light  of  the  subseriuent  opinion  in  the  Hopkins  Case  and  in  Cincin- 
nati  Packet  Company  v.  Bay,  200  IT.S.  170. 

And  in  order  not  in  the  slightest  degree  to  be  wanting  in  frankness, 
we  say  that  in  so  far,  however,  as  by  s(>par;iting  the  general  language 
used  in  the  opinions  in  the  Freight  Association  and  Joint  TniJTic  Cases 
from  the  context  and  the  subject  and  parties  with  which  the  cases 
were  concerned,  it  may  be  conceived  that  the  language  referred  to 
conflicts  with  the  construction  which  we  give  the  statute,  they  are 
necessarily  now  limiteii  and  (nialifie»l.  We  see  no  possible  escape 
from  this  conclusion  if  we  are  to  adhere  to  the  many  cases  decided 
in  this  court  in  which  the  Anti-Trust  I^aw  has  IxK^n  applied  and  en- 
forced and  if  the  duty  to  apply  and  enforce  that  law  in  the  future  is 
to  continue  to  exist.  The  first  is  true,  l)ecause  the  construction  which 
we  now  give  the  statute  does  not  in  the  slightest  degree  conflict  with 
a  single  previous  case  decided  concerning  the  Anti-Trust  Law  aside 
from  the  contention  as  to  the  Freight  Association  and  Joint  Traffic 
Cases,  and  because  every  one  of  those  ca.sps  applied  the  rule  of  reason 
for  the  purpose  of  determining  whether  the  su]>ject  before  the  court 
was  within  the  statute.  The  second  is  also  true,  since,  as  we  have 
already  pointed  out,  unaided  by  the  light  of  reason  it  is  impossible 
to  understand  how  the  statute  may  in  the  future  l^e  enforced  and 
the  pul)lic  pohcy  which  it  establishes  l>e  made  efficacious. 

So  far  as  the  olijections  of  the  defendants  are  concerned  they  are 
all  embraced  under  two  headings:  — 

a.  That  the  act,  even  if  the  averments  of  the  bill  be  true,  cannot 
be  constitutionally  applied,  because  to  do  so  would  extend  the  power 


CHAP    III  STANDAKD    OIL   CO.  V.  UNITED   STATES.  565 

Of  Congi«s  to  subiects  <fe.o..  the  ^^^^^^^^ 
commerce,  by  enabling  that  body  to  deal J'th  me  e  q 
production  of  commodities  withm  the  States  _  Bu'^'^^'^^    j^j^,^  i„ 
?pon  which  this  argument  Pro^ed^ '^  ^^^^  X  tw  however, 
United  Stales  v.  E.  f  ■  ^™»" '^"^/^^  ^f  J'the  arr^m  nts  based 

t^Z  STayt  ^^:^  Pfe  c.  up^  flT^ 
connection  with  the  interpretation  and  ™f°Xsly  decided  to  e 
Trust  Act,  and  have  been  so  n««''^^'*"'yf'''f  ^P''?'^,,^^^^^^^^^  to 
nnsound  as  to  c-e  the  contentions   o  be  P 

STrtS;"Ce  v'^'Tllo^S  U.S.  ^^g^^ 
United  States,  196  U.S.  375 ;  Montog«  v.  Lmo,-y.  193  U.S.  38 ,  Skawme 
Cnmvress  Co.  v.  Anderson,,  209  U.S.  423.  o+o+omont 

wSrLb=rnVc::!t=^^^^^^^^^ 

teappied  under  the  fact,  of  this  case  without  impairing  ng  ts  o 

to  be  unsound  by  the  construction  we  have  given  the  statue,  oi 
course  the  propositions  which  rest  upon  that  premise  need  not  be 

'"Sollrtuie  arguments  proceed  upon  the  eonception  t^^^^^^^^ 

eric  statutory  provision.    But  to^f '^^^e/^^J:  ^..nbstance  they  deny 

right  of  the  judiciary  i^"  P^'  ,     u^^^t^^^    This  is  so  clear  as 

the  government  has  «^rt<=d  fiom  the  b^P^"  "=  ^1^;^,,  „,eds 

ro  d=:isre  e^^^^^^ 


566  STANDARD    OIL   CO.  V.  UNITED    STATES.  [CHAP.  II. 

upon  wrongful  intent.  Take  questions  of  fraud.  Consider  the  power 
which  must  be  exercised  in  every  case  where  the  courts  are  called 
upon  to  determine  v/hether  particular  acts  are  invalid  which  are, 
abstractly  speaking,  in  and  of  themselves  valid,  but  which  are  as- 
serted to  be  invalid  because  of  their  direct  effect  upon  interstate 
commerce. 

Beyond  dispute  the  proofs  establish  substantially  as  alleged  in  the 
bill  the  following  facts: 

1 .  The  creation  of  the  Standard  Oil  Company  of  Ohio ; 

2.  The  organization  of  the  Standard  Oil  Trust  of  18S2,  and  also  a 
previous  one  of  1879,  not  referred  to  in  the  bill,  and  the  proceedings 
in  the  Supreme  Court  of  Ohio,  culminating  in  a  decree  based  upon 
the  finding  that  the  company  was  unlawfully  a  party  to  that  trust; 
the  transfer  by  the  trustees  of  stocks  in  certain  of  the  companies;  the 
contempt  proceedings;  and,  finally,  the  increase  of  the  capital  of  the 
Standard  Oil  Company  of  New  Jersey  and  the  acciuisition  by  that 
company  of  the  shares  of  the  stock  of  the  other  corporations  in  ex- 
change for  its  certificates. 

The  vast  amount  of  property  and  the  possibilities  of  far-reaching 
control  which  resulted  from  the  facts  last  stated  are  shown  by  the 
statement  which  we  have  pre\4ously  annexed  concerning  the  parties 
to  the  trust  agreement  of  1882,  and  the  corporations  whose  stock  was 
held  by  the  trustees  under  the  trust  and  which  came  therefore  to  be 
held  by  the  New  Jersey  corporation.  But  these  statements  do  not 
with  accuracy  convey  an  appreciation  of  the  situation  as  it  existed 
at  the  time  of  the  entry  of  the  decree  below,  since  during  the  more 
than  ten  years  which  elapsed  between  the  acquiring  by  the  New 
Jersey  corporation  of  the  stock  and  other  property  which  was 
formerly  held  by  the  trustees  under  the  trust  agreement,  the  situa- 
tion of  course  had  somewhat  changed,  a  change  which  when  an- 
alyzed in  the  light  of  the  proof,  we  think,  establishes  that  the  result 
of  enlarging  the  capital  stock  of  the  New  Jersey  company  and  giving 
it  the  vast  power  to  which  we  have  referred  produced  its  normal 
consequence,  that  is,  it  gave  to  the  corporation,  despite  enormous 
dividends  and  despite  the  dropping  out  of  certain  corporations 
enumerated  in  the  decree  of  the  court  below,  an  enlarged  and  more 
perfect  sway  and  control  over  the  trade  and  commerce  in  petroleum 
and  its  products. 

Giving  to  the  facts  just  stated  the  weight  which  it  was  deemed 
they  were  entitled  to,  in  the  light  afforded  by  the  proof  of  other 
cognate  facts  and  circumstances,  the  court  below  held  that  the  acts 
and  dealings  established  by  the  proof  operated  to  destroy  the  "po- 
tentiahty  of  competition"  which  othen\'ise  would  have  existed  to 
such  an  extent  as  to  cause  the  transfers  of  stock  which  were  made  to 
the  New  Jersey  corporation  and  the  control  which  resulted  over  the 
many  and  various  subsidiary  corporations  to  be  a  combination  or 


CHAP.  II.]  STANDARD    OIL    CO.  V.  UNITED    STATES.  567 

conspiracy  in  restraint  of  trade  in  violation  of  the  first  section  of  the 
act,  but  also  to  be  an  attempt  to  monopohze  and  a  monopolization 
bringing  about  a  perennial  violation  of  the  second  section. 

We  see  no  cause  to  doubt  the  correctness  of  these  conclusions, 
considering  the  subject  from  every  aspect,  that  is,  both  in  view  of 
the  facts  established  by  the  record  and  the  necessary  operation  and 
effect  of  the  law  as  we  have  construed  it  upon  the  inferences  deduci- 
ble  from  the  facts,  for  the  following  reasons: 

a.  Because  the  unification  of  power  and  control  over  petroleum 
and  its  products  which  was  the  inevitable  result  of  the  combining 
in  the  New  Jersey  corporation  by  the  increase  of  its  stock  and  the 
transfer  to  it  of  the  stocks  of  so  many  other  corporations,  aggregating 
so  vast  a  capital,  gives  rise,  in  and  of  itself,  in  the  absence  of  coun- 
tervailing circumstances,  to  say  the  least,  to  the  prima  facie  pre- 
sumption of  intent  and  purpose  to  maintain  the  dominancy  over 
the  oil  industry,  not  as  a  result  of  normal  methods  of  industrial 
development,  but  by  new  means  of  combination  which  were  resorted 
to  in  order  that  greater  power  might  be  added  than  would  otherwise 
have  arisen  had  normal  methods  been  followed,  the  whole  with  the 
purpose  of  excluding  others  from  the  trade  and  thus  centralizing 
in  the  combination  a  perpetual  control  of  the  movements  of  petrol- 
eum and  its  products  in  the  channels  of  interstate  commerce. 

h.  Because  the  prima  facie  presumption  of  intent  to  restrain  trade, 
to  monopolize  and  to  bring  about  monopolization  resulting  from  the 
act  of  expanding  the  stock  of  the  New  Jersey  corporation  and  vesting 
it  with  such  vast  control  of  the  oil  industry,  is  made  conclusive  by 
considering,  1,  the  conduct  of  the  persons  or  corporations  who  were 
mainly  instrumental  in  bringing  about  the  extension  of  power  in  the 
New  Jersey  corporation  before  the  consummation  of  that  result  and 
prior  to  the  formation  of  the  trust  agreements  of  1879  and  1882; 
2,  by  considering  the  proof  as  to  what  was  done  under  those  agree- 
ments and  the  acts  which  immediately  preceded  the  vesting  of  power 
in  the  New  Jersey  corporation  as  well  as  by  weighing  the  modes  in 
which  the  power  vested  in  that  corporation  has  been  exerted  and  the 
results  which  have  arisen  from  it. 

Recurring  to  the  acts  done  by  the  individuals  or  corporations  who 
were  mainly  instrumental  in  bringing  about  the  expansion  of  the  New 
Jersey  corporation  during  the  period  prior  to  the  formation  of  the 
trust  agreements  of  1879  and  1882,  including  those  agreements,  not 
for  the  purpose  of  weighing  the  substantial  merit  of  the  numerous 
charges  of  wrongdoing  made  during  such  period,  but  solely  as  an  aid 
for  discovering  intent  and  purpose,  we  think  no  disinterested  mind 
can  survey  the  period  in  question  without  being  irresistibly  driven 
to  the  conclusion  that  the  very  genius  for  commercial  development 
and  organization  which  it  would  seem  was  manifested  from  the  be- 
ginning soon  begot  an  intent  and  purpose  to  exclude  others  which 


568  STANDARD    OIL    CO.  V.  UNITED    STATES.  [cilAP.  II. 

was  frequently  manifested  by  acts  and  dealings  wholly  inconsistent 
with  the  theory  that  they  were  made  with  the  single  cone('i)ti(>n  of 
advancing  the  development  of  business  power  by  usual  methods,  but 
which  on  the  contrary  necessarily  involved  the  intent  to  drive  others 
from  the  field  and  to  excluile  them  from  their  right  to  trade  and  thus 
accomplish  the  mastery  which  was  the  end  in  \ie\v.  And,  considering 
the  period  from  the  date  of  the  trust  agreements  of  1879  and  1882, 
up  to  the  time  of  the  expansion  of  the  New  Jersey  corporation,  the 
gradual  extension  of  the  power  over  the  commerce  in  oil  which 
ensued,  the  decision  of  the  Supreme  Court  of  Ohio,  the  tardiness  or 
reluctance  in  conforming  to  the  commands  of  that  ilecision,  the 
method  first  adopted  and  that  which  finally  culminated  in  the  plan 
of  the  New  Jersey  corporation,  all  additionally  serve  to  make  mani- 
fest the  continued  existence  of  the  intent  which  we  have  previously 
indicated  and  which  among  other  things  impellod  the  expansion  of 
the  New  Jersey  corporation.  The  exercise  of  the  power  which  re- 
sulted from  that  organization  fortifies  the  foregoing  conclusions, 
since  the  development  which  came,  the  acquisition  here  and  there 
which  ensued  of  every  efficient  means  by  which  competition  could 
have  been  asserted,  the  slow  but  resistless  methods  which  followed 
by  which  means  of  transportation  were  absorbed  and  brought  under 
control,  the  system  of  marketing  which  was  adopted  by  which  the 
country  was  divided  into  districts  and  the  trafle  in  each  district  in 
oil  was  turned  over  to  a  designated  corporation  within  the  combina- 
tion and  all  others  were  excluded,  all  lead  the  mind  up  to  a  conviction 
of  a  purpose  and  intent  which  we  think  is  so  certain  as  practically 
to  cause  the  subject  not  to  be  within  the  domain  of  reasonal)le  con- 
tention. 

The  inference  that  no  attempt  to  monopolize  could  have  been 
intended,  and  that  no  monopolization  resulted  from  the  acts  com- 
plained of,  since  it  is  established  that  a  very  small  percentage  of  the 
crude  oil  produced  was  controlled  by  the  combination,  is  unwar- 
ranted. As  substantial  power  over  the  crude  product  was  the  inevi- 
table result  of  the  absolute  control  which  existed  over  the  refined 
product,  the  monopolization  of  the  one  carried  with  it  the  power 
to  control  the  other,  and  if  the  inferences  which  this  situation  sug- 
gests were  developed,  which  we  deem  it  unnecessary  to  do.  they 
might  well  serve  to  add  additional  cogency  to  the  presumption  of 
intent  to  monopolize  which  we  have  found  arises  from  the  unques- 
tioned proof  on  other  subjects. 

Mr.  Justice  Harlan  concurred  with  the  majority  in  its  conclusion 
that  rehef  should  be  given  to  the  United  States,  but  dissented  from 
the  reasoning  of  Mr.  Chief  Justice  White.  Extracts  from  his  opinion 
follow. 

[After  quoting  from  the  opinion  of  the  court  in  the  Trans-Missouri 
Freight  Case,  166  U.S.  290.] 


CHAP.  II.]  STANDARD    OIL   CO.  V.  UNITED    STATES.  569 

It  thus  appears  that  fifteen  years  ago,  when  the  purpose  of  Con- 
gress in  passing  the  Anti-Trust  Act  was  fresh  in  the  minds  of  courts, 
lawyers,  statesmen  and  the  general  public,  this  court  expressly  de- 
clined to  indulge  in  judicial  legislation,  by  inserting  in  the  act  the 
word  "unreasonable"  or  any  other  word  of  like  import.  It  may  be 
stated  here  that  the  country  at  large  accepted  this  view  of  the  act, 
and  the  Federal  courts  throughout  the  entire  country  enforced  its 
provisions  according  to  the  interpretation  given  in  the  Freight  As- 
sodation  Case.  What,  then,  was  to  be  done  by  those  who  questioned 
the  soundness  of  the  interpretation  placed  on  the  act  by  this  court 
in  that  case?  As  the  court  had  decided  that  to  insert  the  word  ''un- 
reasonable" in  the  act  would  be  "judicial  legislation"  on  its  part, 
the  only  alternative  left  to  those  who  opposed  the  decision  in  that 
case  was  to  induce  Congress  to  so  amend  the  act  as  to  recognize  the 
right  to  restrain  interstate  commerce  to  a  reasonable  extent.  The 
public  press,  magazines  and  law  journals,  the  debates  in  Congress, 
speeches  and  addresses  by  public  men  and  jurists,  all  contain  abun- 
dant e\'idence  of  the  general  understanding  that  the  meaning,  extent 
and  scope  of  the  Anti-Trust  Act  had  been  judicially  determined  by 
this  court,  and  that  the  only  question  remaining  open  for  discussion 
was  the  wisdom  of  the  policy  declared  by  the  act  —  a  matter  that 
was  exclusively  within  the  cognizance  of  Congress.  But  at  every 
session  of  Congress  since  the  decision  of  1896,  the  lawmaking  branch 
of  the  Government,  with  full  knowledge  of  that  decision,  has  re- 
fused to  change  the  policy  it  had  declared  or  to  so  amend  the  act  of 
1890  as  to  except  from  its  operation  contracts,  combinations  and 
trusts  that  reasonably  restrain  interstate  commerce. 

But  those  who  were  in  combinations  that  were  illegal  did  not  de- 
spair. They  at  once  set  up  the  baseless  claim  that  the  decision  of 
1896  disturbed  the  "business  interests  of  the  country,"  and  let  it  be 
known  that  they  would  never  be  content  until  the  rule  was  established 
that  would  permit  interstate  commerce  to  be  subjected  to  reasonable 
restraints.  Finally,  an  opportunity  came  again  to  raise  the  same 
question  which  this  court  had,  upon  full  consideration,  determined  in 
1896.  I  now  allude  to  the  case  of  United  States  v.  Joint  Traffic  As- 
sociation, 171  U.S.  505,  decided  in  1898.  What  was  that  case? 

It  was  a  suit  by  the  United  States  against  more  than  thirty  rail- 
road companies  to  have  the  court  declare  illegal,  under  the  Anti- 
Trust  Act,  a  certain  agreement  between  these  companies.  The  relief 
asked  was  denied  in  the  subordinate  Federal  courts  and  the  Govern- 
ment brought  the  case  here. 

It  is  important  to  state  the  points  urged  in  that  case  by  the  defend- 
ant companies  charged  with  violating  the  Anti-Trust  Act,  and  to 
show  that  the  court  promptly  met  them.  To  that  end  I  make  a 
copious  extract  from  the  opinion  in  the  Joint  Traffic  Case.  Among 
other  things,  the  court  said:  "Upon  comparing  that  agreement  [the 


570  STANDARD    OIL    CO.  V.  UNITED    STATES.  [ciIAP.  II. 

one  in  the  Joint  Traffic  Case,  then  under  consideration,  171  U.S. 
505]  with  the  one  set  forth  in  the  ease  of  United  States  v.  Trans- 
Missouri  Freight  Association,  100  U.S.  290,  the  great  similarity  be- 
tween them  suggests  that  a  similar  result  should  be  reached  in  the 
two  cases"  (p.  558).  Learned  counsel  in  the  Joint  Traffic  Case  urged 
a  reconsideration  of  the  question  decided  in  the  Trans-Missouri 
Case  contending  that  "the  decision  in  that  ca.sc  [the  Trans-Missouri 
Freight  Case]  is  quite  plainly  erroneous,  and  the  consequences  of  such 
error  are  far  reaching  and  disastrous,  and  clearly  at  war  with  justice 
and  sound  policy,  and  the  construction  placed  upon  the  Anti-Trust 
statute  has  been  received  by  the  public  with  surprise  and  alarm." 
They  suggested  that  the  point  mafle  in  the  Joint  Traffic  Case  as  to 
the  meaning  and  scope  of  the  act  might  have  been  but  was  not  made 
in  the  previous  case.  The  court  said  (171  U.S.  550)  that  "tiie  report 
of  the  Trans-M issouri  Case  clearly  shows  not  only  that  the  point 
now  taken  luas  there  urged  upon  the  attention  of  the  court,  l)ut  it  was 
then  intentionally  and  necessarily  decided." 

The  question  whether  the  court  should  again  consider  the  point 
decided  in  the  Trans-Missouri  Case,  171  U.S.  573,  was  disposed  of 
in  the  most  decisive  language,  as  follows:  "Finally,  we  are  asked  to 
reconsider  the  question  decided  in  the  Trans-Missouri  Case,  and 
to  retrace  the  steps  taken  therein,  because  of  the  plain  error  con- 
tained in  that  decision  and  the  widespread  alarm  with  which  it  was 
received  and  the  serious  consequences  which  have  resulted,  or  may 
soon  result,  from  the  law  as  interpreted  in  that  case.  It  is  jiropcr  to 
remark  that  an  apphcation  for  a  reconsideration  of  a  question  but 
lately  decided  by  this  court  is  usually  based  upon  a  statement  that 
some  of  the  arguments  employed  on  the  original  hearing  of  the  ques- 
tion have  been  overlooked  or  misunderstood,  or  that  some  controlling 
authority  has  been  either  misapplied  by  the  court  or  passed  over 
without  discussion  or  notice.  While  this  is  not  strictly  an  application 
for  a  rehearing  in  the  same  case,  yet  in  substance  it  is  the  same  thing. 
The  court  is  asked  to  reconsider  a  question  but  just  decided  after  a 
careful  investigation  of  the  matter  involved.  There  have  heretofore 
been  in  effect  two  arguments  of  precisely  the  same  questions  now 
before  the  court,  and  the  same  arguments  were  addressed  to  us  on 
both  those  occasions.  The  report  of  the  Trans-Missouri  Case  shows 
a  dissenting  opinion  delivered  in  that  case,  and  that  the  opinion  was 
concurred  in  by  three  other  members  of  the  court.  That  opinion,  it 
w'ill  be  seen,  gives  with  great  force  and  ability  the  arguments  against 
the  decision  which  was  finally  arrived  at  by  the  court.  It  was  after 
a  full  discussion  of  the  questions  involved  and  with  the  knowledge  of 
the  \'1ews  entertained  by  the  minority  as  expressed  in  the  dissenting 
opinion,  that  the  majority  of  the  court  came  to  the  conclusion  it  did. 
Soon  after  the  decision  a  petition  for  a  rehearing  of  the  case  was 
made,  supported  by  a  printed  argument  in  its  favor,  and  pressed 


CHAP.  II.]  STANDARD    OIL    CO.  V.  UNITED    STATES.  571 

with  an  earnestness  and  vigor  and  at  a  length  which  were  certainly 
commensurate  with  the  importance  of  the  case.  This  court,  with 
care  and  deliberation  and  also  with  a  full  appreciation  of  their  im- 
portance, again  considered  the  questions  involved  in  its  former  de- 
cision. A  majority  of  the  court  once  more  arrived  at  the  conclusion 
it  had  first  announced,  and  accordingl}^  it  denied  the  application. 
And  now  for  the  third  time  the  same  arguments  are  employed,  and 
the  court  is  again  asked  to  recant  its  former  opinion,  and  to  decide 
the  same  question  in  direct  opposition  to  the  conclusion  arrived  at  in 
the  Trans-Missouri  Case.  The  learned  counsel  while  making  the 
application  frankly  confess  that  the  argument  in  opposition  to  the 
decision  in  the  case  above  named  has  been  so  fully,  so  clearly  and  so 
forcibly  presented  in  the  dissenting  opinion  of  Mr.  Justice  White 
[in  the  Freight  Case]  that  it  is  hardly  possible  to  add  to  it,  nor  is  it 
necessary  to  repeat  it.  The  fact  that  there  was  so  close  a  division  of 
opinion  in  this  court  when  the  matter  was  first  under  advisement, 
together  with  the  different  views  taken  by  some  of  the  judges  of  the 
lower  courts,  led  us  to  the  most  careful  and  scrutinizing  examination 
of  the  arguments  advanced  by  both  sides,  and  it  was  after  such  an 
examination  that  the  majority  of  the  court  came  to  the  conclusion  it 
did.  It  is  not  now  alleged  that  the  court  on  the  former  occasion 
overlooked  any  argument  for  the  respondents  or  misapplied  any 
controlling  authority.  It  is  simply  insisted  that  the  court,  notwith- 
standing the  arguments  for  an  opposite  view,  arrived  at  an  erroneous 
result,  which,  for  reasons  already  stated,  ought  to  be  reconsidered 
and  reversed.  As  we  have  twice  already  deliberately  and  earnestly  con- 
sidered the  same  arguments  which  are  noiv  for  a  third  time  pressed  upon 
our  attention,  it  could  hardly  be  expected  that  our  opinion  should  now 
change  from  that  already  expressed." 

These  utterances,  taken  in  connection  ^vith  what  was  previously 
said  in  the  Trans-Missouri  Freight  Case,  show  so  clearly  and  affirm- 
atively as  to  admit  of  no  doubt  that  this  court,  many  years  ago,  upon 
the  fullest  consideration,  interpreted  the  Anti-Trust  Act  as  prohib- 
iting and  making  illegal  not  only  every  contract  or  combination,  in 
whatever  form,  which  was  in  restraint  of  interstate  commerce,  with- 
out regard  to  its  reasonableness  or  unreasonableness,  but  all  mo- 
nopolies or  attempts  to  monopolize  "any  part"  of  such  trade  or 
commerce. 

In  this  connection  it  may  be  well  to  refer  to  the  adverse  report 
made  in  1909,  by  Senator  Nelson,  on  behalf  of  the  Senate  Judiciarj^ 
Committee,  in  reference  to  a  certain  bill  offered  in  the  Senate  and 
which  proposed  to  amend  the  Anti-Trust  Act  in  various  particulars. 
That  report  contains  a  full,  careful  and  able  analysis  of  judicial 
decisions  relating  to  combinations  and  monopohes  in  restraint  of 
trade  and  commerce.  Among  other  things  said  in  it  which  bear  on 
the  questions  involved  in  the  present  case  are  these:  "The  Anti- 


572  STANDARD    OIL    CO.  V.  UNITED    STATES.  [ciIAP.  II. 

Trust  Act  makes  it  a  criminal  offense  to  violate  the  law,  and  provides 
a  punishment  both  by  fine  and  imprisonment.  To  inject  into  the 
act  the  question  of  whether  an  agreement  or  combination  is  reason- 
able or  unreasonable  would  render  the  act  as  a  criminal  or  penal  stat- 
ute indefinite  and  uncertain,  and  hence,  to  that  extent,  utterly 
nugatory  and  void,  and  would  practically  amount  to  a  repeal  of  that 
part  of  the  act.  .  .  .  And  while  the  same  technical  objection  docs 
not  apply  to  ci\Til  prosecutions,  the  injection  of  the  rule  of  reasonable- 
ness or  unreasonableness  ivould  lead  to  the  greatest  variableness  and 
uncertainty  in  the  enforcement  of  the  law.  The  defense  of  reasonable 
restraint  would  be  made  in  every  case  and  there  would  be  as  many  dif- 
ferent rules  of  reasonableness  as  cases,  courts,  and  juries.  What  one 
court  or  jury  might  deem  unreasonable  another  court  or  jury  might 
deem  reasonable.  A  court  or  jury  in  Ohio  might  find  a  given  agree- 
ment or  combination  reasonable,  while  a  court  and  jury  in  Wisconsin 
might  find  the  same  agreement  and  combination  unreasonable.  In 
the  case  of  People  v.  Sheldon,  139  N.Y.  264,  Chief  Justice  Andrews 
remarks:  'If  agreements  and  combinations  to  prevent  competition 
in  prices  are  or  may  be  hurtful  to  trade,  the  only  sure  remedy  is  to 
'prohibit  all  agreements  of  that  character.  If  the  validity  of  such  an 
agreement  was  made  to  depend  upon  actual  proof  of  public  prejudice 
or  injury,  it  would  be  very  difficult  in  any  case  to  establish  the  in- 
validity, although  the  moral  evidence  might  be  very  convincing.' 
...  To  amend  the  Anti-Trust  Act,  as  suggested  by  this  bill,  would 
be  to  entirely  emasculate  it,  and  for  all  practical  purposes  render  it 
nugatory  as  a  remedial  statute.  Criminal  prosecutions  would  not 
lie  and  civil  remedies  would  labor  under  the  greatest  doubt  and  un- 
certainty. The  act  as  it  exists  is  clear,  comprehensive,  certain  and 
highly  remedial.  It  practically  covers  the  field  of  Federal  jurisdic- 
tion, and  is  in  every  respect  a  model  law.  To  destroy  or  undermine 
it  at  the  present  juncture,  when  combinations  are  on  the  increase, 
and  appear  to  be  as  obli\ious  as  ever  of  the  rights  of  the  public, 
would  be  a  calamity."  The  result  was  the  indefinite  postponement  by 
the  Senate  of  any  further  consideration  of  the  proposed  amendments 
of  the  Anti-Trust  Act. 

After  what  has  been  adjudged,  upon  full  consideration,  as  to  the 
meaning  and  scope  of  the  Anti-Trust  Act,  and  in  view  of  the  usages 
of  this  court  when  attorneys  for  litigants  have  attempted  to  reopen 
questions  that  have  been  deliberately  decided,  I  confess  to  no  little 
surprise  as  to  what  has  occurred  in  the  present  case.  The  court  says 
that  the  previous  cases,  above  cited,  "cannot  by  any  possible  con- 
ception be  treated  as  authoritative  without  the  certitude  that  reason 
was  resorted  to  for  the  purpose  of  deciding  them."  And  its  opinion 
is  full  of  intimations  that  this  court  proceeded  in  those  cases,  so  far 
as  the  present  question  is  concerned,  without  being  guided  by  the 
"rule  of  reason,"  or  "the  light  of  reason."    It  is  more  than  once 


CHAP.  II.]  STANDARD    OIL   CO. 'w.  UNITED    STATES.  573 

intimated,  if  not  suggested,  that  if  the  Anti-Trust  Act  is  to  be  con- 
strued as  prohibiting  every  contract  or  combination,  of  whatever 
nature,  which  is  in  fact  in  restraint  of  commerce,  regardless  of  the 
reasonableness  or  unreasonableness  of  such  restraint,  that  fact  would 
show  that  the  court  had  not  proceeded,  in  its  decision,  according  to 
"the  light  of  reason,"  but  had  disregarded  the  "rule  of  reason."  If 
the  court,  in  those  cases,  was  wrong  in  its  construction  of  the  act, 
it  is  certain  that  it  fully  apprehended  the  views  advanced  by  learned 
counsel  in  previous  cases  and  pronounced  them  to  be  untenable. 
The  published  reports  place  this  beyond  all  question.  The  opinion 
of  the  court  was  delivered  by  a  Justice  of  wide  experience  as  a  judicial 
officer,  and  the  court  had  before  it  the  Attorney  General  of  the  United 
States  and  lawyers  who  were  recogiiized,  on  all  sides,  as  great  leaders 
in  their  profession.  The  same  eminent  jurist  who  delivered  the 
opinion  in  the  Trans-Missouri  Case  delivered  the  opinion  in  the 
Joint  Traffic  Association  Case,  and  the  Association  in  that  case  was 
represented  by  lawyers  whose  ability  was  universally  recognized. 
Is  it  to  be  supposed  that  any  point  escaped  notice  in  those  cases 
when  we  think  of  the  sagacity  of  the  Justice  who  expressed  the  views 
of  the  court,  or  of  the  ability  of  the  profound,  astute  lawyers,  who 
sought  such  an  interpretation  of  the  act  as  would  compel  the  court 
to  insert  words  in  the  statute  which  Congress  had  not  put  there,  and 
the  insertion  of  which  words,  would  amount  to  "judicial  legislation  "? 
Now  this  court  is  asked  to  do  that  which  it  has  distinctly  declared 
it  could  not  and  would  not  do,  and  has  now  done  what  it  then  said 
it  could  not  constitutionally  do.  It  has,  by  mere  interpretation, 
modified  the  act  of  Congress,  and  deprived  it  of  practical  value  as  a 
defensive  measure  against  the  evils  to  be  remedied.  On  reading  the 
opinion  just  delivered,  the  first  inquiry  will  be,  that  as  the  court  is 
unanimous  in  holding  that  the  particular  things  done  bj'-  the  Stand- 
ard Oil  Company  and  its  subsidiary  companies,  in  this  case,  were 
illegal  under  the  Anti-Trust  Act,  whether  those  things  were  in  rea- 
sonable or  unreasonable  restraint  of  interstate  commerce,  whj^  was 
it  necessary  to  make  an  elaborate  argument,  as  is  done  in  the  opinion, 
to  show  that  according  to  the  "rule  of  reason"  the  act  as  passed  by 
Congress  should  be  interpreted  as  if  it  contained  the  word  "unrea- 
sonable" or  the  word  "undue"?  The  only  answer  which,  in  frank- 
ness, can  be  given  to  this  question  is,  that  the  court  intends  to  decide 
that  its  deliberate  judgment,  fifteen  years  ago,  to  the  effect  that  the 
act  permitted  no  restraint  whatever  of  interstate  commerce,  whether 
reasonable  or  unreasonable,  was  not  in  accordance  with  the  "rule 
of  reason."  In  effect  the  court  says,  that  it  will  now,  for  the  first 
time,  bring  the  discussion  under  the  "light  of  reason"  and  apply  the 
"rule  of  reason"  to  the  questions  to  be  decided.  I  have  the  authority 
of  this  court  for  saying  that  such  a  course  of  proceeding  on  its  part 
would  be  "judicial  legislation." 


574  UNITED    STATES    V.  AMERICAN    TOBACCO    CO.        [ciIAP,  II. 

UNITED  STATES  y.  AMERICAN  TOBACCO  CO. 

221  U.S.  1U6.     1911. 

Mr.  Chief  Justice  White.  We  sliuU  divide  our  invcstij^ution  of 
the  case  into  three  subjects:  First,  tlie  uncHsputed  facts;  second,  the 
meaning  of  the  Anti-Trust  Act  and  its  application  as  correctly  con- 
strued to  the  ultimate  conclusions  of  fact  dcducible  from  the  proof; 
third,  the  remedies  to  be  applied. 

First.   Undisputed  facts. 

The  matters  to  be  considered  under  this  heading  we  think  can 
best  be  made  clear  by  stating  the  merest  outline  of  the  condition  of 
the  tobacco  industry  prior  to  what  is  asserted  to  have  been  the  initial 
movement  in  the  combination  which  the  suit  a.^sails  and  in  the  light 
so  afford^'d  to  briefly  recite  the  histoiy  of  the  a.ssailcd  acts  and  con- 
tracts. We  shall  divide  the  subject  into  two  periods,  (a)  the  one 
from  the  time  of  the  organization  of  the  first  or  old  American  To- 
bacco Company  in  1890  to  the  organization  of  the  Continental 
Tobacco  Company,  and  (6)  from  the  date  of  such  organization  to 
the  filing  of  the  bill  in  this  ca.se. 

Summarizing  in  the  broadest  way  the  conditions  which  oljtained 
prior  to  1890,  as  to  the  production,  manufacture  and  distribution 
of  tobacco,  the  following  general  facts  are  adequate  to  portray  the 
situation. 

Tobacco  was  grown  in  many  sections  of  the  country  having  diver- 
sity of  soil  and  climate  and  therefore  was  subject  to  various  vicis- 
situdes resulting  from  the  places  of  production  and  consequently 
varied  in  quality.  The  great  diversity  of  use  to  which  tobacco  was 
applied  in  manufactunng  caused  it  to  be  that  there  was  a  demand 
for  all  the  various  qualities.  The  demand  for  all  qualities  was 
not  local,  but  widespread,  extending  as  well  to  domestic  as  to  for- 
eign trade,  and,  therefore,  all  the  products  were  marketed  under 
competitive  conditions  of  a  peculiarly  advantageous  nature.  The 
manufacture  of  the  product  in  this  country  in  various  forms  was 
successfully  carried  on  by  many  individuals  or  concerns  scattered 
throughout  the  countr}'-,  a  larger  number  perhaps  of  the  manufac- 
turers being  in  the  vicinage  of  production  and  others  being  advanta- 
geously situated  in  or  near  the  principal  markets  of  distribution. 

Before  January,  1890,  five  distinct  concerns  —  Allen  &  Ginter, 
with  factory  at  Richmond,  Va. ;  W.  Duke,  Sons  &  Co.,  with  factories 
at  Durham,  North  Carolina,  and  New  York  City;  Kinney  Tobacco 
Company,  with  factory  at  New  York  City;  W.  S.  Kimball  &  Com- 
pany, with  factory  at  Rochester,  New  York;  Goodwin  &  Company, 
with  factory  at  BrookU-n,  New  York  —  manufactured,  distributed 
and  sold  in  the  United  States  and  abroad  95  per  cent  of  all  the  do- 
mestic cigarette  and  less  than  8  per  cent  of  the  smoking  tobacco 


CHAP.  II.]       UNITED    STATES    V.  AMERICAN    TOBACCO    CO.  575 

produced  in  the  United  States.  There  is  no  doubt  that  these  fac- 
tories were  competitors  in  the  purchase  of  the  raw  product  which  they 
manufactured  and  in  the  distribution  and  sale  of  the  manufactured 
products.  Indeed  it  is  shown  that  prior  to  1890  not  only  had  normal 
and  ordinary  competition  existed  between  the  factories  in  question, 
but  that  the  competition  had  been  fierce  and  abnormal.  In  January, 
1890,  having  agreed  upon  a  capital  stock  of  $25,000,000,  all  to  be 
divided  amongst  them,  and  who  should  be  directors,  the  concerns 
referred  to  organized  the  American  Tobacco  Company  in  New  Jersey, 
''for  trading  and  manufacturing,"  with  broad  powers,  and  conveyed 
to  it  the  assets  and  businesses,  including  good  will  and  right  to  use 
the  names  of  the  old  concerns ;  and  thereafter  this  corporation  carried 
on  the  business  of  all.  The  S25,000,000  of  stock  of  the  Tobacco  Com- 
pany was  allotted  to  the  charter  members  as  follows:  Allen  & 
Ginter,  S3,000,000  preferred,  $4,500,000  common;  W.  Duke,  Sons 
&  Co.,  $3,000,000  preferred,  $4,500,000  common;  Kinney  Tobacco 
Company,  $2,000,000  preferred,  $3,000,000  common;  W.  S.  Kimball 
&  Co.,  $1,000,000  preferred,  $1,500,000  common;  and  Goodwin  & 
Co.,  $1,000,000  preferred,  $1,500,000  common. 

There  is  a  charge  that  the  valuation  at  which  the  respective  prop- 
erties were  capitalized  in  the  new  corporation  was  enormously  in 
excess  of  their  actual  value.  We,  however,  put  that  subject  aside, 
since  we  propose  only  to  deal  with  facts  which  are  not  in  controversy. 

Shortly  after  the  formation  of  the  new  corporation  the  Goodwin 
&  Co.  factory  was  closed,  and  the  directors  ordered  "that  the  manu- 
facture of  all  tobacco  cigarettes  be  concentrated  at  Richmond."  The 
new  corporation  in  1890,  the  first  year  of  its  operation,  manufac- 
tured about  two  and  one  half  billion  cigarettes,  that  is,  about  96 
or  97  per  cent  of  the  total  domestic  output,  and  about  five  and 
one  half  million  pounds  of  smoking  tobacco  out  of  a  total  domestic 
product  of  nearly  seventy  million  pounds. 

In  a  little  over  a  year  after  the  organization  of  the  company  it 
increased  its  capital  stock  by  ten  million  dollars.  The  purpose  of  this 
increase  is  inferable  from  the  considerations  which  we  now  state. 

There  was  a  firm  known  as  Pfingst,  Doerhoefer  &  Co.,  consisting 
of  a  number  of  partners,  who  had  been  long  and  successfully  carrying 
on  the  business  of  manufacturing  plug  tobacco  in  Louisville,  Ken- 
tucky, and  distributing  it  through  the  channels  of  interstate  com- 
merce. In  January,  1891,  this  firm  was  converted  into  a  corporation 
known  as  the  National  Tobacco  Works,  having  a  capital  stock  of 
$400,000  all  of  which  was  issued  to  the  partners.  Almost  immedi- 
ately thereafter,  in  the  month  of  February,  the  American  Tobacco 
Company  became  the  purchaser  of  all  the  capital  stock  of  the 
new  corporation,  paying  $600,000  cash  and  $1,200,000  in  stock  of 
the  American  Tobacco  Company.  The  members  of  the  previously 
existing  firm  bound  themselves  by  contract  with  the  American 


576  UNITED    STATES   V.  AMERICAN    TOBACCO    CO.       [CHAP.  II. 

Tobacco  Company  to  enter  its  service  and  manage  the  business  and 
property  sold,  and  eacii  further  agreed  that  for  ten  years  he  would 
not  engage  in  carr>nng  on,  directly  or  indirectly,  or  permit  or  sulTer 
the  use  of  his  name  in  connection  with  the  carrying  on  of  the  tobacco 
business  in  any  form. 

In  April  following,  the  American  Tobacco  Company  bought  out 
the  business  of  Philip  Whitlock,  of  Richmond,  Virginia,  who  was 
engaged  in  the  manufacture  of  cheroots  and  cigars,  and  with  the 
exclusive  right  to  use  the  name  of  Whitlock.  The  consideration  for 
this  purchase  was  §300,000,  and  Whitlock  agreed  to  become  an 
employ^  of  the  American  Tobacco  Company  for  a  number  of  years 
and  not  to  engage  for  twenty  years  in  the  tobacco  business. 

In  the  month  of  April  the  American  Tobacco  Company  also 
acquired  the  business  of  i\Iar])urg  Brothers,  a  well-known  firm  located 
at  Baltimore,  Maryland,  and  engaged  in  the  manufacture  and  dis- 
tribution of  tobacco,  principally  smoking  and  snuff.  The  considera- 
tion was  a  cash  payment  of  $164,637.65  and  stock  to  the  amount  of 
$3,075,000.  The  meml)ers  of  the  firm  also  conveyed  the  right  to  the 
use  of  the  firm  name  and  agreed  not  to  engage  in  the  tobacco  business 
for  a  lengthy  period. 

Again,  in  the  same  month,  the  American  Tobacco  Company 
bought  out  a  tobacco  firm  of  old  standing,  also  located  in  Baltimore, 
known  as  G.  W.  Gail  &  Ax,  engaged  principally  in  manufacturing 
and  selling  smoking  tobacco,  bujnng  with  the  business  the  exclusive 
right  to  use  the  name  of  the  firm  or  the  partners,  and  the  members  of 
the  firm  agreed  not  to  engage  in  the  tobacco  business  for  a  specified 
period.  The  consideration  for  this  purchase  was  $77,582.66  in  cash 
and  stock  to  the  amount  of  $1,760,000.  The  plant  was  abandoned 
soon  after. 

Referring  to  the  occurrences  of  the  year  1891,  as  in  all  respects 
tj^pical  of  the  occurrences  which  took  place  in  all  the  other  years  of 
the  first  period,  that  is  during  the  years  1892,  1893,  1894,  1895,  1896, 
1897  and  1898  we  content  ourselves  with  saying  that  it  is  undis- 
puted that  between  Februar>%  1891,  and  October,  1898,  including 
the  purchases  which  we  have  specifically  referred  to,  the  American 
Tobacco  Company  acquired  fifteen  going  tobacco  concerns  doing 
business  in  the  States  of  Kentucky,  Louisiana,  Marj-land,  Michigan, 
Missouri,  New  York,  North  Carolina  and  Virginia.  For  ten  of  the 
plants  an  all  cash  consideration  of  $6,410,235.26  was  paid,  while  the 
pa^Tnents  for  the  remaining  five  aggregated  in  cash  $1,115,100.95 
and  in  stock  $4,123,000.  It  is  worth  nothing  that  the  last  purchase, 
in  October,  1898,  was  of  the  Drummond  Tobacco  Company,  a  Mis- 
souri corporation  dealing  principallj'^  in  plug,  for  w'hich  a  cash  con- 
sideration was  paid  of  $3,457,500. 

The  corporations  which  were  combined  for  the  purpose  of  forming 
the  American  Tobacco  Company  produced  a  very  small  portion  of 


CHAP.  II.]       UNITED    STATES   V.  AMERICAN   TOBACCO    CO.  577 

plug  tobacco.  That  an  increase  in  this  direction  was  contemplated  is 
manifested  by  the  almost  immediate  increase  of  the  stock  and  its  use 
for  the  purpose  of  acquiring,  as  we  have  indicated,  in  1891  and  1892, 
the  ownership  and  control  of  concerns  manufacturing  plug  tobacco 
and  the  consequent  increase  in  that  branch  of  production.  There  is 
no  dispute  that  as  early  as  1893  the  president  of  the  American  To- 
bacco Company,  by  authority  of  the  corporation,  approached  lead- 
ing manufacturers  of  plug  tobacco  and  sought  to  bring  about  a  com- 
bination of  the  plug  tobacco  interests,  and  upon  the  failure  to 
accomplish  this,  ruinous  competition,  by  lowering  the  price  of  plug 
below  its  cost,  ensued.  As  a  result  of  this  warfare,  which  continued 
until  1898,  the  American  Tobacco  Company  sustained  severe  losses 
aggregating  more  than  four  millions  of  dollars.  The  warfare  pro- 
duced its  natural  result,  not  only  because  the  company  acquired 
during  the  last  two  years  of  the  campaign,  as  we  have  stated,  control 
of  important  plug  tobacco  concerns,  but  others  engaged  in  that  in- 
dustry came  to  terms.  We  say  this  because  in  1898,  in  connection 
with  several  leading  plug  manufacturers,  the  American  Tobacco 
Company  organized  a  New  Jersey  corporation  styled  the  Continental 
Tobacco  Company,  for  "trading  and  manufacturing,"  with  a  capital 
of  S75,000,000,  afterwards  increased  to  $100,000,000.  The  new  com- 
pany issued  its  stock  and  took  transfers  to  the  plants,  assets  and 
businesses  of  five  large  and  successful  competing  plug  manufacturers. 

The  American  Tobacco  Company  also  conveyed  to  this  corpora- 
tion, at  large  valuations,  the  assets,  brands,  real  estate  and  good  will 
pertaining  to  its  plug  tobacco  business,  including  the  National  To- 
bacco Works,  the  James  G.  Butler  Tobacco  Co.,  Drummond  To- 
bacco Company,  and  Brown  Tobacco  Co.,  receiving  as  considera- 
tion S30,274,200  of  stock  (one-half  common  and  one-half  preferred), 
$300,000  cash,  and  an  additional  sum  for  losses  sustained  in  the  plug 
business  during  1898,  $840,035.  Mr.  Duke,  the  president  of  the 
American  Tobacco  Company,  also  became  president  of  the  Conti- 
nental Company. 

Under  the  preliminary  agreement  which  was  made  looking  to  the 
formation  of  the  Continental  Tobacco  Company,  that  company 
acquired  from  the  holders  all  the  $3,000,000  of  the  common  stock  of 
the  P.  Lorillard  Company  in  exchange  for  $6,000,000  of  its  stock, 
and  $1,581,300  of  the  $2,000,000  preferred  in  exchange  for  notes 
aggregating  a  sum  considerably  larger.  The  Lorillard  Company, 
however,  although  it  thus  passed  practically  under  the  control  of 
the  American  Tobacco  Company  by  virtue  of  its  ownership  of  stock 
in  the  Continental  Company,  was  not  liquidated,  but  its  business 
continued  to  be  conducted  as  a  distinct  corporation,  its  goods  being 
marked  and  put  upon  the  market  just  as  if  they  were  the  manufac- 
ture of  an  independent  concern. 

Following  the  organization  of  the  Continental  Tobacco  Company 


578  UNITED    STATES    V.  AMERICAN    TOBACCO    CO.       [CIIAP.  II. 

the  American  Tobacco  Company  increased  its  capital  stock  from 
thirty-five  millions  of  dollars  to  seventy  millions  of  dollars,  and  de- 
clared a  stock  dividend  of  one  hundred  per  cent  on  its  common  stock, 
that  is,  a  stock  dividend  of  $21,000,000. 

As  the  facts  just  stated  bring  us  to  the  end  of  the  first  period  which 
at  the  outset  we  stated  it  was  our  purpose  to  review,  it  is  well  briefly 
to  point  out  the  increase  in  the  power  and  control  of  the  American 
Tobacco  Company  and  the  extension  of  its  activities  to  all  forms  of 
tobacco  products  which  had  been  accomplished  just  prior  to  the 
organization  of  the  Continental  Tobacco  Company.  Nothing  could 
show  it  more  clearly  than  the  following:  At  the  end  of  the  time  the 
company  was  manufacturing  eighty-six  per  cent  or  thereabouts  of  all 
the  cigarettes  produced  in  the  United  States,  above  twenty-six  per 
cent  of  all  the  smoking  tobacco,  more  than  twenty-two  per  cent  of  all 
plug  toliacco,  fifty-one  per  cent  of  all  little  cigai"s,  six  per  cent  each  of 
all  snuff  and  fine  cut  tobacco,  and  over  two  per  cent  of  all  cigars  and 
cheroots. 

A  brief  reference  to  the  occurrences  of  the  second  period,  that  is, 
from  and  after  the  organization  of  the  Continental  Tobacco  Com- 
pany up  to  the  time  of  the  bringing  of  this  suit,  will  serve  to  make 
evident  that  the  transactions  in  their  essence  had  all  the  characteris- 
tics of  the  occurrences  of  the  first  period. 

In  the  year  1899  and  thereafter  either  the  American  or  the  Con- 
tinental company,  for  cash  or  stock,  at  an  aggregate  cost  of  fifty 
millions  of  dollars  ($50,000,000),  bought  and  closed  up  some  thirty 
competing  corporations  and  partnerships  theretofore  engaged  in 
interstate  and  foreign  commerce  as  manufacturers,  sellers,  and  dis- 
tributors of  tobacco  and  related  commodities,  the  interested  parties 
covenanting  not  to  engage  in  the  business.  Likewise  the  two  cor- 
porations acquired  for  cash,  by  issuing  stock,  and  otherwise,  control 
of  many  competing  corporations,  now  going  concerns,  with  plants 
in  various  States,  Cuba  and  Porto  Rico,  which  manufactured, 
bought,  sold  and  distributed  tobacco  products  or  related  articles 
throughout  the  United  States  and  foreign  countries,  and  took  from 
the  parties  in  interest  covenants  not  to  engage  in  the  tobacco  busi- 
ness. 

The  plants  thus  acquired  were  operated  until  the  merger  in  1904, 
to  which  we  shall  hereafter  refer,  as  a  part  of  the  general  system  of 
the  American  and  Continental  companies.  The  power  resulting  from 
and  the  purpose  contemplated  in  making  these  acquisitions  by  the 
companies  just  referred  to,  however,  may  not  be  measured  by  con- 
sidering alone  the  business  of  the  company  directly  acquired,  since 
some  of  those  companies  were  made  the  vehicles  as  representing  the 
American  or  Continental  company  for  acquiring  and  holding  the 
stock  of  other  and  competing  companies,  thus  amplifj-ing  the  power 
resulting  from  the  acquisitions  directly  made  by  the  American  or 


CHAP.  II.]       UNITED    STATES   V.  AMERICAN   TOBACCO    CO.  579 

Continental  company,  without  ostensibly  doing  so.  It  is  besides 
undisputed  that  in  many  instances  the  acquired  corporations  with 
the  subsidiary  companies  over  which  they  had  control  through  stock 
ownership  were  carried  on  ostensibly  as  independent  concerns  dis- 
connected from  either  the  American  or  the  Continental  company, 
although  they  were  controlled  and  owned  by  one  or  the  other  of  these 
companies. 

It  is  of  the  utmost  importance  to  observe  that  the  acquisitions 
made  by  the  subsidiary  corporations  in  some  cases  likewise  show  the 
remarkable  fact  stated  above,  that  is,  the  disbursement  of  enormous 
amounts  of  money  to  acquire  plants,  which  on  being  purchased  were 
not  utilized  but  were  immediately  closed.  It  is  also  to  be  remarked, 
that  the  facts  stated  in  the  memorandum  in  the  margin  show  on  their 
face  a  singular  identity  between  the  conceptions  which  governed  the 
transactions  of  this  latter  period  with  those  which  evidently  existed 
at  the  very  birth  of  the  original  organization  of  the  American  To- 
bacco Company,  as  exemplified  by  the  transactions  in  the  first  period. 
A  statement  of  particular  transactions  outside  of  those  previously 
referred  to  as  having  occurred  during  the  period  in  question  will 
serve  additionally  to  make  the  situation  clear.  And  to  accomplish 
this  purpose  we  shall,  as  briefly  as  may  be  consistent  with  clarity, 
separately  refer  to  the  facts  concerning  the  organization  during  the 
second  period  of  the  five  corporations  which  were  named  as  defend- 
ants in  the  bill,  as  heretofore  stated  and  which  for  the  purpose  of 
designation  we  have  hitherto  classified  as  accessory  defendants,  such 
corporations  being  the  American  Snuff  Company,  American  Cigar 
Company,  American  Stogie  Company,  MacAndrews  &  Forbes  Com- 
pany (licorice),  and  Conley  Foil  Company. 

1.  The  American  Snuff  Company. 

As  we  have  seen,  the  American  Tobacco  Campany  at  the  com- 
mencement of  the  first  period  produced  a  very  small  quantity  of  snuff. 
Its  capacity,  however,  in  that  regard  was  augmented  owing  partic- 
ularly to  the  formation  of  the  Continental  Tobacco  Company  and 
the  acquisition  of  the  Lorillard  Company,  by  which  it  came  to  be 
a  serious  factor  as  a  snuff  producer.  There  shortly  ensued  an  ag- 
gressive competition  in  the  snuff  business  between  the  American 
Tobacco  Company,  with  the  force  acquired  from  the  vantage  ground 
resulting  from  the  dominancy  of  its  expanded  organization,  and 
others  in  the  trade  operating  independently  of  that  organization. 
The  result  was  identical  with  that  which  had  previously  arisen  from 
like  conditions  in  the  past. 

In  March,  1900,  there  was  organized  in  New  Jersey  a  corporation 
known  as  the  American  Snuff  Company,  with  a  capital  of  $25,000,- 
000,  one-half  preferred  and  one-half  common,  which  took  over  the 
snuff  business  of  the  P.  Lorillard  Company,  Continental  Tobacco 
Company  and  the  American  Tobacco  Company,  with  that  of  a 


580  UNITED    STATES    V.  AMERICAN    TOBACCO    CO.       [CHAP.   II. 

large  competitor,  viz:  the  Atlantic  Snuff  Co.  The  stock  of  the  new 
company  was  thus  apportioned:  Atlantic  Snuff  Company,  preferred, 
$7,500,000,  common,  825,000,000;  P.  Lorillard  Company,  preferred, 
$1,124,700,  common,  $3,459,400;  the  American  Tobacco  Company, 
preferred,  $1,177,800,  common,  $3,227,500;  Continental  Tobacco 
Company,  preferred,  8197,500,  common,  $813,100.  The  stock  issued 
to  Continental  Tobacco  Company  and  the  defendants.  P.  LoriUartl 
Company  and  the  American  Tobacco  Company,  is  still  held  by  the 
latter,  and  they  have  at  all  times  had  a  controUinp;  interest  in  the 
Snuff  Company.  All  the  companies,  together  with  their  officers  and 
directors,  covenanted  that  they  would  not  thereafter  engage  as  com- 
petitors in  the  tobacco  business  or  the  manufacture,  sale,  or  distribu- 
tion of  snuff. 

Among  the  assets  transferred  by  the  Atlantic  Snuff  Company  to 
American  Snuff  Company  were  all  the  shares  (SOOO.CKK))  of  W.  E. 
Garrett  &  Sons,  Inc.,  then  and  now  one  of  the  oldest  and  ver>'dargest 
producers  of  snuff,  for  a  long  time  and  still  engaged  at  Yorkland, 
Del.,  in  interstate  and  foreign  commerce  in  tobacco  and  its  products, 
and  which  controlled  through  stock  ownership  the  Southern  Snuff 
Company,  Memphis,  Tenn.;  Dental  Snuff  Company,  Lynchburg, 
Va.,  and  Stewart-Ralph  Snuff  Company,  Clarksville,  Tenn.  The 
separate  existence  of  W.  E.  Garrett  &  Sons,  Inc.,  has  been  preserved 
and  its  business  conducted  under  the  corporate  name.  In  March, 
1900,  the  American  Snuff  Company  acquired  all  the  shares  of  George 
"W.  Helme  Company,  one  of  the  oldest  and  largest  producei-s  of  snuff 
and  actively  engaged  at  Helmetta,  N.J.,  in  interstate  and  foreign 
commerce  in  competition  with  defendants,  by  issuing  in  exchange 
therefor  $2,000,000  preferred  stock  and  $1,000,000  common;  and  it 
thereafter  took  a  conveyance  of  all  assets  of  the  acquired  company 
and  now  operates  the  plant  under  its  own  name. 

As  a  result  of  the  transactions  just  stated  it  came  to  pass  that  the 
American  Tobacco  Company,  which  had  at  the  end  of  the  first 
period  only  a  ver\'  small  percentage  of  the  snuff  manufacturing 
business,  came  virtually  to  have  the  dominant  control  as  a  manu- 
facturer of  that  product. 

2.  Conley  Foil  Company  —  manufacturers  of  tivfoil,  an  essential 
for  packing  tobacco  products. 

In  December,  1899,  the  American  Tobacco  Company  secured 
control  of  the  business  of  John  Conley  &  Sons,  a  partnership  of  New 
York  City.  By  agreement  the  Conley  Foil  Company  was  incor- 
porated in  New  York  "for  trading  and  manufacturing,"  etc.,  with 
$250,000  capital,  ultimately  increased  to  8825,000.  The  corporation 
took  over  the  business  and  assets  of  the  firm,  and  the  American  To- 
bacco Company  became  owTier  of  a  majority  of  the  shares  of  stock. 
The  Conley  Foil  Company  has  acquired  all  the  shares  of  stock  of  the 
Johnson  Tinfoil  &  Metal  Company,  of  St.  Louis,  a  leading  com- 


CHAP.  II.]   UNITED  STATES  V.   AMERICAN  TOBACCO  CO.         581 

petitor,  and  they  supply  under  fixed  contracts  at  remunerative 
prices  the  tinfoil  used  by  the  defendants,  which  constitutes  the 
major  part  of  the  total  production  in  the  United  States. 

3.  American  Cigar  Company. 

Prior  to  1901  the  American  and  Continental  Tobacco  companies 
manufactured,  sold,  and  distributed  cigars,  stogies,  and  cheroots. 
In  the  year  stated  the  companies  determined  to  engage  in  the  busi- 
ness upon  a  larger  scale.  Under  agreement  with  Powell,  Smith  & 
Company,  large  manufacturers  and  dealers  in  cigars,  they  caused 
the  incorporation  in  New  Jersey  of  the  American  Cigar  Company 
"for  trading  and  manufacturing,"  etc.,  to  which  all  three  conveyed 
their  said  business,  and  it  has  since  carried  on  the  same.  The  Ameri- 
can and  Continental  companies  each  acquired  46^  per  cent  of  the 
shares,  and  Powell,  Smith  &  Company  7  per  cent;  the  original  cap- 
italization was  $10,000,000  (afterwards  $20,000,000),  and  more  than 
three-fourths  is  owned  by  the  former.  The  Cigar  Company  acquired 
many  competitors  (partnerships  and  corporations)  engaged  in 
interstate  and  foreign  commerce,  taking  from  the  parties  covenants 
against  engaging  in  the  tobacco  business;  and  it  has  also  procured 
the  organization  of  controlled  corporations  which  have  acquired  com- 
peting manufacturers,  jobbers  and  distributors  in  the  United  States, 
Cuba  and  Porto  Rico.  It  manufactures,  sells  and  distributes  a  con- 
siderable percentage  of  domestic  cigars;  is  the  dominating  factor  in 
the  tobacco  business,  foreign  and  domestic,  in  Cuba  and  Porto  Rico, 
and  is  there  engaged  in  tobacco  planting.  It  also  controls  corporate 
jobbers  in  California,  Alabama,  Virginia,  Pennsylvania,  Georgia, 
Louisiana,  New  Jersey  and  Tennessee. 

4.  The  Mac  Andrews  &  Forbes  Company  —  manufacturers  of 
licorice. 

There  is  no  question  that  licorice  paste  is  an  essential  ingredient 
in  the  manufacture  of  plug  tobacco,  and  that  one  who  is  debarred 
from  obtaining  such  paste  would  therefore  be  unable  to  engage  in  or 
carry  on  the  manufacture  of  such  product.  The  control  over  this 
article  was  thus  secured:  In  May,  1902,  the  Continental  Company 
secured  control  of  MacAndrews  &  Forbes  Co.  of  Newark,  New  Jersey, 
and  organized  ''for  trading  and  manufacturing"  a  corporation  knowm 
as  the  MacAndrews  &  Forbes  Co.,  with  a  capital  of  $7,000,000, 
$4,000,000  preferred  and  $3,000,000  common,  which  took  over  the 
business  of  MacAndrew  &  Forbes  and  another  large  competitor. 
The  Continental  Company  acquired  two-thirds  of  the  common 
stock  by  agreeing  to  purchase  its  supply  of  paste  from  the  new 
company.  The  American  Tobacco  Company,  at  the  time  of  the 
fihng  the  bill,  was  the  owner  of  $2,112,900  of  the  common  stock  and 
$750,000  preferred.  By  various  purchases  and  agreements  the  Mac- 
Andrews  &  Forbes  Company  acquired,  substantially,  the  business  of 
all  competitors.   Thus,  in  June,  1902,  it  purchased  the  business  of 


582  UNITED    STATES    V.  AMERICAN    TOBACCO    CO.       [CHAP.  II, 

the  Stamford  Mfg.  Co.,  of  Stamford,  Connecticut,  and  incorporated 
the  National  Licorice  Company,  which  ac(juired  the  bu.siness  of 
Young  &  Smylic  and  F.  B.  &  V.  P.  Scudder,  and  the  National  Com- 
pany agreed  with  Mac  Andrews  &  Forbes  not  to  produce  licorice 
for  tobacco  manufacturers.  In  1006  all  the  stock  in  the  J.  8.  Young 
Company  ($1,800,000),  wiiich  had  been  organized  to  take  over  the 
business  of  the  J.  S.  Young  Co.,  of  Baltimore,  Md.,  was  ucrjuired  by 
the  MacAndrews  &  Forbes  Co.  The  MacAndrews  &  Forl)es  Co.  u.se 
in  excess  of  ninety-five  per  cent  of  the  licorice  root  consumed  in  the 
United  States. 

5.  American  Stogie  Company. 

In  May,  1903,  the  American  Cigar  Company  and  the  American 
and  Continental  Tobacco  Companies  cau.'^ed  the  American  Stogie 
Company  to  1x3  incorporated  in  Now  Joi-soy,  with  SI  1 ,970,000  capital, 
which  immediately  took  over  the  stogie  and  tol)i('  business  of  the 
companies  named  in  exchange  for  88,200,275  stock  and  then  in  the 
usual  ways  acquired  the  business  of  others  in  the  manufacture,  sale, 
and  distribution  of  such  products,  with  covenants  not  to  compete. 
It  acquired  in  exchange  for  .$.3,047,725  stock  all  shares  of  United 
States  Cigar  Company  (which  harl  previously  acquired  and  owned 
the  business  of  important  competitors)  and  subseciuently  took  the 
conveyance  of  the  plant  and  assets.  The  majority  shares  always  have 
been  held  by  d(>fondant,  the  American  Cigar  Company. 

As  we  think  the  legitimate  inferences  dcduciblo  from  the  undis- 
puted facts  which  we  have  thus  stated  will  be  sufficient  to  dispose 
of  the  controversy,  we  do  not  deem  it  necessary  to  expand  this  state- 
ment so  as  to  cause  it  to  embrace  a  recital  of  the  undisputed  facts 
concerning  the  entr\'  of  the  American  Tobacco  Company  into  the 
retail  tobacco  trade  through  the  acquisition  of  a  controlling  interest 
in  the  stock  of  what  is  known  as  the  United  Cigar  Stores  Company, 
as  well  as  to  some  other  sul:>jects  which  for  the  sake  of  brc\ity  we 
likewise  pass  over,  in  order  to  come  at  once  to  a  statement  concern- 
ing the  foreign  companies. 

The  English  Companies. 

In  September,  1901,  the  American  Tobacco  Co.  purchased  for 
$5,347,000  a  Liverpool  (Eng.)  corporation,  known  as  Ogden's 
Limited,  there  engaged  in  manufacturing  and  distributing  tobacco 
products.  A  trade  conflict  which  at  once  ensued  caused  many  of 
the  English  manufacturers  to  combine  into  an  incorporation  known 
as  the  Imperial  Tobacco  Company  of  Great  Britain  and  Ireland, 
capital  15,000,000,  afterwards  increased  to  18,000,000,  pounds 
sterling.  The  trade  war  was  continued  between  this  corporation 
and  the  American  Tobacco  Company,  with  a  result  substantially 
identical  with  that  which  had  hitherto,  as  we  have  seen,  arisen  from 
such  a  situation. 

In  September,  1902,  the  Imperial  and  the  American  companies 


CHAP.  II.]       UNITED    STATES   V.  AMERICAN    TOBACCO    CO.  583 

entered  into  contracts  (executed  in  England)  stipulating  that  the 
former  should  limit  its  business  to  the  United  Kingdom,  except  pur- 
chasing leaf  in  the  United  States  (it  buys  54,000,000  pounds  an- 
nually) ;  that  the  American  companies  should  limit  their  business  to 
the  United  States,  its  dependencies  and  Cuba ;  and  that  the  British- 
American  Tobacco  Company,  with  capital  of  6,000,000  pounds  sterl- 
ing apportioned  between  them,  should  be  organized,  take  over  the 
export  business  of  both,  and  operate  in  other  countries,  etc.  This 
arrangement  was  immediately  put  into  effect,  and  has  been  ob- 
served. 

The  Imperial  Company  holds  one-third  and  the  American  Com- 
pany two-thirds  of  the  capital  stock  of  the  British- American  Tobacco 
Company,  Limited.  The  latter  company  maintains  a  branch  office 
in  New  York  City  and  the  vice-president  of  the  American  Tobacco 
Company  is  a  principal  officer.  This  company  uses  large  quantities 
of  domestic  leaf,  partly  exported  to  various  plants  abroad  and  about 
half  manufactured  here  and  then  exported.  By  agreement,  all  this 
is  purchased  through  the  American  Tobacco  Company.  In  addition 
to  many  plants  abroad  it  has  warehouses  in  various  States  and  plants 
at  Petersburg,  Va.,  and  Durham,  N.C.,  where  tobacco  is  manu- 
factured and  then  exported. 

The  purchase  of  necessary  leaf  tobacco  in  the  United  States  by 
the  Imperial  Company  is  now  made  through  a  resident  general  agent 
and  is  exported  as  a  part  of  foreign  commerce. 

Not  to  break  the  continuity  of  the  narrative  of  facts  we  have 
omitted  in  the  proper  chronological  order  to  state  the  facts  relative 
to  what  was  known  as  the  Consolidated  Tobacco  Company.  We 
now  particularly  refer  to  that  subject. 

The  Consolidated  Tobacco  Co. 

In  June,  1901,  parties  largely  interested  in  the  American  and  Con- 
tinental companies  caused  the  incorporation  in  New  Jersey  of  the 
Consolidated  Tobacco  Company,  capital  $30,000,000  (afterwards 
$40,000,000),  with  broad  powers  and  perpetual  existence;  to  do  busi- 
ness throughout  the  world,  and  to  guarantee  securities  of  other  com- 
panies, etc.  A  majority  of  shares  was  taken  by  a  few  individuals 
connected  with  the  old  concerns:  A.  N.  Brady,  J.  B.  Duke,  A.  H. 
Payne,  Thomas  Ryan,  W.  C.  Whitney,  and  P.  A.  B.  Widener. 
J.  B.  Duke,  president  of  both  the  old  companies,  became  president 
of  the  Consolidated.  Largely  in  exchange  for  bonds  the  new  com- 
pany acquired  substantially  all  the  shares  of  common  stock  of  the 
old  ones.  Its  business,  of  holding  and  financing,  was  continued  until 
1904,  when,  with  the  American  and  Continental  companies,  it  was 
merged  into  the  present  American  Tobacco  Company. 

By  proceedings  in  New  Jersey,  October,  1904,  the  (old)  American 
Tobacco  Company,  Continental  Tobacco  Company  and  Consoli- 
dated Tobacco  Company  were  merged  into  one  corporation,  under 


584  tjNITED    STATES    V.  AMERICAN    TOBACCO    CO.       [cHAP.  II. 

the  name  of  The  American  Tobacco  Company,  the  principal  de- 
ft'iuhint  here.  The  morKCfl  company,  with  pcqx'tual  existence,  was 
cupitulized  iit  S18(),(XK),()0()  (SSO,UUO,(JOO  preferrcil,  ordinurily  with- 
out power  to  vote). 

Prior  to  the  merj^er  the  ConsoUdatetl  Tobacco  Company,  a  ma- 
jority of  whose  $4(),(MM),(KX)  share  capital  was  held  by  J.  B.  Duke, 
Thomas  F.  Ryan,  William  C.  Whitney,  Anthony  X.  Brady,  Peter 
A.  B.  Widener  and  ( )liv('r  H.  Payne,  had  ac(iuircd.  as  alrea<ly  stated, 
nearly  all  connnon  shares  of  lK)th  old  American  and  Continental 
companies,  and  thereby  control.  The  preferreil  shares,  however, 
were  held  by  many  indiviiluals.  Through  the  method  of  distribu- 
tion of  the  stock  of  the  new  company,  in  exchange  for  shares  in  the 
old  American  and  in  the  Continental  Company,  it  resulted  that  the 
same  six  men  in  control  of  the  combination  through  the  Consolidated 
Tobacco  Company  continued  that  contrf)l  by  ownershij)  of  stock  in 
the  merp;ed  or  new  American  Tobacco  Company.  The  a.ssets,  prop- 
erty, etc.,  of  the  old  companies  pa.ssed  to  the  .\merican  Tobacco 
Company  (merged),  which  luus  since  carried  on  the  business. 

The  record  indisputal)ly  discloses  that  after  this  merger  the  same 
methods  which  were  used  from  the  l)ogiiming  contimuMl  to  be  em- 
ployed. Thus,  it  is  lH\v<tnd  dispute^:  First,  that  since  the  organization 
of  the  new  American  Tobacco  Company  that  company  has  acquired 
four  large  tobacco  concerns,  that  restrictive  covenants  against  en- 
gaging in  the  tobacco  bu.siness  were  taken  from  the  sellers,  and  that 
the  plants  were  not  contimicd  in  oj^'ration  but  were  at  once  aban- 
doiKMl.  Second,  that  the  new  company  has  iK'sides  acquired  control 
of  eight  additional  concerns,  the  business  of  such  concerns  being  now 
carried  on  by  four  separate  corporations,  all  absolutely  controlled 
by  the  American  Tol>acco  Company,  although  the  connection  as  to 
two  of  the.se  companies  with  that  corporation  was  long  and  persist- 
ently denied. 

Thus  reaching  the  end  of  the  second  period  and  coming  to  the 
time  of  the  bringing  of  the  suit,  brevity  prevents  us  from  stopping 
to  portray  the  difference  between  the  condition  in  1S90  when  the 
(old)  American  Tobacco  Company  was  organized  by  the  consolida- 
tion of  five  competing  cigarette  concerns  and  that  which  existed  at 
the  commencement  of  the  suit.  That  situation  and  the  vast  power 
which  the  principal  and  accessory  corporate  defendants  and  the 
small  number  of  individuals  who  own  a  majority  of  the  common 
stock  of  the  new  American  Tobacco  Company  exert  over  the  market- 
ing of  tobacco  as  a  raw  product,  its  manufacture,  its  marketing  when 
manufactured,  and  its  consequent  movement  in  the  channels  of 
interstate  commerce,  indeed  relatively  over  foreign  commerce,  and 
the  commerce  of  the  whole  world,  in  the  raw  and  manufactured  prod- 
ucts stand  out  in  such  bold  relief  from  the  undisputed  facts  which 
have  been  stated  as  to  lead  us  to  pass  at  once  to  the  second  funda- 


CHAP.  II.]       UNITED    STATES   V.  AMERICAN    TOBACCO    CO.  585 

mental  proposition  which  we  are  required  to  consider.  That  is,  the 
construction  of  the  Anti-Trust  Act  and  the  apphcation  of  the  act  as 
rightly  construed  to  the  situation  as  proven  in  consequence  of  having 
detennined  the  ultimate  and  final  inferences  properly  deducible 
from  the  undisputed  facts  which  we  have  stated. 

The  construction  and  application  of  the  Anti-Trust  Act. 

If  the  Anti-Trust  Act  is  applicable  to  the  entire  situation  here 
presented  and  is  adequate  to  afford  complete  relief  for  the  evils  which 
the  United  States  insist  that  situation  presents  it  can  only  be  because 
that  law  will  be  given  a  more  comprehensive  application  than  has 
been  affixed  to  it  in  any  previous  decision.  This  will  be  the  case  be- 
cause the  undisputed  facts  as  we  have  stated  them  involve  questions 
as  to  the  operation  of  the  Anti-Trust  Act  not  hitherto  presented  in 
any  case.  Thus,  even  if  the  ownership  of  stock  by  the  American 
Tobacco  Company  in  the  accessory  and  subsidiary  companies  and 
the  ownership  of  stock  in  any  of  those  companies  among  themselves 
were  held,  as  was  decided  in  United  States  v.  Standard  Oil  Co.,  to  be 
a  violation  of  the  act  and  all  relations  resulting  from  such  stock 
ownership  were  therefore  set  aside,  the  question  would  yet  remain 
whether  the  principal  defendant,  the  American  Tobacco  Company, 
and  the  five  accessory  defendants,  even  when  divested  of  their  stock 
ownership  in  other  corporations,  by  virtue  of  the  power  which  they 
would  continue  to  possess,  even  although  thus  stripped,  would 
amount  to  a  violation  of  both  the  first  and  second  sections  of  the  act. 
Again,  if  it  were  held  that  the  corporations,  the  existence  whereof 
was  due  to  a  combination  between  such  companies  and  other  com- 
panies was  a  violation  of  the  act,  the  question  would  remain  whether 
such  of  the  companies  as  did  not  owe  their  existence  and  power  to 
combinations  but  whose  power  alone  arose  from  the  exercise  of  the 
right  to  acquire  and  own  property  would  be  amenable  to  the  prohi- 
bitions of  the  act.  Yet  further:  Even  if  this  proposition  was  held 
in  the  affirmative  the  question  would  remain  whether  the  principal 
defendant,  the  American  Tobacco  Company,  when  stripped  of  its 
stock  ownership,  would  be  in  and  of  itself  within  the  prohibitions  of 
the  act  although  that  company  was  organized  and  took  being  before 
the  Anti-Trust  Act  was  passed.  Still  further,  the  question  would 
yet  remain  whether  particular  corporations  which,  when  bereft  of 
the  power  which  they  possessed  as  resulting  from  stock  ownership, 
although  they  were  not  inherently  possessed  of  a  sufficient  residuum 
of  power  to  cause  them  to  be  in  and  of  themselves  either  a  restraint 
of  trade  or  a  monopolization  or  an  attempt  to  monopolize,  should 
nevertheless  be  restrained  because  of  their  intimate  connection  and 
association  with  other  corporations  found  to  be  within  the  prohibi- 
tions of  the  act.  The  necessity  of  relief  as  to  all  these  aspects,  we 
think,  seemed  to  the  Government  so  essential,  and  the  difficulty  of 
giving  to  the  act  such  a  comprehensive  and  coherent  construction  as 


586  UNITED    STATES    V.  AMERICAN    TOBACCO    CO.       [cHAP.  II. 

would  be  adequate  to  enable  it  to  meet  the  entire  situation,  led  to 
what  appears  to  us  to  be  in  their  essence  a  resort  to  methods  of 
construction  not  compatible  one  with  the  other.  And  the  same  ap- 
parent conllict  is  presented  by  the  views  of  the  act  taken  l)y  the 
defendants  when  their  contentions  are  accurately  tested.  Thus  tb.e 
Government,  for  the  purpose  of  fi.xing  the  illegal  character  of  the 
orif2;inaI  combination  which  organized  the  old  American  Tobacco 
Company,  asserts  that  the  illej^al  character  of  the  combination  is 
plainly  shown  Ix'cause  the  combination  wa.s  brought  about  to  stay 
the  progress  of  a  flagrant  and  ruinous  trade  war.  In  other  words,  the 
contention  is  that  as  the  act  forbids  every  contract,  and  combina- 
tion, it  hence  prohil)its  a  reasonable  and  just  agre<Mnent  made  for 
the  purpose  of  ending  a  trade  war.  But  :us  thus  construing  the  act 
by  the  rule  of  the  letter  which  kills,  would  necessarily  operate  to 
take  out  of  the  reach  of  the  act  some  one  of  the  accessor^'  and  many 
subsitliarv'  corporations,  the  existence  of  which  depend  not  at  all 
upon  coml)ination  or  agreement  or  contract,  but  upon  mere  pur- 
chases of  property,  it  is  insisted  in  many  forms  of  argument  that  the 
rule  of  construction  to  be  applied  must  be  the  spirit  and  intent  of 
the  act  and  therefore  its  prohibitions  must  Ix^  held  to  extend  to  acts 
even  if  not  within  the  literal  terms  of  the  statute  if  they  are  within 
its  spirit  l)ecause  done  with  an  intent  to  bring  al)out  the  harmful 
results  which  it  was  the  purpose  of  the  .statute  to  prohibit.  So  as  to 
the  defendants.  \Vhile  it  is  argued  on  the  one  hand  that  the  forms  by 
which  various  properties  were  acquired  in  v\qw  of  the  letter  of  the 
act  exclude  many  of  the  assailed  transactions  from  condemnation, 
it  is  yet  urged  that  gi\ing  to  the  act  the  broad  construction  which 
it  should  rightfully  receive,  whatever  may  1x3  the  form,  no  condemna- 
tion should  follow,  because,  looking  at  the  ca.se  as  a  whole,  ever>'  act 
assailed  is  shov\Ti  to  have  been  but  a  legitimate  and  lawful  result  of 
the  exertion  of  honest  business  methods  brought  into  play  for  the 
purpose  of  advancing  trade  instead  of  with  the  object  of  obstructing 
and  restraining  the  same.  But  the  difficulties  which  arise,  from  the 
complexity  of  the  particular  dealings  which  are  here  involverl  and  the 
situation  which  they  produce,  we  think  grows  out  of  a  plain  mis- 
conception of  both  the  letter  and  spirit  of  the  Anti-Trust  Act.  We 
say  of  the  letter,  because  while  seeking  by  a  narrow  rule  of  the  letter 
to  include  things  which  it  is  deemed  would  otherv\'ise  be  excluded, 
the  contention  really  destroys  the  great  purpose  of  the  act,  since  it 
renders  it  impossible  to  apply  the  law  to  a  multitude  of  wrongful 
acts,  which  would  come  within  the  scope  of  its  remedial  purposes  by 
resort  to  a  reasonable  construction,  although  they  would  not  be 
within  its  reach  by  a  too  narrow  and  unreasonable  adherence  to  the 
strict  letter.  This  must  be  the  case  unless  it  be  possible  in  reason  to 
say  that  for  the  purpose  of  including  one  class  of  acts  which  would 
not  otherv\ase  be  embraced  a  literal  construction  although  in  con- 


CHAP.  II.]       UNITED    STATES    V.  AMERICAN    TOBACCO    CO.  587 

flict  with  reason  must  be  applied  and  for  the  purpose  of  including 
other  acts  which  would  not  otherwise  be  embraced  a  reasonable 
construction  must  be  resorted  to.  That  is  to  say  two  conflicting 
rules  of  construction  must  at  one  and  the  same  time  be  apphed  and 
adhered  to. 

The  obscurity  and  resulting  uncertainty,  however,  is  now  but  an 
abstraction  because  it  has  been  removed  by  the  consideration  which 
we  have  given  quite  recently  to  the  construction  of  the  Anti-Trust 
Act  in  the  Standard  Oil  Case.  In  that  case  it  was  held,  without  de- 
parting from  any  previous  decision  of  the  court,  that  as  the  statute 
had  not  defined  the  words  restraint  of  trade,  it  became  necessary 
to  construe  those  words,  a  duty  which  could  only  be  discharged  by 
a  resort  to  reason.  We  say  the  doctrine  thus  stated  was  in  accord 
with  all  the  previous  decisions  of  this  court,  despite  the  fact  that  the 
contrary  view  was  sometimes  erroneously  attributed  to  some  of  the 
expressions  used  in  two  prior  decisions  (the  Trans-Missouri  Freight 
Association  and  Joint  Traffic  Cases,  166  U.S.  290,  and  171  U.S.  505). 
That  such  view  was  a  mistaken  one  was  fully  pointed  out  in  the 
Standard  Oil  Case  and  is  additionally  shown  by  a  passage  in  the 
opinion  in  the  Joint  Traffic  Case  as  follows  (171  U.S.  568) :  "The  act 
of  Congress  must  have  a  reasonable  construction,  or  else  there  would 
scarcely  be  an  agreement  or  contract  among  business  men  that  could 
not  be  said  to  have,  indirectly  or  remotely,  some  bearing  on  inter- 
state commerce,  and  possibly  to  restrain  it."  Applying  the  rule  of 
reason  to  the  construction  of  the  statute,  it  was  held  in  the  Standard 
Oil  Case  that  as  the  words  "restraint  of  trade"  at  common  law  and 
in  the  law  of  this  country  at  the  time  of  the  adoption  of  the  Anti- 
Trust  Act  only  embraced  acts  or  contracts  or  agreements  or  com- 
binations which  operated  to  the  prejudice  of  the  public  interests  by 
unduly  restricting  competition  or  unduly  obstructing  the  due  course 
of  trade  or  which,  either  because  of  their  inherent  nature  or  effect  or 
because  of  the  evident  purpose  of  the  acts,  etc.,  injuriously  restrained 
trade,  that  the  words  as  used  in  the  statute  were  designed  to  have 
and  did  have  but  a  like  significance.  It  was  therefore  pointed  out 
that  the  statute  did  not  forbid  or  restrain  the  power  to  make  normal 
and  usual  contracts  to  further  trade  by  resorting  to  all  normal 
methods,  whether  by  agreement  or  otherwise,  to  accomplish  such 
purpose.  In  other  words,  it  was  held,  not  that  acts  which  the  statute 
prohibited  could  be  removed  from  the  control  of  its  prohibitions  by 
a  finding  that  they  were  reasonable,  but  that  the  duty  to  interpret 
which  inevitably  arose  from  the  general  character  of  the  term  "re- 
straint of  trade"  required  that  the  words  "restraint  of  trade"  should 
be  given  a  meaning  which  would  not  destroy  the  individual  right  to 
contract  and  render  difficult  if  not  impossible  any  movement  of  trade 
in  the  channels  of  interstate  commerce  —  the  free  movement  of 
which  it  was  the  purpose  of  the  statute  to  protect.  The  soundness 


588  ITNITED    STATES    V.  AMERICAN    TOBACCO    CO.       [ciiAP.  II. 

of  the  rule  that  the  statute  should  receive  a  reasonable  construction, 

after  further  mature  ilelilKMation,  we  see  no  reason  to  doubt.  In- 
deed, the  necessity  for  not  dei)artinn  in  this  ciuse  from  the  standard 
of  the  rule  of  reason  which  is  univereal  in  its  application  is  so  plainly 
required  in  order  to  give  effect  to  the  remedial  purposes  which  the 
act  under  consideration  contemplates,  and  to  prevent  that  act  from 
destroying;  all  liberty  of  contract  and  all  swbstiintiul  ri^rlit  to  trade, 
and  thus  causing  the  act  to  be  at  war  with  itself  by  annihilating  the 
fundamental  right  of  freedom  to  trade  which,  on  the  very  face  of 
the  act,  it  was  enacted  to  preserve,  is  illustrated  by  the  record  In'forc 
us.  In  truth,  the  plain  demonstration  which  this  record  gives  of  the 
injury  which  woukl  arise  from  and  the  promotion  of  the  wrongs 
which  the  statute  was  intended  to  guard  against  which  would  result 
from  giving  to  the  statute  a  narrow,  unrea-^oning  and  unheard  of 
construction,  as  illustrated  by  the  record  Ix^fore  us,  if  iK)ssible  serves 
to  strengthen  our  convict  if  m  as  to  the  correctness  of  the  rule  of 
construction,  the  rule  of  reason,  which  was  applied  in  the  Standard 
Oil  Case,  the  application  of  which  rule  to  the  statute  we  now,  in  the 
most  unequivocal  terms,  rei'xpress  and  re-afhrm. 

Coming  then  to  apply  to  the  case  l)efore  us  the  act  as  interpreted 
in  the  Standard  Oil  and  previous  cases,  all  the  difficulties  suggested 
by  the  mere  form  in  which  the  assiailed  transactions  are  clothed  be- 
come of  no  moment.  This  follows  because  although  it  was  held  in 
the  Standard  Oil  Case  that,  giving  to  the  statute  a  reasonable  con- 
struction, the  words  "restraint  of  trade"  did  not  embrace  all  those 
normal  and  usual  contracts  essential  to  individual  freedom  and  the 
right  to  make  which  were  necessary  in  order  that  the  course  of  trade 
might  be  free,  yet,  as  a  result  of  the  reasonable  construction  which  was 
affixed  to  the  statute,  it  was  pointed  out  that  the  generic  designa- 
tion of  the  first  and  second  sections  of  the  law,  when  taken  together, 
embraced  ever>''  conceivable  act  which  could  possibly  come  within 
the  spirit  or  purpose  of  the  prohibitions  of  the  law,  without  regard  to 
the  garb  in  which  such  acts  were  clothed.  That  is  to  say,  it  was  held 
that  in  view  of  the  general  language  of  the  statute  and  the  pul)lic  pol- 
icy which  it  manifested,  there  was  no  possibility  of  frustrating  that 
poficy  by  resorting  to  any  disguise  or  subterfuge  of  form,  since 
resort  to  reason  rendered  it  impossible  to  escape  by  any  indirection 
the  prohibitions  of  the  statute. 

Considering  then  the  undisputed  facts  which  we  have  previously 
stated,  it  remains  only  to  determine  whether  they  establish  that  the 
acts,  contracts,  agreements,  combinations,  etc.,  which  were  assailed 
were  of  such  an  unusual  and  wrongful  character  as  to  bring  them 
within  the  prohilntions  of  the  law.  That  they  were,  in  our  opinion, 
so  overwhelmingly  results  from  the  undisputed  facts  that  it  seems 
only  necessary  to  refer  to  the  facts  as  we  have  stated  them  to  demon- 
strate the  correctness  of  this  conclusion.  Indeed,  the  history  of  the 


CHAP.  II.]       UNITED    STATES   V.  AMERICAN   TOBACCO    CO.  589 

combination  is  so  replete  with  the  doing  of  acts  which  it  was  the 
obvious  purpose  of  the  statute  to  forbid,  so  demonstrative  of  the 
existence  from  the  beginning  of  a  purpose  to  acquire  dominion  and 
control  of  the  tobacco  trade,  not  by  the  mere  exertion  of  the  ordi- 
nary right  to  contract  and  to  trade,  but  by  methods  devised  in  order 
to  monopohze  the  trade  by  driving  competitors  out  of  business,  which 
were  ruthlessly  carried  out  upon  the  assumption  that  to  work  upon 
the  fears  or  play  upon  the  cupidity  of  competitors  would  make  suc- 
cess possible.  We  say  these  conclusions  are  inevitable,  not  because 
of  the  vast  amount  of  property  aggregated  by  the  combination,  not 
because  alone  of  the  many  corporations  which  the  proof  shows  were 
united  by  resort  to  one  device  or  another.  Again,  not  alone  because 
of  the  dominion  and  control  over  the  tobacco  trade  which  actually 
exists,  but  because  we  think  the  conclusion  of  wrongful  purpose  and 
illegal  combination  is  overwhelmingly  established  by  the  following 
considerations:  a.  By  the  fact  that  the  very  first  organization  or- 
combination  was  impelled  by  a  previously  existing  fierce  trade  war, 
evidently  inspired  by  one  or  more  of  the  minds  which  brought  about 
and  became  parties  to  that  combination,  h.  Because,  immediately 
after  that  combination  and  the  increase  of  capital  which  followed,  the 
acts  which  ensued  justify  the  inference  that  the  intention  existed 
to  use  the  power  of  the  combination  as  a  vantage  ground  to  further 
monopolize  the  trade  in  tobacco  by  means  of  trade  conflicts  de- 
signed to  injure  others,  either  by  driving  competitors  out  of  the 
business  or  compelling  them  to  become  parties  to  a  combination  — 
a  purpose  whose  execution  was  illustrated  by  the  plug  war  which 
ensued  and  its  results,  by  the  snuff  war  which  followed  and  its  results, 
and  by  the  conflict  which  immediately  followed  the  entry  of  the 
combination  in  England  and  the  division  of  the  world's  business  by 
the  two  foreign  contracts  which  ensued,  c.  By  the  ever-present 
manifestation  which  is  exhibited  of  a  conscious  wrongdoing  by  the 
form  in  which  the  various  transactions  were  embodied  from  the 
beginning,  ever  changing  but  ever  in  substance  the  same.  Now  the 
organization  of  a  new  company,  now  the  control  exerted  by  the  taking 
of  stock  in  one  or  another  or  in  several,  so  as  to  obscure  the  result 
actually  attained,  nevertheless  uniform,  in  their  manifestations  of 
the  purpose  to  restrain  others  and  to  monopolize  and  retain  power  in 
the  hands  of  the  few  who,  it  would  seem,  from  the  beginning  con- 
templated the  mastery  of  the  trade  which  practically  followed. 
d.  By  the  gradual  absorption  of  control  over  all  the  elements  essen- 
tial to  the  successful  manufacture  of  tobacco  products,  and  placing 
such  control  in  the  hands  of  seemingly  independent  corporations 
serving  as  perpetual  barriers  to  the  entry  of  others  into  the  tobacco 
trade,  e.  By  persistent  expenditure  of  millions  upon  milhons  of 
dollars  in  buying  out  plants,  not  for  the  purpose  of  utilizing  them, 
but  in  order  to  close  them  up  and  render  them  useless  for  the  pur- 


590  UNITED    STATES    V.  AMERICAN    TOBACCO    CO.       [CHAP.  II. 

poses  of  trade.  /.  By  the  constantly  recurring  stipulations,  whose 
legality,  isolatedly  vioweil,  we  are  not  consiilcring,  by  which  num- 
bers of  persons,  whether  manufacturers,  stockliolders  or  cmpioj'^s, 
were  required  to  bind  themselves,  generally  for  long  periods,  not  to 
compete  in  the  future.  Indeed,  when  the  results  of  the  undisputed 
proof  which  we  have  stated  are  fully  apprehended,  and  the  wrongful 
acts  which  they  exhibit  are  considered,  there  comes  inevitably  to 
the  mind  the  conviction  that  it  was  the  danger  which  it  was  deemed 
would  arise  to  individual  liberty  and  the  public  well-being  from  acts 
like  those  which  this  record  exhibits,  which  led  the  legislative  mind 
to  conceive  and  to  enact  the  Anti-Trust  Act,  considerations  which 
also  serve  to  clearly  demonstrate  that  the  combination  here  assailed 
is  within  the  law  as  to  leave  no  doubt  that  it  is  our  plain  duty  to 
apply  its  prohibitions. 

In  stating  summarily,  as  we  have  done,  the  conclusions  which, 
in  our  opinion,  are  plainly  deducible  from  the  undisputed  facts,  we 
have  not  paused  to  give  the  reasons  why  we  consider,  after  great 
consideration,  that  the  elaborate  arguments  advanced  to  affix  a 
different  comi)lexion  to  the  ca.^e  are  wholly  devoid  of  merit.  We  do 
not,  for  the  sake  of  brevity,  moreover,  stop  to  examine  and  discuss 
the  various  propositions  urged  in  the  argument  at  bar  for  the  pur- 
pose of  demonstrating  that  the  subject-matter  of  the  combination 
which  we  find  to  exist  and  the  combination  itself  are  not  within  the 
scope  of  the  Anti-Trust  Act  because  when  rightly  considered  they 
are  merely  matters  of  intrastate  commerce  and  therefore  subject 
alone  to  state  control.  We  have  done  this  l)ecause  the  want  of  merit 
in  all  the  arguments  advanced  on  such  subjects  is  so  completely 
established  by  the  prior  decisions  of  this  court,  as  pointed  out  in  the 
Stayidard  Oil  Case,  as  not  to  require  restatement. 

Leading  as  this  does  to  the  conclusion  that  the  assailed  combina- 
tion in  all  its  aspects  —  that  is  to  say,  whether  it  Ix^  looked  at  from 
the  point  of  view  of  stock  ownership  or  from  the  standpoint  of  the 
principal  corporation  and  the  accessory  or  subsidiary  corporations 
viewed  independently,  including  the  foreign  corporations  in  so  far 
as  by  the  contracts  made  by  them  they  l:)ecame  cooperators  in  the 
combination  —  comes  within  the  prohibitions  of  the  first  and  second 
sections  of  the  Anti-Trust  Act,  it  remains  only  finally  to  consider  the 
remedy  which  it  is  our  duty  to  apply  to  the  situation  thus  found  to 
exist. 

The  remedy. 

Our  conclusion  being  that  the  combination  as  a  whole,  invohing 
all  its  cooperating  or  associated  parts,  in  whatever  form  clothed,  con- 
stitutes a  restraint  of  trade  within  the  first  section,  and  an  attempt 
to  monopolize  or  a  monopolization  within  the  second  section  of 
the  Anti-Trust  Act,  it  follows  that  the  relief  which  we  are  to  afford 
must  be  wider  than  that  awarded  by  the  lower  court,  since  that 


CHAP.  II.]       UNITED    STATES    V.  AMERICAN    TOBACCO    CO.  591 

court  merely  decided  that  certain  of  the  corporate  defendants  con- 
stituted combinations  in  violation  of  the  first  section  of  the  act,  be- 
cause of  the  fact  that  they  were  formed  by  the  union  of  previously 
competing  concerns  and  that  the  other  defendants  not  dismissed 
from  the  action  were  parties  to  such  combinations  or  promoted  their 
purposes.  We  hence,  in  determining  the  relief  proper  to  be  given, 
may  not  model  our  action  upon  that  granted  by  the  court  below,  but 
in  order  to  enable  us  to  award  relief  coterminous  with  the  ultimate 
redress  of  the  wrongs  which  we  find  to  exist,  we  must  approach  the 
subject  of  relief  from  an  original  point  of  view.  Such  subject  neces- 
sarily takes  a  two-fold  aspect  —  the  character  of  the  permanent 
reUef  required  and  the  nature  of  the  temporary  relief  essential  to  be 
applied  pending  the  working  out  of  permanent  relief  in  the  event 
that  it  be  found  that  it  is  impossible  under  the  situation  as  it  now 
exists  to  at  once  rectify  such  existing  wrongful  condition.  In  con- 
sidering the  subject  from  both  of  these  aspects  three  dominant  in- 
fluences must  guide  our  action:  1.  The  duty  of  giving  complete  and 
efficacious  effect  to  the  prohibitions  of  the  statute;  2,  the  accomplish- 
ing of  this  result  with  as  little  injury  as  possible  to  the  interest  of 
the  general  public;  and,  3,  a  proper  regard  for  the  vast  interests  of 
private  property  which  may  have  become  vested  in  many  persons 
as  a  result  of  the  acquisition  either  by  way  of  stock  ownership  or 
otherwise  of  interests  in  the  stock  or  securities  of  the  combination 
without  any  guilty  knowledge  or  intent  in  any  way  to  become  actors 
or  participants  in  the  wrongs  which  we  find  to  have  inspired  and 
dominated  the  combination  from  the  begiiming.  Mindful  of  these 
considerations  and  to  clear  the  way  for  their  application  we  say  at 
the  outset  without  stopping  to  amplif}^  the  reasons  which  lead  us  to 
that  conclusion,  we  think  that  the  court  below  clearly  erred  in  dis- 
missing the  individual  defendants,  the  United  Cigar  Stores  Company, 
and  the  foreign  corporations  and  their  subsidiary  corporations. 

Looking  at  the  situation  as  we  have  hitherto  pointed  it  out,  it 
involves  difficulties  in  the  application  of  remedies  greater  than  have 
been  presented  by  any  case  involving  the  Anti-Trust  Act  which  has 
been  hitherto  considered  by  this  court:  First.  Because  in  this  case 
it  is  obvious  that  a  mere  decree  forbidding  stock  ownership  by  one 
part  of  the  combination  in  another  part  or  entity  thereof,  would 
afford  no  adequate  measure  of  relief,  since  different  ingredients  of 
the  combination  would  remain  unaffected,  and  by  the  very  nature 
and  character  of  their  organization  would  be  able  to  continue  the 
wrongful  situation  which  it  is  our  duty  to  destroy.  Second.  Because 
the  methods  of  apparent  ownership  by  which  the  wrongful  intent 
was,  in  part,  carried  out  and  the  subtle  devices  which,  as  we  have 
seen,  were  resorted  to  for  the  purpose  of  accomplishing  the  wrong 
contemplated,  by  way  of  ownership  or  otherwise,  are  of  such  a  char- 
acter that  it  is  difficult  if  not  impossible  to  formulate  a  remedy  which 


592  UNITED    STATES    V.  AMERICAN    TOBACCO    CO.       [CUAP.  II. 

could  restore  in  their  entirety  the  prior  lawful  conditions.    Third. 
Because  the  methods  devised  by  vvliich  the  various  essential  elements 
to  the  successful  operation  of  the  tobacco  business  from  any  partic- 
ular aspect  have  been  so  separated  under  various  subordinate  com- 
binations, yet  so  unified  by  way  of  the  control  worked  out  by  the 
scheme  here  condenmed,  are  so  involved  that  any  specific  form  of 
relief  which  we  might  now  order  in  substance  and  effect  might 
operate  really  to  injure  the  public  and,  it  may  be,  to  perpetuate  the 
wrong.    Doubtless  it  was  the  presence  of  these  difficulties  which 
caused  the  United  States,  in  its  prayer  for  relief, to  tentatively  sug- 
gest rather  than  to  specifically  demand  defmite  and  precise  remedies. 
We  might  at  once  resort  to  one  or  the  other  of  two  general  remedies 
—  a,  the  allowance  of  a  permanent  injunction  restraining  the  com- 
bination as  a  universality  and  all  the  individuals  and  corporations 
which  form  a  part  of  or  cooperate  in  it  in  any  manner  or  form  from 
continuing  to  engage  in  interstate  commerce  until  the  illegal  situa- 
tion be  cured,  a  measure  of  relief  which  would  accord  in  substantial 
effect  with  that  awarded  below  to  the  extent  that  the  court  found 
illegal  combinations  to  exist;  or,  b,  to  direct  the  appointment  of  a 
receiver  to  take  charge  of  the  assets  and  property  in  this  country  of 
the  combination  in  all  its  ramifications  for  the  purpose  of  prevent- 
ing a  continuetl  \'iolation  of  the  law,  and  thus  working  out  by  a  sale 
of  the  property  of  the  combination  or  otherAvise,  a  condition  of 
things  which  would  not  be  repugnant  to  the  prohil)itions  of  the  act. 
But,  having  regard  to  the  principles  which  we  have  said  must  con- 
trol our  action,  we  do  not  think  we  can  now  direct  the  immediate 
application  of  either  of  these  remedies.  We  so  consider  as  to  the  first 
because  in  view  of  the  extent  of  the  combination,  the  vast  field  which 
it  covers,  the  all-embracing  character  of  its  activities  concerning 
tobacco  and  its  products,  to  at  once  stay  the  movement  in  interstate 
commerce  of  the  products  which  the  combination  or  its  cooperating 
forces  produce  or  control  might  inflict  infinite  injur>' upon  the  pub- 
lic by  leading  to  a  stoppage  of  supply  and  a  great  enhancement  of 
prices.  The  second  because  the  extensive  power  which  would  result 
from  at  once  resorting  to  a  receivership  might  not  only  do  grievous 
injury  to  the  public,  but  also  cause  widespread  and  perhaps  irre- 
parable loss  to  many  innocent  people.   Under  these  circumstances, 
taking  into  mind  the  complexity  of  the  situation  in  all  of  its  aspects 
and  gi\ang  weight  to  the  many-sided  considerations  which  must 
control  our  judgment,  we  think,  so  far  as  the  permanent  relief  to  be 
awarded  is  concerned,  we  should  decree  as  follows:  1st.  That  the 
combination  in  and  of  itself,  as  well  as  each  and  all  of  the  elements 
composing  it,  whether  corporate  or  individual,  whether  considered 
collectively  or  separately,  be  decreed  to  be  in  restraint  of  trade  and 
an  attempt  to  monopolize  and  a  monopolization  within  the  first  and 
second  sections  of  the  Anti-Trust  Act.  2d.  That  the  court  below,  in 


CHAP.  II.]       UNITED    STATES    V.  AMERICAN    TOBACCO    CO.  593 

order  to  give  effective  force  to  our  decree  in  this  regard,  be  directed 
to  hear  the  parties,  by  evidence  or  otherwise,  as  it  may  be  deemed 
proper,  for  the  purpose  of  ascertaining  and  determining  upon  some 
plan  or  method  of  dissolving  the  combination  and  of  recreating,  out 
of  the  elements  now  composing  it,  a  new  condition  which  shall  be 
honestly  in  harmony  with  and  not  repugnant  to  the  law.  3d.  That 
for  the  accomplishment  of  these  purposes,  taking  into  view  the 
difficulty  of  the  situation,  a  period  of  six  months  is  allowed  from  the 
receipt  of  our  mandate,  with  leave,  however,  in  the  event,  in  the 
judgment  of  the  court  below,  the  necessities  of  the  situation  require, 
to  extend  such  period  to  a  further  time  not  to  exceed  sixty  days. 
4th.  That  in  the  event,  before  the  expiration  of  the  period  thus 
fixed,  a  condition  of  disintegration  in  harmony  with  the  law  is  not 
brought  about,  either  as  the  consequence  of  the  action  of  the  court 
in  determining  an  issue  on  the  subject  or  in  accepting  a  plan  agreed 
upon,  it  shall  be  the  duty  of  the  court,  either  by  way  of  an  injunction 
restraining  the  movement  of  the  products  of  the  combination  in  the 
channels  of  interstate  or  foreign  commerce  or  by  the  appointment 
of  a  receiver,  to  give  effect  to  the  requirements  of  the  statute. 

Pending  the  bringing  about  of  the  result  just  stated,  each  and  all 
of  the  defendants,  individuals  as  well  as  corporations,  should  be 
restrained  from  doing  any  act  which  might  further  extend  or  enlarge 
the  power  of  the  combination,  by  any  means  or  device  whatsoever. 
In  view  of  the  considerations  we  have  stated  we  leave  the  matter 
to  the  court  below  to  work  out  a  compliance  with  the  law  without 
unnecessary  injury  to  the  public  or  the  rights  of  private  property. 

While  in  many  substantial  respects  our  conclusion  is  in  accord 
with  that  reached  by  the  court  below,  and  while  also  the  relief  which 
we  think  should  be  awarded  in  some  respects  is  coincident  with  that 
which  the  court  granted,  in  order  to  prevent  any  complication  and 
to  clearly  define  the  situation  we  think  instead  of  affirming  and 
modifying,  our  decree,  in  view  of  the  broad  nature  of  our  conclusions, 
should  be  one  of  reversal  and  remanding  with  directions  to  the  court 
below  to  enter  a  decree  in  conformity  with  this  opinion  and  to  take 
such  further  steps  as  may  be  necessary  to  fully  carry  out  the  direc- 
tions which  we  have  given. 

And  it  is  so  ordered. 

Mr.  Justice  Harlan  concurred  in  holding  that  relief  ought  to  be 
granted  the  United  States,  but  dissented  from  that  part  of  the  opin- 
ion stating  the  form  of  relief  to  be  granted,  and  also  dissented  from 
that  part  of  the  opinion  in  which  the  court  reaffirms  the  doctrine 
of  the  "rule  of  reason"  announced  in  the  Standard  Oil  Case,  supra. 

Note.  —  For  later  suits,  instituted  by  the  United  States,  in  which 
the  court  held  acts  to  be  in  violation  of  the  Anti-Trust  Act,  see 


594  UNITED    STATES    V.  AMERICAN    TOBACCO    CO.       [CHAP.  II. 

United  States  v.  St.  Louis  Terminal,  224  U.S.  383;  United  States  v. 
Reading  Co.,  226  U.S.  324;  United  States  v.  Patten,  220  U.S.  525; 
Eastern  States  Lumber  Ass' n  v.  United  States,  234:  \J.^.  600;  Lawlorv. 
Loeive,  235  U.S.  522  (see  also  208  U.S.  274). 

In  Nash  v.  United  States.,  229  U.S.  373,  Mr.  Justice  Holmes 
said  (p.  376) :  "The  objection  to  the  criminal  operation  of  the  statute 
is  thought  to  be  warranted  by  The  Standard  Oil  Co.  v.  United  States, 
221  U.S.  1,  and  United  States  v.  American  Tobacco  Co.,  221  U.S.  100. 
Those  cases  may  be  taken  to  have  established  that  only  such  con- 
tracts and  combinations  are  wnthin  the  act  as,  by  reason  of  intent  or 
the  inherent  nature  of  the  contemplated  acts,  prejudice  the  puljlic 
interests  by  unduly  restricting  competition  or  unduly  obstructing  the 
course  of  trade.  221  U.S.  179.  And  thereupon  it  is  said  that  the 
crime  thus  defined  by  the  statute  contains  in  its  definition  an  element 
of  degree  as  to  which  estimates  may  differ,  with  the  result  that  a 
man  might  find  himself  in  prison  because  his  honest  judgment  did 
not  anticipate  that  of  a  jury  of  less  competent  men.  The  kindred 
proposition  that  'the  criminality  of  an  act  cannot  dcj^end  upon 
whether  a  juiy  may  think  it  rea.sonable  or  unreasonable.  There  must 
be  some  defmiteness  and  certainty,'  is  cited  from  the  late  Mr. 
Justice  Brewer  sitting  in  the  Circuit  Court.  Tozer  v.  United  States, 
52  Fed.  Rep.  917,  919. 

"  But  apart  from  the  common  law  as  to  restraint  of  trade  thus  taken 
up  by  the  statute  the  law  is  full  of  instances  where  a  man's  fate  de- 
pends on  his  estimating  rightly,  that  is,  as  the  jury  subsequently 
estimates  it,  some  matter  of  degree.  If  his  judgment  is  wrong,  not 
only  may  he  incur  a  fine  or  a  short  imprisonment,  as  here;  he  may 
incur  the  penalty  of  death.  'An  act  causing  death  may  be  murder, 
manslaughter,  or  misadventure  according  to  the  degree  of  danger 
attending  it'  by  common  experience  in  the  circumstances  known  to 
the  actor.  'The  very  meaning  of  the  fiction  of  implied  malice  in 
such  cases  at  common  law  was,  that  a  man  might  have  to  answer 
with  his  life  for  consequences  which  he  neither  intended  nor  foresaw.' 
Commonwealth  v.  Pierce,  138  Massachusetts,  165,  178.  Common- 
wealth v.  Chance,  174  Massachusetts,  245,  252.  'The  criterion  in 
such  cases  is  to  examine  whether  common  social  duty  would,  under 
the  circumstances,  have  suggested  a  more  circumspect  conduct.' 
1  East  P.C.  262.  If  a  man  should  kill  another  by  driving  an  auto- 
mobile furiously  into  a  crowd  he  might  be  convicted  of  murder  how- 
ever little  he  expected  the  result.  See  Reg.  v.  Desmond,  and  other 
illustrations  in  Stephen,  Dig.  Crim.  Law,  art.  223,  1st  ed.,  p.  146. 
If  he  did  no  more  than  drive  negligently  through  a  street  he  might 
get  off  with  manslaughter  or  less.  Reg.  v.  Swindall,  2  C.  &  K.  230; 
Rex  v.  Burton,  1  Strange,  481.  And  in  the  last  case  he  might  be  held 
although  he  himself  thought  that  he  was  acting  as  a  prudent  man 
should.  See  The  Germanic,  196  U.S.  589,  596.  But  without  further 


CHAP.  II.]  UNITED  STATES  V.   WINSLOW.  595 

argument,  the  case  is  very  nearly  disposed  of  by  Waters-Pierce  Oil 
Co.  V.  Texas  (No.  1),  212  U.S.  86,  109,  where  Mr.  Justice  Brewer's 
decision  and  other  similar  ones  were  cited  in  vain.  We  are  of  opinion 
that  there  is  no  constitutional  difficulty  in  the  way  of  enforcing  the 
criminal  part  of  the  act."  Cf.  International  Harvester  Co.  v.  Kertr 
tucky,  23-4  U.S.  216. 


UNITED  STATES  v.  WINSLOW. 

227  U.S.  202.     1912. 

Mr.  Justice  Holmes.  This  is  a  writ  of  error  to  determine  whether 
two  counts  in  an  indictment  as  construed  by  the  District  Court 
charge  offences  under  the  Sherman  Act  of  July  2,  1890,  chap.  647. 
26  Stat.  209.  They  were  held  bad,  on  demurrer,  by  the  District 
Court.  195  Fed.  Rep.  578.  The  two  counts  allege  substantially  the 
same  facts;  the  first  laying  them  as  a  combination  in  restraint  of  the 
trade  of  the  defendants  themselves,  the  second  as  a  conspiracy  in 
restraint  of  the  trade  of  others,  shoe  manufacturers. 

The  facts  alleged  are  as  follows:  For  the  last  twenty-five  years 
practically  all  the  shoes  worn  in  the  United  States  have  been  made 
by  the  help  of  machines,  gi'ouped  as  lasting  machines,  welt-sewing 
machines  and  outsole-stitching  machines,  heeling  machines  and 
metallic  fastening  machines,  there  being  a  large  variety  of  machines 
in  each  group.  (These  machines  of  course  are  not  alleged  to  do  all 
the  work  of  making  finished  shoes.)  There  is  a  great  number  of  shoe 
factories,  and  because  the  machines  are  expensive  and  the  best  of 
them  patented,  the  manufacturers  have  had  to  get  them  principally 
from  the  defendants.  Before  and  up  to  February  7,  1899,  the  de- 
fendants Winslow,  Hurd  and  Brown,  through  the  Consolidated  and 
McKay  Lasting  Machine  Company,  under  letters  patent,  made  sixty 
per  cent,  of  all  the  lasting  machines  made  in  the  United  States ;  the 
defendants  Barbour  and  Howe,  through  the  Goodyear  Shoe  Ma- 
chinery Companj'-,  in  like  manner  made  eighty  per  cent,  of  all  the 
welt-sewing  machines  and  outsole-stitching  machines,  and  ten  per 
cent,  of  all  the  lasting  machines;  and  the  defendant  Storrow,  (against 
whom  the  indictment  has  been  dismissed) ,  through  the  McKay  Shoe 
Manufacturing  Company,  made  seventy  per  cent,  of  all  the  heeling 
machines  and  eighty  per  cent,  of  all  the  metallic  fastening  machines 
made  in  the  United  States.  The  defendants  all  were  carrjang  on 
commerce  among  the  States  with  such  of  the  shoe  manufacturers  as 
are  outside  IVIassachusetts,  the  State  where  the  defendants  made 
their  machines. 

On  February  7, 1899,  the  three  groups  of  defendants  above  named, 
up  to  that  time  separate,  organized  the  United  Shoe  Machinery 


596  UNITED    STATES    V.  WINSLOW.  [CHAP.  II. 

Company  and  turned  over  to  that  company  the  stocks  and  business 
of  the  several  corporations  that  they  respectively  controlled.  The 
new  company  now  makes  all  the  machines  that  had  been  made  in 
different  places,  at  a  single  new  factory  at  Beverly,  Massachusetts, 
and  directly,  or  through  subsidiary  companies,  carries  on  all  the 
commerce  among  the  States  that  had  been  carried  on  independently 
by  the  constituent  companies  before.  The  defendants  have  ceased 
to  sell  shoe  machinery  to  the  shoe  manufacturers.  Instead,  they  only 
let  machines,  and  on  the  condition  that  unless  the  shoe  manufac- 
turers use  only  machines  of  the  kinds  mentioned  furnished  by  the 
defendants,  or  if  they  use  any  such  machines  furnished  \)y  other 
machinery  makers,  then  all  machines  let  by  the  defendants  shall 
be  taken  away.  This  condition  they  constantly  have  enforced.  The 
defendants  are  alleged  to  have  done  the  acts  recited  with  intent 
unreasonably  to  extend  their  monopolies,  rights  and  control  over 
commerce  among  the  States;  to  enhance  the  value  of  the  same  at  the 
expense  of  the  public,  and  to  discourage  others  from  inventing  and 
manufacturing  machines  for  the  work  done  by  those  of  the  defend- 
ants. The  organization  of  the  new  company  and  the  turning  over  of 
the  stocks  and  business  to  it  are  alleged  to  constitute  a  breach  of  the 
Sherman  Act. 

It  is  to  be  observed  that  the  conditions  now  inserted  in  the  leases 
are  not  alleged  to  have  been  contemporaneous  with  the  combination, 
or  to  have  been  contemplated  when  it  was  made.  The  District  Court 
construed  the  indictment  as  confined  to  the  combination  of  February 
7,  that  is,  simply  to  the  merger  of  the  companies  without  regard  to 
the  leases  subsequently  made,  195  Fed.  Rep.  592,  594;  and  we  have 
no  jurisdiction  to  review  this  interpretation  of  the  indictment.  United 
States  V.  Patten,  226  U.S.  525.  Hence  the  only  question  before  us  is 
whether  that  combination  taken  by  itself  was  within  the  penalties  of 
the  Sherman  Act.  The  validity  of  the  leases  or  of  a  combination 
contemplating  them  cannot  be  passed  upon  in  this  case. 

Thus  limited  the  question  does  not  require  lengthy  discussion,  and 
a  large  part  of  the  argument  addressed  to  us  concerned  matters  not 
open  here.  On  the  face  of  it  the  combination  was  simply  an  effort 
after  greater  efficiency.  The  business  of  the  several  groups  that  com- 
bined, as  it  existed  before  the  combination,  is  assumed  to  have  been 
legal.  The  machines  are  patented,  making  them  is  a  monopoly  in 
sa\y  case,  the  exclusion  of  competitors  from  the  use  of  them  is  of  the 
very  essence  of  the  right  conferred  by  the  patents.  Paper  Bag  Patent 
Case,  210  U.S.  405,  429,  and  it  maj^  be  assumed  that  the  success  of 
the  several  groups  was  due  to  their  patents  having  been  the  best. 
As,  by  the  interpretation  of  the  indictment  below,  195  Fed.  Rep. 
591,  and  by  the  admission  in  argument  before  us,  they  did  not  com- 
pete with  one  another,  it  is  hard  to  see  why  the  collective  business 
should  be  any  worse  than  its  component  parts.  It  is  said  that  from 


CHAP.  II.]  UNITED    STATES   V.  WINSLOW.  597 

seventy  to  eighty  per  cent,  of  all  the  shoe  machinery  business  was 
put  into  a  single  hand.  This  is  inaccurate,  since  the  machines  in 
question  are  not  alleged  to  be  types  of  all  the  machines  used  in 
making  shoes,  and  since  the  defendants'  share  in  commerce  among  the 
States  does  not  appear.  But  taking  it  as  true  we  can  see  no  greater 
objection  to  one  corporation  manufacturing  seventy  per  cent,  of 
three  non-competing  groups  of  patented  machines  collectively  used 
for  making  a  single  product  than  to  three  corporations  making  the 
same  proportion  of  one  group  each.  The  disintegration  aimed  at  by 
the  statute  does  not  extend  to  reducing  all  manufacture  to  isolated 
units  of  the  lowest  degree.  It  is  as  lawful  for  one  corporation  to 
make  every  part  of  a  steam  engine  and  to  put  the  machine  together 
as  it  would  be  for  one  to  make  the  boilers  and  another  to  make  the 
wheels.  Until  the  one  intent  is  nearer  accomplishment  than  it  is  by 
such  a  juxtaposition  alone,  no  intent  could  raise  the  conduct  to  the 
dignity  of  an  attempt. 

Note.  —  On  the  rights  of  owners  of  patented  articles  see  Bement 
V.  National  Harrow  Co.,  186  U.S.  70;  Henry  v.  Dick  Co.,  224  U.S.  1, 
30;  Standard  Sanitary  Mfg.  Co.  v.  United  States,  226  U.S.  20;  United 
States  V.  Pacific  &  Arctic  Co.,  228  U.S.  87;  Bauer  &  Cie  v.  O'Donnell, 
229  U.S.  1. 

On  the  rights  of  owners  of  copyrighted  articles  see  Bobhs-Merrill 
Co.  V.  Straus,  210  U.S.  339;  Straus  v.  American  Publishers'  Associa- 
tion, 231  U.S.  222. 

On  the  rights  of  owners  of  proprietary  medicines  see  Dr.  Miles 
Medical  Co.  v.  Park  &  Sons  Co.,  220  U.S.  373. 


BOOK   V. 
UNAUTHORIZED   CORPORATE   ACTION. 


CIL\PTER  I. 

COLLATERAL   ATTACK  UPON  THE  FORMATION   OF  A 

CORPORATION.     HEREIN   OF  THE   EXPRESSION 

"DE  FACTO  CORPORATION." 


SECTION   L 


WHERE  THERE  HAVE  BEEN   DF.AI.IXCS  RETWEEX  THE 
PARTIES  ON  A  CORPORATE  BASIS. 


CALLENDER  v.   PAINF^VILLE   R.R.   CO. 

11  Ohio  State,  516.     1860. 

The  plaintiffs  sought  to  recover  for  a  breach  of  a  written  contract 
by  the  defendant,  as  an  incorporated  company,  executed  in  its  be- 
half by  Van  R.  Humphrey,  as  its  president. 

A  summons  was  served  i)y  leaving  a  true  and  certified  copy  at  the 
principal  business  office  of  the  defendant  at  Painesville. 

Thereafter  one  George  W.  Steele  filed  a  motion,  stating  that  he  was 
a  member,  and  the  secretary  of  the  company,  and  a.>^king  that  the 
petition  be  dismissed  on  several  grounds,  one  l)eing  that  said  raih'oad 
company  "  is  not  an  incorporated  company." 

This  motion  was  granted  in  the  lower  court. 

It  appeared  that  there  was  a  law  under  which  such  a  railroad  cor- 
poration could  be  formed,  and  that  a  certificate  purporting  to  comply 
with  the  requirements  of  that  law  had  been  filed  in  the  proper  public 
office,  and  that  the  associates  had  done  business,  as  though  they  were 
incorporated. 

It  was  argued  that  the  certificate  did  not  comply  with  the  require- 
ments of  law  because  the  line  of  railroad  was  not  defined  with  suffi- 
cient certainty. 

SuTLiFF,  J.  [After  intimating  that  the  objection  to  the  certificate 
was  untenable.] 

But  in  this  case  the  original  petition  alleged  that  the  defendant 
was  a  corporation.  The  contract  upon  which  the  action  was  brought, 


SECT.  I.]  CALLENDER    V.  PAINESVILLE    R.R.  CO.  599 

a  copy  of  which  was  appended  to  the  petition,  purported  to  be  exe- 
cuted by  the  defendant,  as  a  corporation;  and  the  motion  and  the 
affidavit  of  the  mover,  disclosed,  at  most,  only  a  defect  in  the  act  of 
incorporation.  But  the  affidavit  admits  that  the  company  had  at- 
tempted in  all  respects  to  comply  with  the  requisitions  of  the  statute, 
and  in  fact  obtained,  by  a  supposed  compliance  on  their  part,  the 
acceptance  and  record  of  their  certificate  by  the  secretary  of  state, 
a  copy  of  which  was  to  them  a  valid  charter,  as  they  supposed. 
And  the  affiant  further  states  that  he  had  acted  as  their  secretary 
for  some  three  years,  and  that  the  president  of  the  company  was 
then  residing  at  Painesville,  where  the  company  then  kept  its  office. 

It  thus  appears  that  the  members  of  the  company  obtained  their 
charter,  supposed  themselves  a  legally  incorporated  companj'',  and 
had  continued  to  hold  themselves  out,  and  to  act  as  such,  to  and 
with  the  public,  and  are  still  so  acting.  Nor  is  there  any  denial, 
either  in  the  motion  or  affidavit  of  Steele,  that  their  president, 
Humphrey,  was  not  authorized  by  himself  and  others  of  the  associa- 
tion, to  execute  said  contract  on  behalf  of  the  association,  as  an 
incorporated  company. 

Under  such  circumstances,  the  members  of  the  company,  and 
especially  the  officers  of  the  company,  are  estopped  to  deny  its 
existence  as  a  corporation.  However  mistaken  in  fact,  no  person, 
whether  artificial  or  natural,  is  permitted  to  so  conduct  and  repre- 
sent himself  as  to  induce  reasonable  men,  at  his  instance,  to  act  upon 
the  truth  of  such  representations  in  their  contracts  and  dealings 
with  him,  and  to  then  deny  the  truth  of  such  representations,  to  the 
prejudice  of  the  party  so  having  relied  upon  them. 

In  order  for  the  company,  or  any  member  thereof,  to  so  repudiate 
its  conduct,  and  disprove  the  truth  of  its  own  representation,  it  is 
necessary  for  it,  not  only  to  show  an  honest  mistake,  but  that  such 
mistaken  representation  had  not  induced  the  adversary  party,  in 
the  exercise  of  reasonable  prudence  on  his  part,  to  give  the  credit, 
make  the  contract,  and  act  under  it  in  confidence  of  the  truth  of 
such  conduct  and  representations. 

But  in  this  case,  not  only  has  the  association  obtained  a  copy  of 
the  certificate,  its  charter  of  incorporation,  and  represented  itself  to 
the  other  party  to  be  a  corporation,  by  making  the  contract  in  that 
capacity,  but  it  has  continued  to  act  in  a  corporate  capacity  down  to 
the  time  of  filing  the  motion ;  and  the  member  so  filing  the  motion 
states  that  he  is  still  the  officer  of  the  corporation.  It  thus  appears 
that,  instead  of  contradicting  the  misrepresentation,  before  the  con- 
tract was  made,  the  company  had  not,  even  after  making  the  con- 
tract, either  in  conduct  or  representation,  ever  denied  their  corporate 
character. 

Under  such  circumstances,  to  suffer  the  defendants  to  repudiate 
their  first  conduct,  and  deny  the  truth  of  their  representations,  by 


600  BOYCE    V.  TOWSONTOWN    STATION.  [CHAP.  I. 

which  the  plaintiffs  had  been  induced  to  contract  with  them,  and 
upon  which  both  parties  had  acted,  would  be  in  contravention  of 
those  principles  of  equity  upon  which  the  doctrine  of  estoppel  rests, 
and  its  operative  effect  to  prevent  fraud  depends. 

We  are,  therefore,  clearly  of  opinion  that,  at  the  time  of  the  hear- 
ing of  the  motion,  the  company  anil  its  memlx'rs  who  hail  so  held 
themselves  out  to  be  a  corporation,  were  estopped  to  deny  that 
fact,  for  any  defect  whatsoever,  if  the  same  had  in  fact  existed  in 
their  charter. 

The  judgment  of  the  court  of  common  pleas  must,  therefore,  be 
reversed,  and  the  cause  remanded. 

Judgment  accordingly. 


BOYCE  V.  TOWSONTOWN  STATION. 

46  Md.  359.     1877. 

Assumpsit  against  an  alleged  religious  corporation.  Defendants 
appeareil  by  counsel,  and  pleaded,  1st,  that  the  defendants  are  not 
and  never  were  a  body  corporate,  as  alleged.  Plaintiff  offered  in  evi- 
dence an  agreement  or  certificate  of  incorporation  under  a  general 
statute.  The  statute  required  this  document  to  be  acknowledged 
before  two  justices  of  the  peace,  or  a  judge  of  the  Circuit  Court  or 
of  the  Supreme  Bench  of  Baltimore.  It  was  acknowledged  before  a 
single  justice  of  the  peace.  Plaintiff,  to  show  user  of  the  corporate 
name  and  franchise,  offered  in  evidence  a  deed  of  land  to  said 
trustees;  and  a  mortgage  from  said  trustees  to  Crook  and  Hiss, 
trustees. 

All  the  above  evidence  was  rejected,  and  plaintiff  excepted,  ^'e^- 
dict  and  judgment  for  defendants.    Plaintiff  appealed. 

Stewart,  J.  .  .  .  But  the  appellant  has  undertaken  to  offer  evi- 
dence of  certain  acts  and  proceedings  of  the  appellee,  referred  to  in 
the  exceptions,  to  show  that  it  held  itself  out  as  a  corporation,  and 
treated  with  the  appellant  as  such,  and  is  estopped  from  denying  its 
liability  as  a  corporation. 

We  think  it  would  be  extending  the  doctrine  of  estoppel  to  an 
extent,  not  justified  by  the  principles  of  public  policy,  to  allow  it  to 
operate  through  the  conduct  of  the  parties  concerned,  to  create  sub- 
stantially a  de  facto  corporation,  with  just  such  powers  as  the  parties 
may  by  their  acts  give  to  it. 

This  would  be  substituting  the  dealings  of  the  parties,  for  comph- 
ance  with  the  requirements  of  the  law,  and  giving  to  them  the  same 
effect  through  the  aid  of  the  Courts.  Thus,  virtually,  through  the 
Courts,  recognizing  the  existence  of  the  corporation,  in  manifest  dis- 
regard of  the  written  law. 

It  has  been  determined  by  this  Court,  that  a  corporation  cannot 


SECT.  I.]  BOYCE    V.  TOWSONTOWN    STATION.  601 

bind  itself  in  excess  of  its  powers.  Penna.  Steam  Navigation  Co.  v. 
Dandridge,  8  G.  &  J.  319. 

Whilst  denying  its  capacity  upon  any  principle  of  estoppel,  to 
make  contracts  ultra  vires,  to  bind  itself;  it  would  not  be  consistent 
with  that  theory  to  recognize  its  existence  ad  libitum,  according  to  the 
conduct  of  the  parties  concerned. 

Such  a  principle  would  seem  to  affix  no  other  limit  to  the  exist- 
ence of  the  corporation  de  facto,  or  the  extent  of  its  power  than  the 
dealings  of  the  parties,  through  the  recognition  of  the  Courts,  might, 
upon  the  doctrine  of  estoppel,  prescribe. 

It  would  be  more  reasonable  to  hold  corporations  to  their  con- 
tracts, though  ultra  vires,  of  which  they  have  received  the  benefit, 
or  to  prevent  parties  who  have  contracted  with  them,  and  received 
the  benefit  therefrom,  from  defeating  their  liability,  on  the  ground 
of  want  of  power  in  the  corporation,  as  is  held  in  quarters  of  high 
authority  (see  note  and  references  in  2  Kent,  351),  than  to  hold  that 
corporations  should  be  deemed  to  have  existence,  because  they  had 
so  held  themselves  out. 

The  statute  law  of  the  State  expressly  requiring  certain  pre- 
scribed acts  to  be  done  to  constitute  a  corporation,  to  permit  parties 
indirectly,  or  upon  the  principle  of  estoppel,  virtually  to  create  a  cor- 
poration for  any  purpose,  or  to  have  acts  so  construed,  would  be  in 
manifest  opposition  to  the  statute  law,  and  clearly  against  its  policy, 
and  justified  upon  no  sound  principle  in  the  administration  of  justice. 

Judgment  affirmed. 

Note.  —  Suppose  a  legislature  has  passed  some  law  authorizing 
the  formation  of  a  corporation  upon  the  performance  of  certain  acts; 
that  associates  assume  to  comply  with  the  law  and,  therefore,  to  be 
incorporated;  and  that  it  is  claimed  that  they  have  not  complied 
with  the  law.  The  court  may  hold  (1)  that  what  has  been  done 
amounts  to  a  substantial  compliance  with  the  law;  or  (2)  that  the 
provision  of  law  not  complied  with  was  a  mere  directory  provision; 
or  (3)  that  non-compliance  with  the  provision  of  law  in  question  was 
intended  by  the  legislature  to  be  only  a  cause  for  the  forfeiture  of  the 
corporate  existence. 

The  doctrine  of  de  facto  corporations  is  reached  only  when  the 
court  feels  bound  to  hold  that  the  defect  in  organization  amounts 
to  a  failure  substantially  to  perform  a  mandatory  provision,  the  per- 
formance of  which  the  legislature  intended  should  be  a  condition 
precedent  to  incorporation.    (See  note  on  p.  30,  supra.) 

Whenever  associates,  who  are  not  incorporated,  assume  to  be  in- 
corporated, there  is,  in  the  nature  of  things,  a  composite  unit,  —  the 
conception  of  a  composite  unit  was  not  originated  by  the  law.  But 
the  question  remains  whether  this  composite  unit  is  to  be  treated  by 
the  court  as  a  legal  unit.   It  is  for  the  legislature,  not  the  court,  to 


602  BOYCE    V.  TOWSON'TOWN    STATION.  [CIIAP.  I. 

create  corporations;  and,  by  our  supposition,  the  associatcH  have 
faileil  to  perform  a  condition  precedent  to  incorjwration. 

It  is  clear  that  if  the  State  itself,  in  ([uo  warranto  (or  similar  pro- 
ceeding), (luestions  the  incorporation  of  the  associates,  the  court  will 
declare  them  not  to  be  a  logjil  unit. 

But  if  there  is  no  such  direct  attack  upon  the  incorporation  of  the 
associates,  the  question  remains  whether  the  court  will  permit  col- 
lateral attack  upon  their  incorjioratiiju,  —  whether,  for  example,  the 
court  will  permit  a  private  indiviilual  to  show  that  the  :u<sociates  are 
not  incorporated.  It  is  to  be  frankly  recognized  that,  in  any  case  in 
which  the  court  denies  collateral  attack,  it  predicates  the  siime  con- 
sequences upon  unauthorized  corporate  action  as  it  would  have  pred- 
icated up(jn  authorized  corporate  action. 

In  every  case  in  which  lu^sociates  who  arc  not  incorporated,  assume 
to  be  incorporated,  the  composite  unit  thus  formed  might,  with  some 
propriety,  Ix?  termed  a  corporation  dr  facto  (or  a  corporation  by  as- 
sumption). But  the  courts  usually  (although  not  always)  use  the 
term  corporat ion  dc  facto  in  a  restricted  .^Mise.  They  incline  to  use  the 
term  only  under  the  following  circumstances:  (1)  when  at  the  time  of 
the  alleged  incorporation  there  was  a  law  authorizing  the  formation  of 
such  a  corporation  as  the  lij^sociates  attempteil  to  form;  (2)  when  the 
attempt  to  incorporate  has  been  carried  .so  far  as  to  result  in  a  colorable 
corporate  organization;  (3)  when  there  has  lx?cn  user  by  the  iuv^oci- 
ates  in  the  name  of  the  alleged  corporation  of  some  of  the  powers  which 
such  a  corporation  would  po.sset^s;  and  (4)  when  the  person  or  per- 
sons asking  that  collateral  attack  l)e  denied  have  acted  in  good  faith. 

Where  tlic  associates  have  caui^ed  a  contract,  in  the  name  of  the 
alleged  corporation,  to  be  made  with  an  outsider,  and  the  outsider 
sues  the  alleged  corporation  for  breach  thereof,  and  the  circumstances 
are  such  that  there  was  a  corporation  dc  facto,  in  the  restricted  sense 
of  the  term  explained  above,  the  authorities  in  accord  with  Callcnder 
v.  Paincsville  li.R.  Co.,  supra,  are  very  numerous.  tSce  20  ILL. II. 
476,  note  33. 

The  rule  laid  down  in  Boycc  v.  Towsontown  Church  has  been 
changed  i)y  statute.  Section  0  of  chap.  240  of  the  Laws  of  Marj'- 
land,  1908,  provides:  "Where  an  effort  has  been  made  in  good  faith 
to  form,  under  the  laws  of  this  State  a  corporation  formable  there- 
under, neither  party  to  any  transaction  with  it  shall  deny  the  legality 
of  its  incorporation  or  organization  in  any  suit  or  proceeding  grow- 
ing out  of  such  transaction." 

It  is  a  logical  extension  of  the  principle  of  Callender  v.  Painesville 
R.R.  Co.  that  the  outsider  may  hold  any  stockholder,  director  or  offi- 
cer of  the  alleged  corporation  to  such  liability  as  would  have  attached 
to  him  if  the  associates  had  been  incorporated  when  the  contract 
wdth  the  outsider  was  made.  Slocum  v.  Warren,  10  R.I.  116.  For 
further  authorities  see  20  H.L.R.  476,  note  33. 


SECT.  I.]       BUSHNELL   V.  CONSOLIDATED    ICE    MACHINE    CO.  603 

If  associates  are  incorporated,  de  facto,  a  sale  by  a  receiver  of  the 
alleged  corporation  of  its  assets  will  pass  whatever  rights  the  asso- 
ciates have  treated  as  rights  of  the  corporation.  Matter  of  New  York, 
Westchester  &  Boston  Ry.  Co.,  193  N.Y.  72,  90. 


BUSHNELL  v.   CONSOLIDATED   ICE  MACHINE  CO. 

138  111.  67.     1891. 

Suit  in  chanceiy  to  have  the  Consolidated  Ice  Machine  Company- 
declared  a  copartnership,  and  its  affairs  settled  between  the  com- 
plainant and  defendants  accordingly.  In  the  court  below,  the  de- 
murrer was  sustained  and  the  bill  dismissed. 

The  following  facts  appear  from  the  bill:  In  1884  the  complainant 
and  the  individual  defendants  entered  into  a  written  agreement  to 
form  a  corporation,  with  the  above  title,  under  the  laws  of  the 
State;  all  the  required  steps  were  taken,  up  to  and  including  the  issu- 
ing of  a  certificate  of  the  complete  organization  of  such  corporation 
by  the  Secretary  of  State;  complainant  was  a  director;  and  for  several 
months  secretary  and  soliciting  agent,  actively  engaged  in  its  busi- 
ness. In  1885  complainant  became  afflicted  with  melancholia  and 
remained  mcapacitated  for  the  transaction  of  business  for  about  three 
years.  During  his  sickness,  the  other  directors  sold  some  of  his 
shares  for  non-payment  of  installments,  the  sale  being  without  no- 
tice. Since  the  sale  he  has  been  excluded  from  all  participation  in  the 
management  of  the  business.  After  being  restored  to  health,  and 
before  filing  his  bill,  he  made  frequent  demands  to  be  restored  to  his 
rights  in  said  corporation,  but  without  avail. 

Wilkin,  J.  The  only  allegation  of  the  bill  which  is  seriously  in- 
sisted upon  as  furnishing  a  ground  for  the  relief  prayed  is,  "that  the 
certificate  of  complete  organization  was  never  recorded  in  the  office 
of  the  recorder  of  deeds  for  Cook  County,  where  its  principal  office 
is  located,"  the  argument  being,  that  in  order  to  constitute  the 
defendant  company  a  corporation  under  the  laws  of  this  State  that 
certificate  must  have  been  so  recorded,  and  failing  to  become  incor- 
porated, its  members  are  to  be  treated  as  partners.  The  section  of  the 
statute  upon  which  the  first  proposition  is  based  is  as  follows:  "The 
Secretary  of  State  shall  thereupon  issue  a  certificate  of  the  complete 
organization  of  the  corporation,  making  part  thereof  a  cop3^  of  all 
papers  filed  in  his  office  in  and  about  the  organization  of  the  corpora- 
tion, and  duly  authenticated  under  his  hand  and  seal  of  State,  and 
the  same  shall  be  recorded  in  a  book  for  that  purpose  in  the  office  of 
the  recorder  of  deeds  of  the  county  where  the  principal  office  of  such 
company  is  located.  Upon  the  recording  of  said  copy  the  corporation 
shall  be  deemed  fully  organized,  and  may  proceed  to  business.  Unless 


604  BUSHNELL   V.  CONSOLIDATED    ICE    MACHINE    CO.       [CHAP.  I. 

such  company  shall  be  organized,  and  shall  proceed  to  business,  as 
provided  in  this  act,  within  two  years  after  the  date  of  such  license, 
then  such  license  shall  be  deemed  revoked  and  all  proceedings  there- 
under void."  The  hinguago  of  this  section  is  not  clear.  While  it  says 
the  certificate  shall  be  recorded,  it  does  not  say  who  shall  cause  it  to 
be  done.  It  does  not  say  the  recording  of  the  certificate  shall  be  neces- 
sary to  the  complete  organization  of  a  corporation,  but  "upon  the 
recording  of  the  said  copy  the  corporation  shall  be  deemed  fully 
organized,  and  may  proceed  to  busine.'^s."  Conceding,  however,  by 
the  word  "copy"  is  meant  "certificate,"  incoiporators  would  have 
done  all  that  is  required  of  them  when  they  had  filed  it  with  the 
proper  officer  for  record.  There  is  no  allegation  in  this  bill  that  it  was 
not  so  filed.  The  averment  is  simply  that  it  has  "never  been  re- 
corded," etc. 

But  assuming  that  a  corporate  existence  dejiire  depends  upon  the 
filing  of  the  certificate  of  complete  organization  in  the  office  of  the 
recorder  of  tleeds  of  the  county  in  which  its  principal  office  is  located, 
and  that  the  l)ill  properly  avers  that  it  was  not  done  in  the  case  of 
the  corporation  in  question,  it  by  no  means  follows  that  it  did  not 
become  a  corporation  de  facto  as  between  the  complainant  and  de- 
fendants. From  the  facts  set  up  in  the  bill  it  clearly  appears  that 
there  was  an  honest  attempt  l)y  the  incorporatoi*s  to  organize  a  cor- 
poration authorized  by  the  laws  of  this  State.  The  necessary  steps 
to  perfect  that  organization  were  all  taken  as  required  by  the  statute, 
except  that  the  final  certificate  was  not  recorded.  It  is  shown  by  the 
bill  that  upon  the  issuing  of  that  certificate  its  directors  elected  the 
proper  officers  and  proceeded  to  the  transaction  of  business  as  a 
corporation,  and  continued  to  act  as  such  until  the  filing  of  this  bill, 
a  period  of  more  than  five  years.  That  these  facts  estaljlish  a  cor- 
poration de  facto  is  settled  by  numerous  decisions  of  this  court.  Presi- 
dent and  Trustees,  etc.,  v.  Thompson,  20  111.  198;  Rice  x.  R.I.  and  A. 
R.R.  Co.,  21  id.  93;  Baker  et  al.  v.  Administrator,  32  id.  79;  Ramsey 
V.  Marine  and  Fire  Ins.  Co.,  55  id.  311;  Cincinnati,  Lafayette  and 
Chicago  Railroad  Co.  v.  Danville  and  Vincennes  Ry.  Co.,  75  id.  113; 
Louisville,  Neiv  Albany  and  Chicago  Ry.  Co.  v.  Shires,  108  id.  617; 
Hudson  V.  Green  Hill  Seminary  Corporation,  113  id.  618. 

That  plaintiff  in  error,  if  he  had  been  sued  by  the  Consolidated 
Ice  Machine  Company  on  his  subscription  to  its  capital  stock, 
could  not  have  questioned  its  corporate  existence  on  the  grounds 
alleged  in  his  bill,  is  directly  settled  by  several  of  the  above  cited 
decisions.  It  is  equally  clear  that  if,  during  the  time  he  was  a  mem- 
ber of  said  corporation,  it  had  been  sued  as  such,  neither  he  nor  any 
other  of  its  members  could  have  been  heard  to  say  that  no  such 
corporation  existed.  The  general  rule  is,  that  one  who  deals  with  a  cor- 
poration as  existing  de  facto,  is  estopped  to  deny,  as  against  it,  that  it 
has  been  legally  organized.   It  is  the  settled  rule  in  this  State  that  the 


SECT.  I.]  MINNESOTA    GAS-LIGHT    CO.  V.  DENSLOW.  605 

legal  existence  of  a  corporation  de  facto  cannot  be  questioned  collaterally. 
See  cases  supra,  and  Renwick  et  al.  v.  Hall  et  at.,  84  111.  162;  The  Peo- 
ple ex  rel.  v.  Trustees  of  Schools,  HI  id.  171;  Keigwin  et  al.  v.  Drain- 
age Comrs.,  115  id.  347. 

It  seems  impossible  to  find  a  reason  for  placing  the  complainant  in 
this  bill  in  a  more  favorable  position  to  deny  the  existence  of  the  corpo- 
ration in  question  than  a  mere  subscriber  to  its  capital  stock,  or  one 
who,  as  a  third  party,  had  dealt  with  it  as  a  corporation,  and  we  are 
of  the  opinion  that  he  could  not  do  so  in  this  collateral  proceeding. 

Note.  —  See,  accord,  Lincoln  Park  Chapter  v.  Swatek,  204  111.  228; 
Doty  V.  Patterson,  155  Ind.  60;  Troutman  v.  Council  Bluffs  Co.,  142 
Iowa,  140;  Cannon  v.  Brush  Electric  Co.,  96  Md.  446;  Allegheny  Bank 
V.  Bailey,  147  Pa.  Ill;  Marsh  v.  Mathias,  19  Utah,  350. 


MINNESOTA  GAS-LIGHT  CO.   v.  DENSLOW. 

46  Minn.  171.    1891. 

Vanderburgh,  J.  This  action  is  brought  upon  a  promissory  note 
made  by  the  defendant  to  the  plaintiff  for  the  sum  of  $1,000,  dated 
February  15,  1888,  and  due  in  four  months. 

It  is  found  by  the  trial  court  that  the  plaintiff  at  and  since  the  date 
of  the  note  has  been  an  acting  corporation,  created  and  organized 
under  the  laws  of  the  state  of  West  Virginia  and  doing  business  as 
such  in  the  state  of  Minnesota.  But  the  defendant  denies  that  the 
evidence  warrants  any  such  conclusion,  and  denies  that  the  plaintiff 
has  any  legal  capacity  to  sue  in  the  courts  of  this  state  as  a  corpora- 
tion dejure  or  de  facto.  It  is  clear,  however,  that  a  number  of  persons 
have  associated  themselves  together  claiming  to  be  a  corporation, 
and  under  the  corporate  name  stated  have  filed  articles,  and  have 
received  the  usual  certificate  of  incorporation  under  the  seal  of  the 
state,  and  have  been  transacting  business  under  such  corporate 
name.  Nor  is  it  disputed  that  corporations  with  the  powers  claimed 
to  have  been  granted  the  plaintiff  are  authorized  to  be  created  under 
the  laws  of  the  state  granting  the  charter.  The  defendant  has  con- 
tracted with  the  plaintiff  by  its  corporate  name.  He  is  not  in  a  posi- 
tion, therefore,  to  question  its  corporate  character.  Nor  is  it  ma- 
terial for  the  purposes  of  this  action  what  the  strict  legal  relations  of 
the  associates  may  be  as  between  themselves,  whether  corporators, 
partners,  or  otherwise  jointly  interested  together  and  acting  under 
the  common  corporate  name. 

Note.  —  The  authorities,  accord,  are  very  numerous.  See  20 
H.L.R.  476,  note  33. 


606  snider's  sons'  co.  v.  troy.  [chap.  i. 

SNIDER'S  SONS'  CO.   v.  TROY. 

91  Ala.  224.     ISOO. 

Action  for  goods  sold  by  plaintiffs,  in  1888,  to,  or  on  the  order  of, 
the  Dispatch  Publishing  Co.  The  complaint  alleged  that  said  Com- 
pany was  at  the  time  a  partnership,  and  that  defendant  was  one  of  the 
partners;  that  the  Company  claimed  to  be  a  corporation,  but  was 
never  in  fact  incorporated.  Plea,  setting  out  certain  steps  taken,  in 
1885,  by  defendant  and  other  persons  to  organize  a  corporation  by 
the  above  name;  also  alleging  that  the  debt  now  sued  for  was  con- 
tracted by  said  Company  as  such  corporation,  and  not  otherwise; 
and  that  plaintiff  dealt  with  it  as  a  corporation,  and  not  as  a  part- 
nership or  association  of  individuals.  A  demurrer  to  the  plea  was 
overruled. 

Clopton,  J.  A  corporation  de  facto  exists,  when  from  irregularity 
or  defect  in  the  organization  or  constitution,  or  from  some  omission 
to  comply  with  the  conditions  precedent,  a  corporation  dejure  is  not 
created,  but  there  has  been  a  colorable  compliance  with  the  require- 
ments of  some  law  under  which  an  association  might  I)e  lawfully  in- 
corporated for  the  purposes  and  powers  assumed,  and  a  user  of  the 
rights  claimed  to  be  conferred  by  the  law  —  when  there  is  an  organ- 
ization with  color  of  law,  and  the  exercise  of  corporate  franchises. 
Meth.  E.  Un.  Church  v.  Pickelt,  48  N.J.L.  599. 

The  enabling  law,  under  which  a  corporation  for  the  purposes  and 
objects  of  the  Dispatch  Publishing  Company,  and  with  the  powers 
assumed,  might  have  been  lawfully  created  at  that  time,  is  contained 
in  §§  1803-1812  of  the  Code  of  1876,  and  the  amendatory  acts,  which 
authorize  and  provide  for  the  incorporation  of  two  or  more  pensons 
desirous  of  forming  a  private  corporation  for  the  purpose  of  carrying 
on  any  industrial  or  other  lawful  business  not  otherwise  specially 
pro\'ided  for  by  law.  Acts  1882-3,  p.  40.  The  plea  avers  that  de- 
fendant and  two  other  named  persons  filed,  September  2,  1885,  with 
the  judge  of  probate  of  Montgomery  county  a  written  declaration, 
signed  by  themselves,  setting  forth  substantially  the  matters  re- 
quired by  the  statute,  except  the  residences  of  the  persons;  that  they 
organized  by  the  election  of  three  directors,  and  commenced  and 
continued  to  do  business  in  a  corporate  capacity,  and  were  so  doing 
business  when  the  debt  sued  for  was  contracted.  If  the  averments  of 
the  plea  be  true,  the  truth  of  which  is  admitted  by  the  demurrer,  the 
Dispatch  Publishing  Company  was  an  association  having  capital 
stock  divided  into  shares,  organized  by  the  election  of  officers,  trans- 
acting business,  and  exercising  franchises,  functions  and  powers, 
after  an  attempted  incorporation,  as  if  it  were  a  corporation  de  jure 
—  a  colorable  comphance  with  the  requirements  of  an  existing  and 
enabling  law,  and  user  of  the  rights  claimed  to  be  conferred  thereby 


SECT.  I.]  SNIDER's   sons'    CO.  V.  TROY.  607 

—  the  essential  elements  of  a  corporation  de  facto.  Cen.  Agr.  &  Mech. 
Asso.  V.  Ala.  Gold  Life  Ins.  Co.,  70  Ala.  120. 

Appellant  seeks  by  the  action  to  hold  defendant,  who  was  a  mem- 
ber, liable  as  a  partner  for  paper  and  other  supplies  sold  to  the  Dis- 
patch Publishing  Company.  Whether  the  shareholders  in  a  corpora- 
tion de  facto  are  individually  liable  for  the  corporate  debts,  in  the 
absence  of  fraud  or  a  statute,  is  a  question  as  to  which  the  authorities 
are  in  direct  antagonism.  In  Cook  on  Stock  and  Stockholders,  §  233, 
the  doctrine  asserted  is:  "A  corporate  creditor,  seeking  to  enforce  the 
payment  of  his  debt,  may  ignore  the  existence  of  the  corporation, 
and  may  proceed  against  the  supposed  stockholders  as  partners,  by 
pro\dng  that  the  prescribed  method  of  becoming  incorporated  was 
not  complied  with  by  the  company  in  question."  The  leading  cases 
supporting  this  doctrine  are  Bigelow  v.  Gregory,  73  111.  197;  Abbott 
V.  Omaha  Smelt.  Co.,  4  Neb.  416;  Garrett  v.  Richardson,  35  Ark.  144; 
Ferris  v.  Thaw,  72  Mo.  446;  Richardson  v.  Maijo,  40  Ohio  St.  9;  Cole- 
man V.  Coleman,  78  Ind.  344.  We  have  omitted  reference  to  a  few 
cases  sometimes  cited,  for  the  reason,  that  either  the  question  of 
liability  as  partners  was  not  before  the  court,  as  in  Blanchard  v. 
Kaull,  44  Cal.  440;  or  the  debt  was  contracted  before  any  steps  were 
taken,  other  than  the  mere  filing  of  a  certificate,  toward  organization, 
as  in  Porpoise  Fish  Co.  v.  Bergen,  13  Amer.  &  Eng.  Cor.  Cas.  1 ;  or  it  was 
contracted  after  the  expiration  of  the  charter  by  its  own  limitation, 
without  reorganization,  as  in  Nat.  Bank  v.  Landon,  45  N.Y,  410.  In 
the  case  last  cited,  the  shareholders  entered  into  a  special  agreement, 
which  by  its  terms  created  a  partnership  as  to  third  persons. 

In  2  Mor.  on  Corp.  §  748,  the  doctrine  is  stated  as  follows:  "If 
an  association  assumes  to  enter  into  a  contract  in  a  corporate  capac- 
ity, and  the  party  dealing  with  the  association  contracts  with  it  as 
if  it  were  a  corporation,  the  individual  members  can  not  be  charged 
as  parties  to  the  contract,  either  severally  or  jointly,  or  as  partners." 
The  following  cases  maintain  the  doctrine,  that  the  members  of  a 
corporation  de  facto  can  not  be  held  liable  as  partners  for  the  cor- 
porate debts:  Fay  v.  Noble,  7  Cush.  188;  First  Nat.  Bank  v.  Avery, 
117  Mass.  476;  Stout  v.  Zulick,  48  N.J.L.  599;  Plan.  Bank  v.  Padgett, 
69  Ga.  164;  Mer.  &  Man.  Bank  v.  Stone,  38  Mich.  779;  Humphrey 
V.  Mooney,  5  Cal.  282;  Cen.  City  Sav.  Bank  v.  Walker,  66  N.Y.  424; 
Gartside  Coal  Co.  v.  Maxwell,  22  Fed.  Rep.  197;  Whiting  v.  Wyman, 
101  U.S.  392. 

The  plea  and  demurrer  do  not  raise  the  question  of  the  liability  of 
the  supposed  stockholders  as  partners,  where  there  has  been  no  in- 
tention or  attempt  to  incorporate;  where  they  are  acting  as  a  body 
corporate,  without  even  color  of  legislative  authority  —  sheer  usurp- 
ation. The  plea  avers  that  the  debt  sued  for  was  contracted  by  the 
Dispatch  Publishing  Company,  which  is  alleged  to  have  been  a  de 
facto  corporation,  and  that  plaintiff  sold  the  goods  to,  and  contracted 


608  snider's  sons'  co.  v.  troy.  [chap.  I. 

with  the  company  as  a  corporation,  knowing  that  it  was  doing  busi- 
ness as  such.  The  question  before  us,  anil  the  only  question  we  pro- 
pose to  decide,  is  whether,  there  being  no  fraud  alleged,  nor  statute 
making  the  stockholders  individually  liable,  a  creditor  who  has  dealt 
with  a  dc  facto  corporation  as  a  corporation,  who  has  entered  into 
contractual  relations  with  it  in  its  corporate  name  and  cai)acity,  can 
disregard  the  existence  of  the  corporation,  and,  electing  to  treat  it 
as  a  partnership,  enforce  the  collection  of  his  debt  from  the  stock- 
holders individually?  The  conflicting  authorities  afford  aid  in  the 
solution  of  this  question,  only  so  far  as  tlioir  opinions  may  be  in  ac- 
cord with  settled  principles  and  sustained  by  reason.  Though  it  is  an 
undecided  question  in  this  State,  principles  have  been  well  settled, 
which  materially  bear  upon  the  inquiry,  antl  mark  the  way  to  a  cor- 
rect conclusion. 

Corporations  may  exist  either  de  jure,  or  de  facto.  If  of  the  latter 
class,  they  are  under  the  protection  of  the  same  law,  and  governed 
by  the  same  legal  principles  as  those  of  the  former,  so  long  as  the 
State  acquiesces  in  their  existence  and  exercise  of  corporate  functions. 
A  private  citizen,  whose  rights  are  not  invaded,  who  has  no  cau.se  of 
complaint,  has  no  right  to  inquire  collaterally  into  the  legality  of  its 
existence.  This  can  only  be  done  in  a  tlirect  proceeding  on  the  part 
of  the  State,  from  whom  is  derived  the  right  to  exist  as  a  corporation, 
and  whose  authority  is  usurped.  This  principle  was  clearly  and  em- 
phatically declared  in  Lehman  v.  Warner,  01  Ala.  455,  in  the  follow- 
ing language:  "The  corporation  must,  of  necessity,  be  presumed  to 
be  rightfully  in  possession  of  the  franchise,  and  rightfully  to  exercise 
the  power,  which  the  legislative  grant  confers.  Individual  right  is 
not  invaded,  if  the  negative  is  true  in  fact,  and  there  is  usurpation. 
It  is  the  State  —  the  sovereign  —  who.se  rights  are  invaded,  and 
whose  rights  are  usurped.  The  individual  could  not  create  the  cor- 
poration—  could  not  grant,  define,  limit  its  powers;  and  no  grant 
of  these  by  the  sovereign  can  lessen  his  rights.  There  can  conse- 
quently be  no  cause  of  complaint  by  the  citizen,  and  no  right  to 
inquire  whether  the  corporate  existence  is  riglitful  —  de  jure  —  or 
merely  colorable."  Taylor  on  Corp.  §  145;  4  Amer.  &  Eng.  Encyc. 
of  Law,  198.  The  creditor  can  not  proceed  against  the  stockholders 
as  partners,  without  proving  non-compliance  with  prescribed  con- 
ditions precedent,  thus  inquiring  collaterally,  not  into  the  fact,  but 
the  legality  of  its  existence. 

It  is  also  an  established  rule  of  general  application,  that  a  party 
who  contracts  with  a  corporation,  exercising  corporate  powers,  and 
performing  corporate  functions  —  existing  as  a.  de  facto  corporation 
—  in  its  corporate  name  and  capacity,  will  not  be  permitted,  in  a 
suit  on  the  contract,  to  deny  and  disprove  the  rightfulness  of  its  exist- 
ence. 4  Amer.  &  Eng.  Encyc.  of  Law,  198.  In  Smartwood  v.  Michigan 
Air  Line  R.R.  Co.,  24  Mich.  390,  Cooley,  J.,  declares  the  rule  as 


SECT.  I.]  SNIDEr's    sons'    CO.  V.  TROY.  609 

follows:  "Where  there  is  thus  a  corporation  de  facto,  with  no  want  of 
legislative  power  to  its  due  and  legal  existence,  when  it  is  proceeding 
in  the  performance  of  corporate  functions,  and  the  public  are  dealing 
with  it  on  the  supposition  that  it  is  what  it  professes  to  be,  and  the 
questions  are  only  whether  there  has  been  exact  regularity  and  strict 
compliance  with  the  provisions  of  the  law  relating  to  corporations; 
it  is  plainly  a  dictate  alike  of  justice  and  public  policy,  that  in  con- 
troversies between  the  de  facto  corporation  and  those  who  have 
entered  into  contract  relations  with  it,  as  corporators  or  otherwise, 
that  such  questions  should  not  be  suffered  to  be  raised." 

The  general  rule  is  thus  stated  by  Brickell,  C.J.:  ''Whoever 
contracts  with  a  corporation  in  the  use  of  corporate  powers  and  fran- 
chises, and  within  the  scope  of  such  powers,  is  estopped  from  denying 
the  existence  of  the  corporation,  or  inquiring  into  the  regularity  of 
the  corporate  organization,  when  an  enforcement  of  the  contract,  or 
of  rights  arising  under  it,  is  sought."  Cahall  v.  Citizens^  M.B.  Asso., 
61  Ala.  232;  Central  Agr.  &  Mech.  Asso.  v.  Ala.  Gold  Life  Ins.  Co., 
70  Ala.  120;  Schloss  v.  Mo7itg.  Trade  Co.,  87  Ala.  411. 

It  is  conceded  that  the  rule  has  been  invoked  and  applied  most 
frequently  in  suits  against  the  stockholders  or  corporation,  or  per- 
sons who  have  contracted  with  it,  where  the  stockholder,  corporation 
or  person  is  seeking  to  avoid  a  liability  by  denying  the  legality  of  the 
corporate  organization.  But  why  should  it  not  be  applicable  in  other 
cases?  Why  should  a  stockholder  be  estopped,  in  a  suit  by  a  creditor 
of  an  insolvent  corporation,  to  require  payment  of  his  unpaid  sub- 
scription, and  the  creditor  allowed  to  ignore  the  existence  of  the  cor- 
poration, and  proceed  against  the  stockholder  as  a  partner?  Why 
should  not  the  estoppel  be  mutual?  Taylor,  in  his  work  on  Corpora- 
tions, §  148,  ha\dng  stated  the  general  rule,  that  a  corporation  when 
sued  on  its  contract,  and  the  person  who  contracted  with  it,  when 
sued  on  his  contract,  is  each  estopped  to  deny  its  legal  incorporation, 
adds:  "Furthermore,  persons  who  have  contracted  with  a  corpora- 
tion as  such,  and  have  acquired  claims  against  it,  are  estopped  from 
denying  its  corporate  existence  for  the  purpose  of  holding  its  share- 
holders liable  as  partners."  And  the  same  rule  was  applied  in  several 
of  the  cases  cited  above,  in  which  a  corporate  creditor  was  seeking 
to  hold  the  stockholder  liable  as  a  partner  for  a  corporate  debt.  The 
abrogation  of  the  foregoing  well  established  rule  is  the  logical  se- 
quence of  maintaining  a  suit  by  a  creditor  of  a  de  facto  corporation, 
charging  the  stockholders  as  partners. 

Another  consideration.  §  8  of  Article  XIV  of  the  Constitution 
declares:  "In  no  case  shall  any  stockholder  be  individually  liable, 
otherwise  than  for  the  unpaid  stock  owned  by  him  or  her."  Exemp- 
tion from  liability,  other  than  for  unpaid  stock,  is  the  declared  policy 
of  the  State.  It  can  not  be  imposed  by  legislation,  or  by  the  judg- 
ment of  a  court.  In  view  of  the  constitutional  provision,  it  is  mani- 


610  snider's  sons'  co.  v.  troy.  [chap.  I. 

fest  that  the  share-holders  of  the  Dispatch  PubUshing  Company  in- 
tended, by  the  attempt  to  incorporate,  to  avoid  individual  liability 
for  the  debts  contracted  by  the  corporation.  When  a  party  doals  and 
contracts  with  a  corporation  a.s  corporators,  exemption  from  inilivid- 
ual  liability  enters  as  an  element  of  the  contract.  It  is  true  that  the 
liability  of  persons  associated  in  an  enterprise  or  adventure  is  not 
determinable  by  the  name  they  assume,  but  by  the  legal  consequence 
of  their  acts.  A  partnership  may  arise  as  to  third  persons,  by  mere 
operation  of  law,  and  contrary  to  the  intention  of  the  parties;  but, 
to  have  this  effect,  the  elements  essential  to  constitute  a  partnership 
as  to  third  persons  must  exist.  A  corporation  de  facto  has  an  in- 
dependent status,  recognized  by  the  law  as  distinct  from  that  of  its 
members.  A  partnership  is  not  the  ncccs.sary  legal  con.sequence  of  an 
abortive  attempt  at  incorporation.  As  said  in  Fay  v.  Noble,  supra, 
"Surely,  it  can  not  be,  in  the  absence  of  all  fraudulent  intent,  that 
such  a  legal  result  follows  as  to  fasten  on  parties  involuntarily,  for 
such  a  cause,  the  enlarged  liability  of  co-partners,  a  liability  neither 
contemplated  nor  as.sentcd  to  by  them.  The  statement  of  the  prop- 
osition carries  with  it  a  sufficient  refutation." 

Maintenance  of  such  suit  involves  judicial  nullification  of  fran- 
chises and  powers  enjoyed  and  exercised  by  a  dc  facto  corporation, 
as  a  distinct  entity  recognized  i)y  the  law,  acquiesced  in  by  the  State; 
defeats  the  corporate  character  of  the  contract,  changes  the  relation 
from  that  of  stockholders  to  that  of  partners;  substitutes  other  and 
new  parties  to  the  contract,  and  effects  the  imposition  of  an  en- 
larged liability,  which  they  did  not  assume,  but  intended  to  avoid; 
so  understood  by  the  creditor,  when  he  contracted  the  debt  with  the 
corporation  as  such.  The  contract  is  valid  and  binding  on  the  cor- 
poration, which  the  creditor  trusted.  No  injustice  is  done  him,  for 
all  his  rights  and  remedies  are  preserved  by  the  principle  that  the 
corporation  and  the  share-holder  are  estopped  from  denying  its 
legal  existence,  as  against  him.  It  will  not  answer  to  say  that  he 
is  not  repudiating,  but  enforcing  the  contract.  He  repudiates  the 
party  —  the  corporation  —  with  which  he  made  the  contract,  and 
seeks  its  enforcement  against  parties  who  never  entered  into  con- 
tractual relations  with  him. 

The  doctrine  that  a  creditor  who  has  dealt  with  a  de  facto  corpora- 
tion, in  its  corporate  capacity,  can  not  charge  the  stockholders  as 
partners  with  the  corporate  debt,  there  being  no  fraudulent  intent 
alleged  and  proved,  seems  to  us  to  be  sustained  by  the  weight  of 
authority,  maintained  by  stronger  reasoning,  consistent  with  well 
settled  principles,  and  in  harmony  with  the  policy  of  the  State. 

Affirmed. 

Note.  —  See,  accord,  Humphreys  v.  Mooney,  5  Colo.  282;  Stafford 
Bank  v.  Palmer,  47  Conn.  443;  Planters'  Bank  v.  Padgett,  69  Ga. 


SECT.  I.]  RICHARDSON    FUELING    CO.  V.  SEYMOUR.  611 

164;  Tulane  Improvement  Co.  v.  Chapman,  129  La.  562;  Jennings  v. 
Dark,  175  Ind.  332;  Trowbridge  v.  Sadder,  11  Cush.  (Mass.)  83; 
Merchants  Bank  v.  Stone,  38  Mich.  779;  Finnegan  v.  Noerenberg, 
52  Minn.  239;  Hague  v.  Capital  National  Bank,  47  Neb.  929;  Lamed 
V.  5mZ,  65  N.H.  184;  Stout  v.  Zii/zc/v,  48  N.J.L.  599;  Whiiford  v. 
Laidler,  94  N.Y.  145,  151  (see  also  Central  Bank  v.  Walker,  66  N.Y. 
424;  but  c/.  A^Ker  v.  i^oii^e,  57  N.Y.  23);  Rowland  v.  Header  Co., 
38  Ohio,  269;  Mason  v.  >Sfeyews,  16S.D.  320;  Shields  v.  Clifton  Co.,  94 
Tenn.  123;  American  Co.  v.  Heidenheimer,  80  Tex.  344;  Mitchell  v. 
Jensen,  29  Utah,  346;  Clausen  v.  Head,  110  Wis.  405  (but  c/.  5er- 
gferon  v.  Hobbs,  96  Wis.  641). 


RICHARDSON  FUELING   CO.   v.   SEYMOUR. 

235  111.  319.    1908. 

Action  of  assumpsit  against  John  Seymour,  and  others,  to  recover 
for  coal  sold. 

Mr.  Justice  Dunn  delivered  the  opinion  of  the  court. 

The  account  sued  on  was  for  coal  furnished  to  the  steamer  Puritan. 
There  was  evidence  tending  to  show  that  the  steamer  was  operated, 
at  the  time  the  account  accrued,  by  the  Seymour  Transportation 
Company,  purporting  to  be  a  corporation  organized  under  the  laws 
of  this  State.  The  certificate  of  incorporation  of  the  company,  how- 
ever, had  never  been  filed  for  record  in  the  county  where  its  principal 
office  was  located,  and  the  ground  of  the  alleged  liability  of  the  ap- 
pellants is  their  assumption  and  exercise  of  corporate  powers  and 
use  of  the  corporate  name  without  complying  with  the  provision  of 
§  4  of  the  Incorporation  Act,  in  regard  to  the  recording  of  the  cer- 
tificate of  complete  organization  of  the  corporation.  The  appellants 
were  original  subscribers  to  the  capital  stock  of  the  supposed  cor- 
poration, and  were  stockholders,  directors  and  oflEicers  thereof  until 
after  the  transactions  here  in  controversy.  The  evidence  tends  to 
show  that  the  appellants  hved  in  Manistee,  Michigan,  and  that 
E.  W.  Seymour,  another  original  subscriber,  stockholder,  director 
and  officer  of  the  company,  was  its  manager,  who  had  actual  charge 
of  the  business  of  the  steamer  in  Chicago,  where  the  coal  was  fur- 
nished. It  is  argued  that  the  debt  to  the  appellee  was  made  by  the 
?atter  alone,  and  that  appellants  did  not  participate  therein  in  any 
way  and  had  no  connection  therewith.  In  the  case  of  Bigelow  v. 
Gregory,  73  111.  197,  the  effect  upon  the  liability  of  incorporators  of  a 
failure  to  comply  with  the  provisions  of  the  statute  of  Wisconsin  in 
regard  to  the  filing  of  their  certificate  and  publication  of  articles  of 
association  was  under  consideration,  and  it  was  there  held  that  the 
incorporators,  under  such  circumstances,  were  liable  as  partners. 


612  RICHARDSON    FUELING    CO.  V.  SEYMOUR.  [ciIAP.  I. 

And  in  Loverin  v.  McLaughlin,  IGl  111.  417,  it  was  held  that  a  com- 
pany which  is  not  a  corporate  body  is  a  partnership,  composed  not 
merely  of  the  directors,  but  of  all  the  subscribers  to  the  articles  of 
association  who  had  not  withdrawn.  So  in  Gunclerson  v.  Illinois 
Trust  and  Sainngs  Bank,  199  111.  422,  it  is  said  that  if  the  a.'<sociation 
there  concerned  was  not  a  corporate  body  it  was  a  partnership  of 
individuals,  who  would  be  liable  as  partners  for  its  debts.  Proof  of  a 
corporation  tie  facto  does  not  relieve  directors  and  officers  of  the  cor- 
poration from  the  liability  imposed  by  the  statute.  A  corporation 
de  jure  must  be  shown,  to  escape  that  liability.  liiitler  Paper  Co.  v. 
Cleveland,  220  111.  128.  Independent  of  any  liability  under  §  18  of  the 
Incorporation  Act,  the  appellants  were  liable  as  partners  if  the  proof 
showed  the  delivery  of  the  coal.  There  was  evidence  tendinp;  to 
show  its  delivery,  and  with  the  weight  of  the  evitlence  we  have  noth- 
ing to  do. 

Note.  —  Section  18  of  the  Incorporation  Act,  to  which  reference 
is  made  in  the  opinion,  is  as  follows:  "  If  any  pcr.son  or  persons  being, 
or  pretending  to  be,  an  ofhcer  or  agent,  or  board  of  directors,  of 
any  stock  corporation,  or  pretended  stock  corporation,  shall  assume 
to  exercise  corporate  powers,  or  use  the  name  of  any  such  corpora- 
tion, or  pretended  corporation,  without  complying  with  the  pro- 
visions of  this  Act  .  .  .  then  they  shall  be  jointly  and  severally  liable 
for  all  debts  and  liai)ilities  made  by  them,  antl  contracted  in  the 
name  of  such  corporation,  or  pretended  corporation." 

In  Bigeloiv  v.  Gregory,  73  111.  197,  the  court  said  (pp.  200,  201): 
"The  defendants  are  seeking  escape  from  individual  liability;  let 
them  show  that  they  have  complied  with  the  statute  which  enables 
them  to  do  so,  at  least  substantially.  .  .  .  There  would  seem  to  be  a 
distinction  between  the  case  where,  in  a  suit  between  a  corporation 
and  a  stockholder  or  other  individual,  the  plea  of  nul  ticl  corporation 
is  set  up  to  defeat  a  liability  which  the  one  may  have  contracted  with 
the  other,  and  the  case  of  a  suit  against  indivitluals  who  claim  exemp- 
tion from  individual  liability,  on  the  ground  of  their  having  become 
a  corporation  formed  under  the  provisions  of  a  general  statute.  In 
the  latter  case,  a  stricter  measure  of  compliance  with  statutory  re- 
quirements wdll  be  required,  than  in  the  former." 

See,  in  accord  with  the  printipal  case,  Garnett  v.  Richardson,  35 
Ark.  144.  See  also  Vanhorn  v.  Corcoran,  127  Pa.  255. 

As  to  the  law  of  Missouri  cf.  Martin  v.  Fewell,  79  Mo.  401,  410, 
with  Bank  v.  Rockefeller,  195  Mo.  15. 

A  liability  may  be  expressly  imposed  in  such  case  by  statute.  See 
Humphreys  v.  Drew,  59  Fla.  295;  Berkson  v.  Anderson,  115  Iowa, 
674;  Ragland  v.  Doolittle,  100  Miss.  498. 


SECT.  I.]  UNITED    STATES    EXPRESS    CO.  V.  BEDBURY.  613 

UNITED   STATES   EXPRESS  CO.  v.  BEDBURY. 

34  111.  459.     1864. 

This  was  a  proceeding  by  garnishment,  commenced  by  Bedbury 
against  tlie  United  States  Express  Company. 

Mr.  Chief  Justice  Walker.  It  is  insisted,  as  a  ground  of  re- 
versal, that  there  is  nothing  in  the  record  to  show  that  plaintiff  in 
error  was  a  corporation.  .  .  . 

It  is  insisted  that  the  service  of  the  garnishee  process  upon  the 
company  was  insufficient  to  sustain  the  judgment.  By  the  amended 
return  it  appears,  that  if  plaintiff  in  error  is  a  corporation  the  service 
was  sufficient,  and  in  strict  compliance  with  the  statute.  It  states, 
that  the  president  of  the  company  not  residing  in  the  county  in  which 
the  suit  was  pending,  that  the  writ  was  served  upon  the  company 
as  garnishee,  by  reading  and  delivering  a  copy  thereof  to  Henry 
Colvin  and  James  C.  Fargo,  agents  of  the  company,  and  on  D.  B. 
Cooke,  their  clerk. 

This,  then,  presents  the  question  whether  this  is  a  corporation. 
Plaintiff  in  error  appeared  to  the  suit  by  the  name  of  the  "United 
States  Express  Company,"  and  this  is  a  sufficient  admission  that 
such  is  their  name.  In  the  case  of  Henriques  v.  Dutch  West  India 
Company,  28  Raym.  1535,  it  was  held,  that  the  name  of  the  com- 
pany imported  a  corporation.  And  the  same  rule  has  been  announced 
or  recognized  in  the  courts  of  New  York  in  the  case  of  Stoddard  v. 
Onondaga  Conference,  12  Barb.  570;  Kennedy  v.  Cotton,  28  id.  62. 

These  cases  show  that  such  a  name  imports  a  corporation.  It 
seems  to  comport  with  reason,  that  when  an  association  of  persons 
assume  a  name,  which  implies  a  corporate  body,  and  exercise  cor- 
porate powers,  [they]  should  not  be  heard  to  deny  that  they  are  a 
corporation.  When  they  do  act  and  contract  they  are  estopped  from 
denying  their  corporate  liability. 

Judgment  affirmed. 

Note.  —  See,  accord,  Ferine  v.  Grand  Lodge,  48  Minn.  82;  Corey 
V.  Morrill,  61  Vt.  598. 

So,  where  the  associates  have  assumed  to  be  still  incorporated  after 
the  expiration  of  the  period  of  incorporation.  Miller  v.  Coal  Co., 
31  W.Va.  836. 

So,  where  the  associates  have  assumed  to  be  incorporated  although 
there  was  no  law  under  which  such  a  corporation,  as  they  assumed 
to  have  formed,  could  have  been  formed.  McDonnell  v.  Alabama 
Insurance  Co.,  85  Ala.  401;  McCarthy  v.  Lavasche,  89  111.  270;  Shad- 
ford  V.  Detroit  Ry.,  130  Mich,  300;  Gardner  v.  Minneapolis  Co., 
73  Minn.  517. 


614  BEATON  V.   GRIMM.  [CHAP.  I. 

SEATON  V.   GRIMM. 

110  Iowa.  145.     1899. 

The  defendants  arc  stockholders  in  a  corporation  known  as 
the  "Farmers'  Co-Operative  Creamery  Association  of  Millcnsburg, 
Iowa."  Plaintiffs  hold  a  judgment  against  the  corporation,  and  bring 
this  action  against  the  stockholders  to  recover  the  balance  due  on 
their  judgment,  after  exhausting  all  property  of  the  corporation,  — 
alleging  that  while  the  corporation  was  organized  on  the  twenty- 
sixth  of  April,  1893,  it  did  not  publish  notice  of  incorporation  until 
November  8,  1893.  By  way  of  estoppel,  defendants  pleaded  that 
plaintiffs  and  defendants  were  and  are  the  identical  persons  who 
signed,  acknowledged,  and  filed  for  record  the  orighial  articles  of 
incorporation,  and  that,  by  reason  of  behig  such  incorporatoi-s  and 
stockholders,  plaintiffs  are  estopped  from  denying  the  legality  of  the 
corporation.   Plaintiffs  demurred  to  the  whole  answer. 

Deemer,  J.  The  estoppel  pleaded  by  defendants  is  said  to  be  in- 
sufficient, because  there  is  no  allegation  or  claim  of  injury.  That  it 
is  injury  defendants  seek  to  avoid  in  their  plea  of  estoppel  is  appar- 
ent. Granting,  for  the  purpose  of  argument,  that,  technically  speak- 
ing, no  estoppel  is  pleaded,  the  broader  question  remains,  may  plain- 
tiffs, who  are  and  were,  with  defendants,  the  original  stockholders  in 
the  corporation,  and  who  dealt  with  the  corporation  as  a  legal  entity, 
plead  failure  to  comply  with  the  statutes  with  reference  to  publicity, 
and  thus  take  advantage  of  their  own  wrong?  The  principle  that  no 
one  may  take  advantage  of  his  own  wrong  is  firmly  imbedded  in  our 
jurisprudence,  and  has  been  applied  to  an  almost  infinite  number  and 
character  of  cases.  That  doctrine  is  peculiarly  applicable  to  the  case 
at  bar.  Here  plaintiffs  dealt  with  a  de  facto  corporation  and  ac- 
cepted notes  and  mortgages  signed  by  the  corporation  as  such.  They 
were  among  the  original  incorporators,  and,  if  notice  was  not  given 
as  required  by  statute,  the  fault  is  theirs;  at  least,  they  are  as  blam- 
able  as  the  defendants.  Surely,  they  cannot  be  heard  to  say  that,  by 
reason  of  not  having  complied  with  the  law,  they  are  entitled  to  hold 
defendants  liable  fori"ailure  to  do  the  very  things  that  they  were  as 
much  bound  to  do  as  the  defendants.  Such  a  rule  would  allow  them 
to  profit  from  their  own  wrong.  Bushnell  v.  Ice  Machine  Co.,  138 
111.  Sup.  67  (27  N.E.  Rep.  596) ;  Heald  v.  Owen,  79  Iowa,  23. 

Note.  —  So,  even  if  the  law  under  which  the  alleged  corporation 
was  formed  is  unconstitutional,  this  is  no  defense  in  an  action  to 
recover  on.  a  subscription  to  its  stock,  made  after  the  alleged  incor- 
poration. Evansville  Co.  v.  Evansville,  15  Ind.  395,  416;  East  Pasca- 
goula  Co.  v.  West,  13  La.  Ann.  545;  Weinman  v.  Wilkinsburg  Co., 
118  Pa.  192. 


SECT.  I.]  WINGET   V.  QUINCT   BUILDING   ASs'n.  615 

WINGET  V.  QUINCY  BUILDING  ASS'N. 

128  III.  67.     1889. 

A  BILL  in  chancery,  brought  by  complainants  to  enjoin  the  sale  of 
certain  premises  under  the  powers  of  sale  contained  in  two  deeds  of 
trust  executed  by  the  complainants  to  the  Quincy  Building  and 
Homestead  Association  to  secure  the  repayment  of  money  loaned. 
Mr.  Justice  Bailey  delivered  the  opinion  of  the  court :  — 
One  of  the  grounds  upon  which  the  complainants  seek  to  be  re- 
lieved from  the  legal  consequences  of  Winget's  membership  in  the 
Quincy  Building  and  Homestead  Association,  and  from  the  obliga- 
tions created  by  the  notes  and  deeds  of  trust  executed  by  them  to 
said  association  is,  that  the  association  has  no  valid  legal  existence. 
In  support  of  this  contention  they  insist  that  the  act  of  1872  under 
which  said  association  was  organized  is  unconstitutional  and  void, 
because  the  entire  scope  of  the  act,  as  is  claimed,  is  not  sufficiently 
expressed  in  the  title.  On  this  point  it  is  sufficient  to  say  that  what- 
ever may  be  the  fact  in  relation  to  the  valid  legal  existence  of  said 
association  as  a  corporation,  the  complainants  are  not  in  a  position 
in  which  they  can  be  permitted  to  challenge  its  validity.  A  party 
who  has  contracted  with  a  corporation  de  facto  as  such,  cannot  be 
permitted,  after  having  received  the  benefits  of  his  contract,  to 
allege  any  defect  in  the  organization  of  such  corporation,  as  affect- 
ing its  capacity  to  enforce  such  contract,  but  all  such  objections,  if 
valid,  are  available  only  on  behalf  of  the  sovereign  power  of  the 
State.  2  Morawetz  on  Corporations,  §  750,  and  authorities  cited  in 
note.  And  this  rule  applies  even  where  the  corporation  is  organized 
under  a  law  alleged  to  be  unconstitutional.  Friedland  v.  Pennsyl- 
vania Central  Ins.  Co.,  94  Pa.  St.  504;  McCarthy  v.  Lavasche,  89  111. 
270;  Dows  v.  Naper,  91  Id.  44;  Morawetz  on  Corporations,  §§  759, 
760. 

Note.  —  See,  accord,  Platte  Bank  v.  Harding,  1  Neb.  461;  Coxe  v. 
State,  144  N.Y.  396;  Freeland  v.  Pe7i7i.  Co.,  94  Pa.  504;  Building 
Ass'n  V.  Chamberlain,  4  S.D.  271;  Black  River  Co.  v.  Holway,  85 
Wis.  344. 

See,  contra,  Green  v.  Graves,  1  Doug.  (Mich.)  Z5l;  Owen  v.  Bank  of 
Sandstone,  2  Doug.  134,  note;  Skinner  v.  Wilhelm.  63  Mich.  568 
(but  cf.  Burton  v.  Schildbach,  45  Mich.  504). 


G16  STOUTIMORE    V.  CLARK.  [CHAP.  I. 

STOUTIMORE  v.   CLARK. 

70  Mo.  471.     1879. 

Appeal  from  Clay  Circuit  Court. 

The  action,  Stoutimore  v.  Clark,  was  brought  to  establish  a  certain 
charge  as  a  lien  upon  the  land  formerly  the  property  of  Jo.seph  Y. 
Clark,  now  deceased;  and  to  obtain  a  decree  for  the  sale  of  the  land 
to  satisfy  the  charge.  By  order  of  court,  the  Missouri  City  Savings 
Bank,  and  John  Chrisman,  were  made  defendants  in  said  suit.  The 
Bank  filed  an  answer  alleging  a  lien  under  a  judgment  against  Clark, 
rendered  March  27,  187i.  This  judgment  was  ft)unded  on  a  note  of 
said  Clark  i)ayable  to  the  order  of  the  Missouri  City  Savings  Bank, 
at  the  office  of  said  Imnk.  Chrisman  filed  an  answer  alleging  a  lien 
on  part  of  the  land  under  a  trust  ileed,  executetl  by  Clark  September 
19,  187-i,  to  secure  a  loan.  Chrisman  also  filed  a  cross  answer  to  the 
answer  of  the  Missouri  City  Savings  Bank,  alleging  that  siiid  bank 
was  not  a  corporation.  Upon  the  trial,  to  prove  the  corporate  organ- 
ization and  existence  of  the  bank,  a  certificate  signed  by  the  alleged 
president  and  secretary  wa.s  oiTered  in  evidence  To  the  admission 
of  this  certificate  Chrisman  objected,  on  the  ground  that  it  did  not 
comply  with  the  statutory  requirements.  This  objection  was  sus- 
tained, and  the  evidence  was  excluded.  The  Circuit  Court  ordered 
the  sale  of  the  land;  and  directed  that  the  judgment  of  the  bank 
should  be  paid  out  of  the  j^roceeds  before  the  claim  of  Chrisman. 
Chrisman  appciiled  from  an  order  denying  his  motion  for  a  new  trial. 

Norton,  J.  It  is  insisted  by  counsel  that,  inasmuch  as,  on  the  trial 
of  the  cause,  the  Missouri  City  Savings  Bank  failed  to  introduce 
evidence  establishing  the  fact  that  it  was  a  corporation,  the  said 
judgment  rendered  in  its  favor  was  a  nullity  and  did  not  create  a 
lien  upon  the  real  estate  of  Clark. 

We  think  the  view  thus  taken  is  unsound.  The  note  upon  which 
said  judgment  was  rendered  is  as  follows:  — 

"$4,000.  Missouri  City,  July  1st,  1870. 

"Four  months  after  date  we  promise  to  pay  to  the  order  of  the 
Missouri  City  Savings  Bank,  Four  Thousand  Dollars,  negotiable 
and  payable  at  the  office  of  the  Missouri  City  Savings  Bank,  Mis- 
souri City,  Mo.,  without  defalcation  or  discount,  for  value  received, 
with  interest  at  ten  per  cent  per  annum  from  maturity  until  paid. 

"Gilmer,  Clark  &  Co. 
"J.  Y.  Clark. 
"R.  G.  Gilmer,  Security." 

We  think  it  clear  that  in  the  suit  instituted  by  the  bank  on  this 
note  Clark  would  not  have  been  allowed  to  deny  the  corporate  exist- 
ence of  the  bank  for  the  reason  that  by  executing  the  note  he  ad- 
mitted the  fact  that  it  was  a  corporation,  which  estopped  him  from 


SECT.  I.]  STOUTIMORE    V.  CLARK.  617 

disputing  it.  This  principle  was  distinctly  enunciated  in  the  case  of 
National  Insurance  Co.  v.  Bowman,  60  Mo.  252,  following  the  case 
of  Farmers  and  Merchants  Insurance  Co.  v.  Needles,  52  Mo.  17,  and 
the  case  of  0.  &  M.  R.R.  Co.  v.  McPherson,  35  Mo.  13.  In  the  case 
of  City  of  St.  Louis  v.  Shields  et  al.,  62  Mo.  247,  it  was  expressly  held 
that  the  obligors  on  a  bond  given  to  a  corporation  by  making  and 
signing  the  instrument  admit  the  corporate  capacity  of  the  obligee, 
and  in  a  suit  on  such  bond  cannot  plead  nul  tiel  corporation.  The 
cases  cited  indisputably  establish  that  Clark,  the  obligor  in  the  note 
upon  wjiich  the  judgment  rests,  could  not  have  set  up  as  a  defense 
that  the  bank  was  not  a  corporation,  and  it  therefore  follows  that  the 
judgment,  so  far  from  being  a  nullity  as  counsel  contend,  was  right- 
ful and  proper,  and  from  the  time  of  its  rendition  became  a  lien  on 
the  real  estate  of  Clark  in  Clay  County,  and  was  conclusive  and 
binding  not  only  on  him  but  upon  all  claiming  through  or  under  him. 
Note.  —  If  A  contracts  with  the  associates  as  a  corporation, 
does  this,  without  more,  give  them  a  right  to  sue  A  as  a  corporation? 
Some  courts  have  been  careful  not  to  commit  themselves  to  any 
larger  doctrine  than  that  the  contract  is  sufficient  to  make  a  prima 
fade  case  of  incorporation.  See  Montgomery  R.R.  v.  Hurst,  9  Ala. 
513;  Gaines  v.  Bank  of  Mississippi,  12  Ark.  769;  Brown  v.  Mortgage 
Co.,  110  111.  235,  241;  Willia7ns  v.  Cheney,  3  Gray  (Mass.)  215,  220; 
Topping  v.  Bickford,  4  Allen  (Mass.)  120,  121;  Williamsburg  Co.y. 
Frothingham,  122  Mass.  391;  French  v.  Donahue,  29  Minn.  Ill,  113; 
Johnston  Co.  v.  Clark,  30  Minn.  308;  Den  v.  Van  Houten,  5  Halst. 
(N.J.)  270;  Ryan  v.  Martin,  91  N.C.  464.  Some  courts  have  gone 
further,  and  have  said  that  where  the  assumption  is  naked  the  asso- 
ciates may  not  sue  as  a  corporation.  See  Schuetzen  Bund  v.  Agita- 
tions Verein,  44  Mich.  313;  Methodist  Church  v.  Pickett,  19  N.Y.  482. 
On  the  other  hand,  there  is  a  cloud  of  dicta  to  the  effect  that  if  A 
contracts  with  the  associates  as  a  corporation,  he  is  estopped  to  show 
that  they  were  not  authorized  to  act  as  a  corporation.  Such  a  dictum 
seems  first  to  have  been  made  in  Dutchess  Manufactory  v.  Davis,  14 
Johns.  (N.Y.)  238  (1.817),  in  which  the  court  relied  on  Henriquesv. 
Dutch  West  India  Co.,  2  Ld.  Raym.  1532.  See  the  explanation  of  this 
latter  case  by  Nelson,  J.,  in  Wetland  Canal  Co.  v.  Hathaway,  8  Wend. 
(N.Y.)  480,  481.  While  the  language  of  these  dicta  is  unrestrained, 
and,  taken  at  its  face  value,  covers  the  case  of  naked  assumption, 
it  is  clear  that  in  nearly  all  of  the  cases  no  question  as  to  naked 
assumption  was  present  to  the  minds  of  the  judges.  Such  dicta  will 
be  found  in  McCullough  v.  Talladega  Co.,  46  Ala.  376;  Lehman  v. 
Warner,  61  Ala.  455,  466;  Greenville  v.  Greenville  Co.,  125  Ala.  625, 
642;  Searcy  v.  Yarnell,  47  Ark.  269,  281;  Plummer  v.  Struhy-Esta- 
hrooke  Co.,  23  Colo.  190,  193;  School  District  v.  Alderson,  6  Dak.  145, 
149;  Booske  v.  Gidf  Ice  Co.,  24  Fla.  550,  559;  Petty  v.  Brunswick  Ry. 
Co.,  109  Ga.  666,  674;  Lombard  v.  Chicago  Congregation,  64  111.  477, 


618  IMPERIAL   BUILDING    CO.  V.  BOARD    OF    TRADE.       [cHAP.  I. 

487;  John  v.  Farmers  Bank,  2  Blackf.  (Ind.)  367,  369;  Ensey  v. 
Cleveland  Co.,  10  Iiul.  178;  Beaver  v.  Ilartsville  University,  34  Iml. 
245;  Janes  v.  Kokomo  Assn,  11  Ind.  340;  Cravens  v.  Eagle  Co.,  120 
Ind.  6;  Depew  v.  Bank  of  Limestone,  1  J.  J.  Marsh.  (Ky.)  378,380; 
Blanc  V.  (krmania  Bank,  114  La.  739;  Meadow  Dam  Co.  v.  Cray, 
30  Mo.  547,  549;  Worcester  Institution  v.  Ilardiny,  11  Cu.sh.  (Mas.s.) 
285;  Mason  v.  Crowder,  98  Mo.  352;  Congregational  Soc.  v.  Berry, 

0  N.H.  104;  A^a.s/jwa  Co.  v.  3/oore,  55  N.H.  48,  53;  DiUchess  Mfy. 
V.  Davis,  14  Johns.  (N.Y.)  238;    Williams  v.  /?anA;  of  Michigan, 

1  Woiul.  (N.Y.)  539,  542;  Commercial  Bank  v.  PfriJJer,  108  N.Y.  242, 
254;  All  Saints'  Church  v.  Lwr//,  1  Hall  (N.Y.)  191,  19S;  XenhurgCo. 
V.  Weare,  27  Ohio  St.  343, 354;  Grant  v.  C7ai/  Co.,  80  Pa.  St.  208,  218; 
Myers  v.  Cro/^  13  Wall.  (U.S.)  291,  295;  Ca.'iey  v.  (Jalli,  94  U.S.  673, 
680;  Close  v.  (,'lenwood  Cemetery,  107  U.S.  466,  477;  i4;K/f.s  v.  Ely,  158 
U.S.  312,  322;  Wallace  v.  //<W.  S9  I-Vd.  11,  20;  Wells  Co.  v.  Avon 
Mills,  118  Ft'd.  190,  194.  Of  those  dicta,  tho.so  entitlod  to  most 
weight  are  in  Williams  v.  Bank  of  Michigan,  7  Wend.  (N.Y.)  539, 
542,  and  Cmnmercial  Bank  v.  PfcifTrr,  108  N.Y.  242.  See  al.so  Calkins 
V.  Bump,  120  Mich.  335,  342;  iiajfrrty  v.  Bank  of  Jersey  City,  33 
N.J.L.  368.  And  there  are  a  few  docision.s,  in  accord  with  the  piin- 
cipal  case,  the  result  of  which  logically  involves  the  proposition  that 
one  who  has  contracted  with  tlie  ivss^ociates  as  a  corporation  is,  with- 
out more,  ostojiped  to  dofond  on  the  p;roinid  that  the  ju^sociatos  wore 
not  authorized  to  act  as  a  corporation.  Blake  v.  Ilolley,  14  Ind.  383; 
Meikcl  V.  German  Soc,  16  Ind.  181 ;  IIas.<ielman  v.  U.S.  Mortgage  Co., 
97  Ind.  365;  Liverpool  Co.  v.  Hunt,  11  La.  Ann.  623;  Franz  v.  Teu- 
tonia  Ass'n,  24  Md.  259  (hut  see  Boyce  v.  Church,  supra);  Farmers' 
Co.  V.  Needles,  52  Mo.  17;  Xat'l  Ins.  Co.  v.  Baumian,  60  Mo.  252; 
Stvdebakcr  Co.  v.  Montgomery,  74  Mo.  101. 

Where  the  period  of  incorporation  has  expired,  and  A  thereafter 
contracts  with  the  a.ssociates  as  a  corporation,  they  may  sue,  :is  a 
corporation,  for  breach  of  A's  contract.  West  Missotiri  Co.  v.  Kansas 
City  Co.,  161  Mo.  595;  Miller  v.  Coal  Co.,  31  W\Va.  836,  841;  Citi- 
zens' Bank  v.  Joties,  117  Wis.  446.  Contra,  White  v.  Campbell,  5 
Humph.  (Tcnn.)  38. 


IMPERIAL  BUILDING   CO.   v.   CHICAGO  OPEN 
BOARD   OF  TRADE. 

238  III.  100.     1909. 

Appellant  sought  to  recover  from  appellee  upon  a  warrant  of 
attorney  contained  in  a  lease  in  which  appellant  was  lessor  and 
appellee  lessee. 

Appellant  was  organized  under  the  general  Incorporation  Act  for 
the  purpose  of  leasing  certain  land  in  Chicago,  erecting  a  building 


SECT.  I.]       IMPERIAL    BUILDING    CO.  V.  BOARD    OF    TRADE.  619 

thereon  for  the  accommodation  of  tenants,  making  leases,  collect- 
ing rents  and  doing  all  things  incident  to  the  management  of  said 
property. 

Mr.  Justice  Farmer  dehvered  the  opinion  of  the  com-t : 
It  is  not  controverted  that  corporations  cannot  be  organized  in 
this  State  for  the  purpose  of  acquiring  and  holding  real  estate.  The 
first  section  of  our  general  Incorporation  Act  (Kurd's  Stat.  1905, 
chap.  32)  reads:  "That  corporations  may  be  formed  in  the  manner 
provided  by  this  act  for  any  lawful  purpose  except  banking,  insur- 
ance, real  estate  brokerage,  the  operation  of  railroads  and  the  busi- 
ness of  loaning  money:  Provided,  that  horse  and  dummy  railroads, 
and  organizations  for  the  purchase  and  sale  of  real  estate  for  burial 
purposes  only,  may  be  organized  and  conducted  under  the  provisions 
of  this  act:  And  provided  further,  that  corporations  formed  for  the 
purpose  of  constructing  railroad  bridges  shall  not  be  held  to  be  rail- 
road corporations."  §  5  provides  that  corporations  formed  under  the 
act  "may  own,  possess  and  enjoy  so  much  real  and  personal  estate 
as  shall  be  necessary  for  the  transaction  of  their  business,  and  may 
sell  and  dispose  of  the  same  when  not  required  for  the  uses  of  the 
corporation."  It  is  further  provided  in  said  §  5  that  real  estate  ac- 
quired by  the  corporation  in  satisfaction  of  an  indebtedness  or  lia- 
bility to  it,  unless  necessary  and  suitable  for  the  business  of  the  cor- 
poration, must  be  offered  at  public  auction  for  sale  once  every  year 
until  sold,  and  that  if  any  such  corporation  shall  not  within  five 
years  sell  land  so  acquired  at  public  or  private  sale,  the  State's  at- 
torney is  required  to  proceed  by  information  against  the  corporation 
in  the  circuit  court,  which  court  shall  have  jurisdiction  to  order  the 
sale  of  such  land  or  real  estate.  The  last  clause  of  §  26  of  the  act 
reads:  "And  no  foreign  or  domestic  corporation  established  or  main- 
tained in  any  way  for  the  pecuniary  profit  of  its  stockholders  or 
members,  shall  purchase  or  hold  real  estate  in  this  State,  except  as 
provided  for  in  this  act." 

It  is  not,  and  could  not  reasonably  be,  contended  that  under  said 
general  Incorporation  Act  a  corporation  can  be  organized  for  the 
purpose  of  purchasing  and  holding  real  estate.  This  act  has  often 
been  before  this  court,  and  it  has  uniformly  been  held  that  acquiring 
and  holding  real  estate  are  not  purposes  for  which  a  corporation  may 
be  organized  but  that  the  organization  of  corporations  for  such  pur- 
poses is  forbidden  by  the  statute.  Bixler  v.  Summerfield,  195  111. 
147;  People  v.  Pullman  Palace  Car  Co.,  175  id.  125;  Carroll  v.  City 
of  East  St.  Louis,  67  id.  568;  First  M.  E.  Church  v.  Dixon,  178  id. 
260.  Authority  is  given  corporations  organized  for  legitimate  pur- 
poses, not  prohibited  by  law,  to  acquire  and  hold  such  real  estate  as 
may  be  necessary  for  the  transaction  of  the  business  of  the  corpora- 
tion, but  beyond  this,  corporations,  no  matter  for  what  purpose 
organized,  are  forbidden  to  hold  real  estate,  but  are  required  by  the 


C20  IMPERIAL    BUILDING    CO.  V.  BOARD    OF    TRADE.       [cHAP.  I, 

statute  referred  to,  to  sell  the  same  within  five  years  or  l>e  proceeded 
against  by  the  State's  attorney  by  information.  That  it  has  always 
been  contrary  to  the  pui)lic  policy  of  this  State  to  permit  corporations 
to  acquire  and  hold  real  estate  was  declared  in  Carroll  v.  City  of  East 
Si.  Louis,  siijjra,  where  in  an  elaborate  opinion  the  legislation,  and 
the  rea.sons  for  it,  were  pointed  out. 

It  is  next  contentled  that  if  appellant's  charter  l)e  held  void  it  is 
not  subject  to  be  attacked  coUaterally,  and  that  appellee  having 
entered  into  a  contract  with  ap|X'llant  for  the  leasing  of  the  premises 
is  now  estoppeil  to  deny  its  corporate  existence.  The  gc'neral  rule  is, 
that  where  there  is  an  attempt  in  good  faith  to  organize  under  a  law 
authorizing  the  incorporation,  and  corporate  functions  are  exercised, 
this  makes  the  organization  a  corporation  dc  facto,  and  its  legality 
cannot  be  questionetl  collaterally  or  by  one  who  deals  with  it  as  a 
corporation.  In  such  ca.^cs  the  introduction  in  evidence  of  the  charter 
and  proof  of  user,  and  that  the  party  .seeking  to  deny  the  legality  of 
the  corporation  dealt  with  it  as  a  corporation,  sufficiently  proves  it  a 
corporation  dc  facto,  and  whether  there  may  have  been  some  irregu- 
larities in  perfecting  the  incorporation  will  not  l)e  in(iuired  into.  The 
legality  of  such  incorporation  can  only  l)e  attacketl  by  the  State  in  a 
direct  proceeding.  Ramsey  v.  Peoria  Marine  and  Fire  Ins.  Co.,  55  III. 
311;  Smith  v.  May  field,  1G3  id.  447;  Mitchell  v.  Deeds,  49  id.  416. 

The  appellee  concedes  that  this  is  the  rule  as  to  de  facto  cor- 
porations but  contends  that  there  can  only  i)e  a  de  facto  corporation 
where  there  is  a  law  under  which  the  corporation  might  legally  be  or- 
ganized, but  that  if  there  is  no  law  authorizing  the  organization  of 
such  corporation  its  non-existence  or  invalidity  may  be  set  up  col- 
laterally. Cook  on  Corj)orations  (§  234)  tims  defines  a  corporation 
de  facto:  "The  corporation  is  a  de  facto  corporation  where  there  is  a 
law  authorizing  such  a  corporation  and  where  the  company  has  made 
an  effort  to  organize  under  the  law  and  is  transacting  busine.«is  in  a 
corporate  name."  In  American  Trust  Co.  v.  Minnesota  and  North- 
western Railroad  Co.,  157  111.  641,  it  was  contended  on  behalf  of  cer- 
tain corporations  that  had  attempted  a  consolidation  without  any 
law  authorizing  such  consolidation,  that  the  validity  of  the  consolida- 
tion, when  not  questioned  by  the  State,  must  be  sustained  as  against 
third  persons  and  wrongdoers.  The  court  held  the  rule  of  law  was  not 
as  broad  as  contended  for,  and  said  (p.  652):  "Where  there  is  a  de 
facto  corporation,  its  corporate  existence,  except  in  a  few  excep- 
tional cases,  cannot  be  questioned  collaterally,  and  can  only  be  in- 
quired into  by  the  State  and  in  a  direct  proceeding.  Hudson  v.  Green 
Hill  Seminary,  113  111.  618.  But  in  order  that  there  should  be  a  de 
facto  corporation  two  things  are  essential:  First,  there  must  be  a  law 
under  which  the  corporation  might  lawfully  be  created;  and  second, 
user.  Where  the  law  authorizes  a  corporation,  and  there  is  an  at- 
tempt, in  good  faith,  to  organize,  and  corporate  functions  are  there- 


SECT.  I.]       IMPERIAL    BUILDING    CO.  V.  BOARD    OF    TRADE.  621 

upon  exercised,  there  is  a  corporation  de  facto,  the  legal  existence  of 
which  cannot  ordinarily  be  questioned  collaterally.  This  is  not  only 
the  doctrine  of  Judson  v.  Green  Hill  Seminary,  supra,  but  of  numer- 
ous other  decisions  in  this  court.  Arid  in  said  Hudson  case  this  court 
quoted  with  approval  the  language  of  the  Supreme  Court  of  In- 
diana in  Williamson  v.  Kokomo  Building  and  Loan  Ass.,  89  Ind.  389, 
as  follows:  'The  rule  stated  does  not  go  to  the  extent  of  precluding 
strangers  from  showing  that  there  was  no  law  authorizing  a  cor- 
poration.' In  Heaston  v.  Cindnnali,  etc.,  Railroad  Co.,  16  Ind.  275, 
it  is  held  that  there  must  be  a  corporation  de  facto  under  an  authority 
sanctioning  such  a  corporation  dejiire.  In  Eaton  v.  Walker,  76  Mich. 
579,  it  is  said :  '  But  the  two  things  necessary  to  show  a  corporation, 
even  de  facto,  do  not  exist.  There  is  no  law  under  which  the  power 
they  assume  might  lawfully  be  created,  and  the  mere  fact  that  they 
assumed  to  act  as  such,  even  in  the  full  behef  that  they  were  legally 
incorporated,  would  not  constitute  them  a  corporation  de  facto.' 
See,  also,  Sivartwout  v.  Michigan  Air  Line  Railroad  Co.,  24  Mich. 
389;  Detroit  Schuetzen  Bund  v.  Detroit  Agitations  Verein,  44  id.  313. 
In  Evenson  v.  Ellingson,  67  Wis.  634,  it  is  held  that  a  body  which 
cannot  become  a  corporation  de  jure  cannot  become  a  corporation 
de  facto.  In  City  of  St.  Louis  v.  Shields,  62  Mo.  247,  it  is  held  that  if 
a  corporation  be  acting  under  legislative  sanction  and  color  of  law 
its  corporate  character  cannot  be  questioned  collaterally.  In  Rape 
V.  Capitol  Bank,  20  Kan.  440,  in  discussing  the  matter  of  a  de  facto 
corporation,  it  is  said  by  Brewer,  J.,  that  the  charter  of  a  corpora- 
tion, with  acts  of  user,  is  sufficient  as  against  collateral  inquiry;  that 
the  same  principle  obtains  in  respect  to  incorporations  organized 
under  a  general  law,  but  that  there  must  in  such  cases  be  a  law  under 
which  the  incorporation  can  be  had.  And  see,  also,  Cooley's  Const. 
Lim.  (6th  ed.)  p.  310."  That  to  create  a  corporation  de  facto  it  is 
necessary  that  there  be  a  law  authorizing  its  incorporation,  an  at- 
tempt in  good  faith  to  comply  with  the  law,  and  user,  was  decided 
in  Hudson  v.  Green  Hill  Seminary  Co.,  supra,  Marshall  v.  Keach, 
227  111.  35,  and  Gillette  v.  Aurora  Railways  Co.,  228  id.  261. 

Appellant  contends  that  the  question  of  estoppel  arising  between 
parties  by  reason  of  a  contract  was  not  involved  in  American  Trust 
Co.  V.  Minnesota  and  Northwestern  Railroad  Co.,  supra,  and  that  it 
is  not  authority  for  the  proposition  that  one  dealing  with  a  party  as 
a  corporation  is  estopped  to  deny  its  legal  existence  even  though 
there  is  no  law  authorizing  such  incorporation.  We  do  not  under- 
stand the  opinion  to  be  capable  of  such  distinction.  In  Eaton  v. 
Walker,  cited  in  the  opinion,  the  Supreme  Court  of  Michigan  held 
that  the  pretended  corporation  itself  might  deny  its  legal  existence, 
where  there  was  no  law  authorizing  its  organization,  when  sued  by  a 
creditor  with  whom  it  had  had  dealings  and  to  whom  it  had  become 
indebted. 


022  WILDER    MFG.  CO.  V.  CORN    PRODUCTS    CO.  [cHAP.  I. 

The  rule  that  one  dealing  with  a  corporation  is  not  estoppetl  to 
deny  its  legal  existence  on  the  ground  that  there  was  no  law  au- 
thorizing it  is  based  on  the  principle  that  the  law  will  not  recognize 
nor  lend  its  aid  to  the  organization  as  a  de  facto  corporation  where 
the  law  does  not  authorize  or  where  it  forbids  such  corporrtion.  It 
is  analogous  to  ultra  i*ires  acts  and  contracts  of  the  corporation  wholly 
beyond  and  outsitle  the  general  scope  of  its  corporate  powers  and 
entirely  foreign  to  the  objects  and  purposes  of  its  creation. 

We  are  not  to  be  understood  as  holding  appellee  is  not  liable  in 
any  event  for  use  and  occupation  of  a|)p('llant's  premises,  for  we  are 
of  the  opinion  if  it  occupied  tliem  under  an  agreement  to  pay  rent,  a 
liability  was  created  whidi  may  be  enforced  in  some  appropriate 
proceeding,  but  it  cannot  be  enforced  in  this  suit. 

We  are  of  opinion  the  judgment  of  the  circuit  court  was  correct, 
and  it  is  therefore  affirmed. 

Judgment  affirmed. 

Note.  —  See  also  Clark  v.  AtJierican  Co.,  105  Ind.  213;  Raccoon 
River  Co.  v.  Eagle,  29  Ohio  St.  238.  Cf.  Homestead  Co.  v.  Linigan, 
40  La.  Ann.  1118. 


WILDER  MFG.   CO.   v.   CORN   PRODUCTS  CO. 

236  U.S.  1G5.     l'.)15. 

Mr.  Chief  Justice  White  delivered  the  opinion  of  the  court. 

We  refer  to  the  parties,  the  one  as  the  Manufacturing,  and  the 
other  as  the  Refining  Company.  Sued  by  the  Refining  Company  in 
April,  1909,  to  recover  the  amount  of  the  price  of  two  lots  of  glucose 
or  com  syrup  which  it  had  bought  in  January,  1909,  and  which  it 
had  consumed  and  not  paid  for,  the  Manufacturing  Company  as.serted 
its  non-liability  on  the  following  grounds  wliich  we  summarize: 

(a)  Because  the  Refining  Company  had  no  legal  existence  as  it 
was  a  combination  composed  of  all  the  manufacturers  of  glucose  or 
corn  syrup  in  the  United  States,  illegally  organized  with  the  object 
of  monopolizing  all  dealings  in  such  products  in  violation  of  the  Anti- 
Trust  Act  of  Congi'ess.  That  having  illegally  brought  into  one  or- 
ganization all  the  manufacturers  of  glucose  or  corn  syrup,  the  cor- 
poration had  unreasonably  advanced  the  price  of  the  products  of 
its  manufacture  to  the  injury  of  the  public.  (6)  That  this  end  being 
accomplished,  the  corporation  sought  to  perpetuate  its  monopoly  by 
rendering  it  difficult  or  impossible  for  competitors  to  go  into  the 
business  of  producing  glucose  or  com  syrup  by  devising  a  so-called 
profit-sharing  scheme,  by  which  it  was  proposed  to  give  to  all  those 
who  purchased  from  the  combination  a  stipulated  percentage  upon 
the  amount  of  the  purchases  made  in  one  year  to  be  paid  at  the  end 


SECT.  I.]  WILDEPw   MFG.  CO.  V.  CORN    PRODUCTS    CO.  623 

of  the  following  year  provided  that  during  such  time  they  dealt  with 
no  one  else  but  the  combination.  While  the  sum  of  the  percentage 
thus  offered,  it  was  alleged,  varied  from  year  to  year,  nevertheless  it 
was  charged  that  in  substance  the  contract  or  offer  remained  the 
same.  The  tender  to  the  Manufacturing  Company  of  a  right  to 
participate  in  the  scheme,  it  was  alleged,  was  first  made  in  1907  rela- 
tive to  the  business  done  in  1906  in  the  form  of  a  letter  which  is  in 
the  margin  and  this  offer  or  asserted  contract  was  continued  from 
year  to  year.  It  was  further  alleged  that  the  scheme  proved  success- 
ful in  accomplishing  its  wrongful  purpose  since,  although  subse- 
quently independent  concerns  engaged  in  the  business  of  manufac- 
turing glucose  or  com  syrup  and  offered  to  sell  their  products  at 
prices  less  than  those  charged  by  the  combination,  such  concerns 
were  virtually  driven  out  of  business  because  those  who  desired  to 
purchase  the  products  were  deterred  from  buying  from  them  for  fear 
of  losing  the  percentage  which  they  would  receive  from  the  combina- 
tion if  all  their  purchases  continued  to  be  made  from  it  alone,  and 
moreover  because  of  the  dread  felt  by  purchasers  that  the  independ- 
ents would  not  be  able  to  resist  the  overweening  and  controlling 
power  of  the  combination.  It  was  moreover  alleged  that  all  purchases 
made  by  the  manufacturing  company  "contained  the  following 
clause  in  the  contract  of  purchase:  'The  goods  herein  sold  are  for 
your  own  consumption  and  not  for  resale.'" 

Charging  that  the  condition  which  made  the  payment  of  the 
proposed  profit-sharing  percentage  depend  upon  dealing  alone  with 
the  combination  was  void  and  should  be  disregarded,  the  answer 
asked  not  only  that  the  prayer  for  judgment  for  the  purchase  price 
be  rejected  but  that  treating  the  failure  of  the  Manufacturing  Com- 
pany to  comply  with  the  condition  on  which  the  offer  of  profit  shar- 
ing was  made  as  immaterial,  there  should  be  a  judgment  for  that  com- 
pany for  the  percentage  of  profits  on  the  business  for  the  year  1908. 

On  motion  the  answer  was  stricken  out  as  stating  no  defense. 
There  was  a  judgment  in  the  absence  of  further  pleading  against  the 
Manufacturing  Company  for  the  price  of  the  goods,  as  sued  for,  and 
rejecting  its  claim  for  the  percentage  of  profits.  This  judgment  was 
affirmed  by  the  court  below  (11  Ga.  App.  588)  and  because  of  an 
assumed  failure  to  give  effect  to  the  Anti-Trust  Act  of  Congress  this 
writ  of  error  was  prosecuted. 

As  the  context  of  the  answer  clearlj^  justified  the  inference  that 
the  sale  of  the  glucose  was  an  interstate  transaction,  the  court  be- 
low was  right  in  assuming  that  to  be  the  case  and  therefore  we  put 
out  of  view  as  devoid  of  merit  the  contrary  suggestion  made  by  the 
Refining  Company. 

Having  dealt  with  the  Refining  Company  as  an  existing  concern 
possessing  the  capacity  to  sell,  speaking  generally  the  assertion  that 
it  had  no  legal  existence  because  it  was  an  unlawful  combination  in 


624  WILDER    MFG.  CO.  V.  COR\    PRODUCTS    CO.  [cHAP.   I. 

violation  of  the  Anti-Trust  Act  was  irrelevant  to  the  question  of  the 
liability  of  the  Manufacturing  Company  to  pay  for  the  ^oods  since 
such  defense  was  a  mere  collateral  attack  on  the  organization  of  the 
corporation  which  could  not  be  lawfully  made.  Besides,  considered 
from  the  point  of  view  of  the  alleged  illegality  of  the  corporation,  the 
attack  on  its  existence  was  absolutely  immaterial  becau.se  the  right 
to  enforce  the  sale  tiid  not  involve  the  question  of  combination,  since 
conceding  the  illegal  existence  of  the  corporation  making  the  sale, 
the  obligation  to  pay  the  price  was  indubitable,  and  the  duty  to 
enforce  it  not  disputable.  This  is  true  becau.se  the  sale  and  the  ob- 
ligations which  arose  from  it  depended  upon  a  distinct  contract  with 
reciprocal  considerations  moving  bet  wren  the  parties,  —  the  receipt 
of  the  goods  on  the  one  hand  and  the  payment  of  the  price  on  the 
other.  And  this  is  but  a  form  of  stating  the  elementary  proposition 
that  courts  may  not  refu.se  to  enforce  an  otherwise  legal  contract 
because  of  some  indirect  benefit  to  a  wrongdoer  which  would  be 
afTord(Ml  from  doing  so  or  .some  remote  aid  to  the  accomplishment  of 
a  wrong  which  might  pos.sibly  result  —  doctrines  of  such  universal 
acceptance  that  no  citation  of  authority  is  needed  to  demonstrate 
their  existence,  especially  in  view  of  the  expre.«;s  ruling  in  Connolly 
V.  Union  Sewer  Pipe  Co.,  184  U.S.  540,  applying  them  to  the  identi- 
cal general  question  here  involved. 

The  case  therefore  reduces  itself  to  the  question  whether  the  con- 
tract of  sale  was  inherently  illegal  so  as  to  bring  it  within  the  also 
elementary  rule  that  courts  \^ill  not  exert  their  powers  to  enforce 
illegal  contracts  or  to  compel  wrongdoing.  The  only  suggestion  as 
to  the  intrinsic  illegality  of  the  sale  results  from  the  averments  of  the 
answer  as  to  the  offer  of  a  percentage  of  profits  upon  the  condition 
of  dealing  exclusively  with  the  Refining  Company  for  the  following 
year  and  the  clause  to  the  effect  that  the  goods  were  i)0ught  by  the 
Manufacturing  Company  for  its  own  use  and  not  for  resale.  But 
we  can  see  no  ground  whatever  for  holding  that  the  contract  of  sale 
was  illegal  because  of  these  conditions.  In  fact  it  is  not  so  contended 
in  argument  since  substantially  the  proposition  which  is  relied  upon 
is  that  although  such  stipulations  were  intrinsically  legal,  they  be- 
come illegal  as  the  result  of  the  duty  to  consider  them  from  the  point 
of  view  that  one  of  the  parties  was  an  illegal  combination  interested 
in  inserting  such  conditions  as  an  efficient  means  of  sustaining  its 
continued  wrongdoing  and  therefore  giving  power  to  accomplish 
the  baneful  and  prohibited  results  of  its  illegal  organization,  —  a 
duty  which,  it  is  urged,  results  from  reason,  is  commanded  by  the 
Anti-Trust  Act  and  the  obligation  to  enforce  its  provisions  and  is 
required  because  of  a  previous  decision  of  this  court  enforcing  that 
act  (Continental  Wall  Paper  Co.  v.  Voight,  212  U.S.  227)  unless  that 
decision  is  to  be  now  qualified  or  overruled. 

In  the  first  place,  the  contention  cannot  be  sustained  consistently 


SECT.  I.]  WILDER   MFG.  CO.  V.  CORN    PRODUCTS    CO.  625 

with  reason.  It  overthrows  the  general  law.  It  admits  the  want  of 
power  to  assail  the  existence  of  a  corporate  combination  as  a  means 
of  avoiding  the  duty  to  pay  for  goods  bought  from  it  and  concedes 
at  the  same  time  the  legality  of  the  condition  in  the  sale  and  yet  pro- 
poses by  bringing  the  two  together  to  produce  a  new  and  strange 
result  unsupported  in  any  degree  by  the  elements  which  are  brought 
together  to  produce  it  and  conflicting  with  both. 

In  the  second  place,  the  proposition  is  repugnant  to  the  Anti- 
Trust  Act.  Beyond  question  reexpressing  what  was  ancient  or  exist- 
ing and  embodying  that  which  it  was  deemed  wise  to  newly  enact, 
the  Anti-Trust  Act  was  intended  in  the  most  comprehensive  way  to 
provide  against  combinations  or  conspiracies  in  restraint  of  trade  or 
commerce,  the  monopolization  of  trade  or  commerce  or  attempts  to 
monopolize  the  same.  Standard  Oil  Co.  v.  United  States,  221  U.S.  1; 
United  States  v.  American  Tobacco  Co.,  221  U.S.  106.  In  other  words, 
founded  upon  broad  conceptions  of  public  policy,  the  prohibitions  of 
the  statute  were  enacted  to  prevent  not  the  mere  injury  to  an  indi- 
vidual which  would  arise  from  the  doing  of  the  prohibited  acts,  but 
the  harm  to  the  general  public  which  would  be  occasioned  by  the 
evils  which  it  was  contemplated  would  be  prevented,  and  hence  not 
only  the  prohibitions  of  the  statute  but  the  remedies  which  it  pro- 
vided were  coextensive  with  such  conceptions.  Thus  the  statute 
expressly  cast  upon  the  Attorney-General  of  the  United  States  the 
responsibility  of  enforcing  its  provisions,  making  it  the  duty  of  the 
district  attorneys  of  the  United  States  in  their  respective  districts 
under  his  authority  and  direction  to  act  concerning  any  violations 
of  the  law.  And  in  addition,  evidently  contemplating  that  the  official 
unity  of  initiative  which  was  thus  created  to  give  effect  to  the  statute 
required  a  like  unity  of  judicial  authority,  the  statute  in  express 
terms  vested  the  Circuit  Court  of  the  United  States  with  "jurisdic- 
tion to  prevent  and  restrain  violations  of  this  act,"  and  besides  ex- 
pressly conferred  the  amplest  discretion  in  such  courts  to  join  such 
parties  as  might  be  deemed  necessary  and  to  exert  such  remedies  as 
would  fully  accomplish  the  purposes  intended.  Act  of  July  2,  1890, 
chap.  647,  26  Stat.  209. 

It  is  true  that  there  are  no  words  of  express  exclusion  of  the  right  of 
individuals  to  act  in  the  enforcement  of  the  statute  or  of  courts  gen- 
erally to  entertain  complaints  on  that  subject.  But  it  is  evident  that 
such  exclusion  must  be  implied  for  a  twofold  reason:  First,  because 
of  the  familiar  doctrine  that  "where  a  statute  creates  a  new  offense 
and  denounces  the  penalty,  or  gives  a  new  right  and  declares  the 
remedy,  the  punishment  or  the  remedy  can  be  only  that  which  the 
statute  prescribes."  Farmers'  &  Mechanics'  National  Bank  v.  Bear- 
ing, 91  U.S.  29,  35;  Barnet  v.  National  Bank,  98  U.S.  555;  Oates  v. 
National  Bank,  100  U.S.  239;  Stephens  v.  Monongahela  Bank,  111 
U.S.  197;  Tenn.  Coal  Co.  v.  George,  233  U.S.  354,  359;  Second,  be- 


626  WILDER    MFG.  CO.  V.  COR\    PRODUCTS    CO.  [cHAP.  I. 

cause  of  the  destruction  of  the  powers  conferred  by  the  statute  and 
the  frustration  of  the  remedies  which  it  creates  which  would  obvi- 
ously result  from  admittinfj;  the  right  of  an  in(nvidual  :is  a  means  of 
defense  to  a  suit  broup;ht  ap;ainst  him  on  his  indivitlual  and  otherwise 
inherently  lpfz;:il  contract  to  Jissert  that  the  corponition  or  combina- 
tion suing,  had  no  legal  existence  in  contemplatiiJii  of  the  Anti-Trust 
Act.  This  is  apparent  since  the  power  given  l)y  the  statute  to  the 
Attorney-General  is  inconsistent  with  the  exi.^tencc  of  the  right  of 
an  individual  to  independently  act  since  the  purpose  of  the  statute 
was  where  a  combination  or  organization  was  found  to  bo  illegally 
existing  to  put  an  end  to  such  illegal  existence  for  all  purjKjses  and 
thus  protect  the  whole  public,  —  an  object  incompatible  with  the 
thought  that  such  a  corporation  should  be  treated  jus  legally  existing 
for  the  purpose  of  parting  with  its  property  by  means  of  a  contract  of 
sale  and  yet  be  hckl  to  l)c  civilly  tlead  for  the  pur{)ose  of  recovering 
the  price  of  such  sale  and  then  by  a  failure  to  provitle  against  its 
future  exertion  of  power  be  recognized  as  virtually  resurrected  and 
in  possession  of  authority  to  violate  the  law.  And  in  a  twofold  sense 
these  considerations  so  clearly  diMnonstrate  the  conflict  between  the 
statute  and  the  right  now  asserted  under  it  as  to  render  it  unneces- 
sary to  pursue  that  subject  further.  In  the  first  place  because  they 
show  in  addition  how  completely  the  right  claimed  would  defeat  the 
jurisdiction  conferred  l)y  the  statute  on  the  courts  of  the  Tnited 
States,  —  a  jurisdiction  evidently  given,  as  we  have  seen,  for  the  pur- 
pose of  making  the  relief  to  be  afforded  by  a  finding  of  illegal  exist- 
ence as  broad  as  would  be  the  necessities  resulting  from  such  finding. 
In  the  second  place  because  the  possil)ility  of  the  wrong  to  be  brought 
about  by  allowing  the  property  to  be  obtained  under  a  contract  of 
sale  without  enforcing  the  duty  to  pay  for  it,  not  upon  the  ground  of 
the  illegality  of  the  contract  of  sale  but  of  the  illegal  organization  of 
the  seller,  additionally  points  to  the  causes  which  may  have  operated 
to  confine  the  right  to  question  the  legal  existence  of  a  corporation 
or  combination  to  public  authority  sanctioned  by  the  sense  of  public 
responsibility  and  not  to  leave  it  to  indivitlual  action  prompted  it 
may  be  by  purely  selfish  motives. 

As  from  these  considerations  it  results  not  only  that  there  is  no 
support  afforded  to  the  proposition  that  the  Anti-Trust  Act  au- 
thorizes the  direct  or  indirect  suggestion  of  the  illegal  existence  of  a 
corporation  as  a  means  of  defense  to  a  suit  brought  by  such  corpora- 
tion on  an  otherwise  inherently  legal  and  enforceable  contract,  but 
on  the  contrary  that  the  pro\'isions  of  the  act  add  cogency  to  the 
principles  of  general  law  on  the  subject  and  therefore  make  more 
imperative  the  duty  not  directly  or  indirectly  to  permit  such  a  de- 
fense to  a  suit  to  enforce  such  a  contract,  we  put  that  subject  out  of 
view  and  come  to  the  only  remaining  inquiry,  the  alleged  effect  of 
the  previous  ruling  in  the  Continental  Wall  Paper  Case,  supra. 


SECT.  I.]  WILDER    MFG.  CO.  V.  CORN    PRODUCTS    CO.  627 

It  is  to  be  observed  in  considering  that  contention  that  the  general 
rule  of  law  which  we  have  stated  is  not  apparently  questioned  in  the 
argument  and  the  controlling  influence  of  the  ruling  in  the  Connolly 
Case,  supra,  if  here  applicable  is  not  denied,  but  the  contention  is  that 
the  general  law  is  not  applicable  and  the  Connolly  Case  is  inapposite 
because  of  an  exception  which  was  engrafted  upon  the  general  law  by 
the  ruling  in  the  Continental  Wall  Paper  Case  under  which  it  is  said 
this  case  comes.  While  it  clearly  appears  that  this  is  the  contention, 
it  is  difficult  to  precisely  fix  the  ground  upon  which  it  is  rested.  But 
as  the  rule  of  general  law  which  under  ordinary  circumstances  does 
not  permit  the  existence  of  a  corporation  to  be  indirectly  attacked  is 
not  assailed,  and  as  it  is  not  asserted  that  irrespective  of  the  illegal 
organization  of  the  corporation,  the  contract  of  sale  was  inherently 
unlawful,  it  follows  that  the  proposition  is  the  one  which  we  have 
already  in  another  aspect  disposed  of,  that  is,  that  the  sale  and  its 
conditions  although  inherently  legal  become  illegal  by  considering 
the  illegal  corporation  and  the  aid  to  be  afforded  to  its  wrongful  pur- 
poses by  the  conditions  which  formed  a  part  of  the  sale.  But  in  sub- 
stance this  only  assumes  that  it  was  held  in  the  Continental  Wall 
Paper  Case  that  that  which  was  inherently  legal  can  be  rendered 
illegal  by  considering  in  connection  with  it  something  which  there  is 
no  right  to  consider  at  all.  But  it  is  apparent  on  the  face  of  the  opin- 
ion in  the  Continental  Wall  Paper  Case  that  it  affords  no  ground  for 
the  extreme  and  contradictory  conclusion  thus  deduced  from  it  since 
the  ruling  in  that  case  was  based  not  upon  any  supposed  right  to 
import  into  a  legal  and  valid  contract  elements  of  wrong  which  there 
was  no  right  to  consider,  but  was  rested  exclusively  upon  elements  of 
illegality  inhering  in  the  particular  contract  of  sale  in  that  case  which 
elements  of  illegality  may  be  thus  summarized:  (a)  the  relations  of 
the  contracting  parties  to  the  goods  sold,  (6)  the  want  of  real  owner- 
slip  in  the  seller,  (c)  the  peculiar  obligations  which  were  imposed 
upon  the  buyer,  and  (d)  the  fact  that  to  allow  the  nominal  seller  to 
enforce  the  payment  of  the  price  would  have  been  in  and  of  itself 
directl}^  to  sanction  and  give  effect  to  a  violation  of  the  Anti-Trust 
Act  inhering  in  the  sale.  It  is  not  necessary  to  analyze  the  facts  and 
issues  in  the  case  for  the  purpose  of  pointing  out  how  completely 
they  are  covered  by  the  statement  just  made  because  the  opinion  of 
the  court  and  the  reasons  stated  by  the  members  of  the  court  who 
dissented  without  more  make  that  fact  perfectly  clear.  Indeed  not 
only  does  this  statement  make  clear  the  fact  that  there  is  no  conflict 
between  the  Connolly  Case  and  the  Continental  Wall  Paper  Case,  but 
it  also  establishes  that  both  cases,  the  first  directly,  and  the  other  by 
a  negative  pregnant,  demonstrate  the  want  of  merit  in  the  conten- 
tions here  insisted  upon. 

It  only  remains  to  say  that  we  think  it  requires  nothing  but  state- 
ment to  demonstrate  that  in  view  of  the  facts  which  we  have  recited 


028  DAVIS    V.  STEVENS.  [CHAP.  1. 

and  the  legal  principles  which  we  have  applied  to  them,  no  error  was 
committed  by  the  court  below  in  refusing  to  give  to  the  defendant  a 
judgment  for  its  alleged  share  of  the  profits  for  the  year  lOOH  when 
it  was  expressly  admitted  that  the  conditions  upon  which  the  offer 
of  a  right  to  a  participation  in  the  profits  wius  rested,  or  the  contract 
(if  there  was  a  contract  to  that  effect)  waa  based,  had  not  been  com- 
plied with. 

Affirmed. 

Note.  —  Where  incorporation  failed  because  of  a  lack  of  good 
faith  on  the  part  of  the  a.ssociates,  but  this  lack  in  no  wise  injured  A, 
there  may  be  a  recovery  in  the  name  of  the  alleged  cor[)oration  for 
breach  of  A's  contract.  See  Sauthern  Bank  v.  Williams,  25  Cla.  034; 
Smith  V.  Mississippi  Co.,  14  Miss.  179;  United  States  Co.  v.  SchUgel, 
143  N.Y.  537;  Wallace  v.  Lootnis,  97  U.S.  14G,  154. 


DAVIS  V.  STEVENS. 

104  Fed.  2.35.      1!»><). 

In  the  U.S.  District  Court  for  the  District  of  South  Dakota. 

On  March  21 ,  1900,  creditors  of  the  Bank  of  Plankintou  filed  a  peti- 
tion, praying  that  the  Bank  of  Plankintou  be  adjudgeil  bankrupt,  as 
a  private  banking  institution,  and  a  co-partnership  consisting  of  the 
above-named  defendants.  In  their  answer  defendants  deny  generally 
the  allegations  of  the  petition,  and,  further  answering,  allege  that  the 
Bank  of  Plankintou  was  during  the  times  allegecl  in  the  jx'tition,  and 
now  is,  a  corporation  duh'  organized  under  the  laws  of  the  territory 
of  Dakota  and  the  state  of  South  Dakota.  It  appears  from  the  testi- 
mony and  admission  of  the  parties  to  this  proceeding  that  on  the  27th 
day  of  November,  1885,  articles  of  incorporation,  duly  signed  and  ac- 
knowledged by  Edwin  S.  Rowley,  Fred  L.  Stevens,  Charles  A.  John- 
son, Joseph  D.  McCormick,  and  ^^'illiam  M.  Smith,  were  duly  filed 
in  the  office  of  the  secretary  of  the  territory  of  Dakota,  wherein  it  was 
stated  that  the  business  of  the  proposed  corporation,  which  was  to  be 
called  the  Bank  of  Plankintou,  should  be  a  general  banking,  real 
estate,  and  loan  business.  Upon  the  filing  of  said  articles  there  was 
issued  by  the  secretary  of  the  territory  of  Dakota  a  certificate  of  cor- 
porate existence  to  the  parties  above  named,  wherein  it  was  certified 
that  said  parties,  their  associates  and  successors,  had  become  a  body 
politic  and  corporate  under  the  corporate  name  of  Bank  of  Plankin- 
ton.  It  further  appears  that  the  Bank  of  Plankintou  did  business  as 
a  banking  corporation  from  the  time  of  its  alleged  incorporation  until 
about  Jan.  10, 1900,  when  it  closed  its  doors  and  ceased  to  do  business. 
•    Carland,  District  Judge.   [After  stating  the  case.]   It  is  claimed 


SECT.  I.]  DAVIS   V.  STEVENS. 


629 


by  the  petitioners  that,  as  there  was  no  law  of  the  territory  of  Dakota 
which  authorized  the  incorporation  of  individuals  to  do  a  bankmg 
business,  the  defendants  in  this  proceeding,  who  are  alleged  to  have 
owned  stock  in  this  corporation,  were  simply  partners,  and  as  such 
were  doing  business  as  a  private  bank,  and  thus  subject  to  be  ad- 
judicated a  bankrupt  as  a  private  bank.  It  is  contended  by  the  de- 
fendants that  whether  or  not  the  Bank  of  Plankinton  was  a  corpora- 
tion cannot  be  inquired  into  collaterally,  and  that  the  state  of  South 
Dakota  is  the  only  power  which  could,  by  proceedings  ni  the  nature 
of  a  quo  warranto,  inquire  into  the  legal  organization  of  this  corpora- 
tion. If  the  Bank  of  Plankinton  was  a  de  facto  corporation,  this  posi- 
tion would  be  unassailable.   But,  in  order  that  there  may  be  a  de 
facto  corporation,  it  must  have  been  possible  for  the  territory  of 
Dakota  to  have  chartered  a  de  jure  corporation,  and  as  there  was 
no  law  of  the  territory  of  Dakota  permitting  the  incorporation  of 
banking  corporations  at  the  time  the  Bank  of  Plankinton  received  its 
certificate  of  corporate  existence,  it  results  that  there  cannot  be  a 
de  facto  corporation.  The  limitation  of  the  doctrine  that  the  validity 
of  corporate  existence  cannot  be  litigated  collaterally  is  that,  where 
there  is  no  law  under  which  a  corporation  might  exist,  then  the 
vahditv  of  corporate  existence  may  be  attacked  collaterally.  Heaston 
V.  Railroad  Co.,  16  Ind.  275;  Krutz  v.  Town  Co.,  20  Kan.  397;  Eaton 
V.  Walker,  76  Mich.  579,  43  N.W.  638,  6  L.R.A.  102;  1  Thomp.  Corp. 
§  505.  As  is  said  in  §  502,  1  Thomp.  Corp. :  —  •  •        ,    + 

"We  must  not  get  too  far  away  from  the  primal  proposition  that 
the  legislature  alone  can  create  a  corporation,  and  that  a  collection 
of  individuals  cannot  make  themselves  a  corporation  by  merely 
resolving  to  be  such,  or  calling  themselves  such.  The  three  tailors  of 
Tooley  street  did  not  make  themselves  the  people  of  England  by 
passing  a  resolution  in  which  they  styled  themselves  such.  There 
must  be  some  basis  for  the  operation  of  the  rule,  and  accordingly  we 
find  a  better  statement  of  it  in  the  proposition  that  where  a  corpora- 
tion exists  de  facto,  and  in  fact  exercises  corporate  powers,  the  ques- 
tion whether  it  exercises  such  powers  lawfully  cannot  be  litigated  m 
a  collateral  proceeding  between  private  parties,  or  between  a  private 
party  and  the  corporation.  The  question  can  only  be  litigated  be- 
tween the  corporation  and  the  state." 

Defendants  invoke  §  2892  of  the  Compiled  Laws  of  Dakota,  which 
is  in  the  following  language: —  i  .  •  i  + 

"The  due  incorporation  of  any  company  claiming  in  good  faith  to 
be  a  corporation  under  this  chapter  and  doing  business  as  such,  or  its 
right  to  exercise  corporate  powers,  shall  not  be  inquired  into  col- 
laterally in  any  private  suit  to  which  such  de  facto  corporation  may 
be  a  party,  but  such  inquiry  may  be  had  and  action  brought  at  the 
suit  of  the  territory  in  the  manner  prescribed  in  the  Code  of  Civil 
Procedure." 


G30  DAVIS    V.  STEVENS.  [ciIAP.   I. 

This  section,  as  I  understand  it,  simply  declares  the  law  in  the 
same  manner  that  the  courts  declare  it.  It  presupposes  that  there  is 
a  de  facto  corporation,  which  cannot  exist  if  there  could  have  existed 
no  de  jure  corporation.  In  tiie  case  of  Orunllc  ct  V.  R.  Co.  v.  Super- 
tisors  of  Plumas  Co.,  37  Cal.  354,  it  was  held  by  the  Supreme  Court 
of  California  that  a  similar  provision  in  the  laws  of  that  State  did 
not  go  to  the  extent  of  preckuling  private  persons  from  denying  the 
existence  de  jure  or  de  facto  of  the  alleged  corporation.  .  .  . 

As  the  claims  of  the  creditors  who  are  petitioners  in  this  action 
arise  from  simply  depositing  money  with  the  Bank  of  Plankinton, 
there  is  no  such  relation  between  the  bank  and  the  creditors  as  would 
allow  the  principle  of  estopjK'l  to  be  urged.  I,  therefore,  am  of  the 
opinion  that  the  parties  interested  in  the  Bank  of  Plankinton  were 
co-partners. 

[Petition  dismissed  for  other  reasons.] 

Note.  —  To  the  same  effect  are  Booth  v.  Wonderhj,  3G  N.J.L.  250 
(a  charter  authorizing  a  business  to  be  carried  on  in  Trenton  was 
used  in  conducting  a  business  at  Jersey  City;  apparently  no  stock 
was  suljscril^ed ;  the  persons  who  assumed  to  act  as  directors  were 
held  to  full  lia])ility);  Ridcnour  v.  Mayo,  40  Ohio  St.  9  (trustees  of  a 
savings  bank  used  name  of  bank  in  carrying  on  a  general  banking 
business).  See  also  Vredenburg  v.  Behan,  33  La.  Ann.  627;  Hill  v. 
Beach,  1  Beasl.  (N.J.)  31,  36  (one  ground  of  the  decision  was  that  the 
laws  of  New  York  did  not  authorize  a  corporation  to  be  formctl  by 
the  residents  of  another  state  to  do  business  only  in  that  other 
State). 

In  Merchants'  Bank  v.  Stone,  38  Mich.  779,  Marston,  J.,  dis.sent- 
ing,  held,  that  a  statute  authorizing  manufacturing  corporations  did 
not  authorize  lumbering  companies,  and  that  the  associates  were 
exposed  to  full  liability.  The  grounds  on  which  the  majority  pro- 
ceeded, in  protecting  the  associates,  are  not  clear. 

If  the  law  under  \yhich  the  associates  organized  is  unconstitutional, 
the  court,  in  Michigan  v.  Hmr,  1  IMich.  512,  said  that  the  associates 
would  be  exposed  to  full  liability.  ''  When  the  law  under  which  such 
exemption  is  claimed  is  unconstitutional,  the  exemption  itself  ceases 
to  exist."  There  is  a  dictum  to  the  same  effect  in  Burton  v.  Schild- 
hach,  45  Mich.  504,  511,  and  a  decision  in  Eaton  v.  Walker,  76  Mich. 
579,  590.  "Obligors  are  bound,  not  by  the  style  which  they  give  to 
themselves,  but  by  the  consequences  which  they  incur  by  reason  of 
their  acts."  The  court  would  apparently  have  held  the  associates 
even  if  the  plaintiff  had  admitted  that  he  dealt  wnth  them  as  a  cor- 
poration. See  also  Clark  v.  American  Co.,  165  Ind.  213,  216;  Che- 
nango Bridge  Co.  v.  Paige,  83  N.Y.  178,  190. 

In  Planters'  Bank  v.  Padgett,  69  Ga.  159,  a  court  assumed,  by  a 
judgment,  to  incorporate  associates.  The  judgment  was  held  to  be 


SECT.  I.]  PROVIDENT    BANK    &    TRUST    CO.  V.  SAXON.  631 

void,  but  the  associates  were  shielded-  from  full  liability  on  the  au- 
thority^ of  iMorawetz,  §  748. 

In  Richards  v.  Minnesota  Bank,  lb  Minn.  196,  the  name  of  a  cor- 
poration de  jure  was  changed.  Held,  that,  even  if  the  act  making  the 
change  was  unconstitutional,  persons  contracting  with  the  corpora- 
tion in  such  new  name  could  not  hold  the  stockholders  to  full  liability. 


PROVIDENT  BANK  &  TRUST  CO.  v.   SAXON. 

116  La.  408.     1906. 

Land,  J.  Plaintiff's  suit  was  dismissed  on  an  exception  of  no 
cause  of  action,  which  necessarily  admits  all  the  facts  alleged  in  the 
petition. 

The  defendants  were  sued  as  members  of  a  commercial  partner- 
ship, formerly  doing  business  in  the  city  of  New  Orleans  under  the 
name  of  the  "  Vossburg  Mineral  Springs  Co.,  Ltd." 

It  is  alleged  that  the  business  of  the  concern  was  the  selling  of 
spring  water  in  bottles,  packages,  or  otherwise,  and  that  the  com- 
pany became  indebted  to  plaintiff  on  deposit  account  in  the  sum  of 
$6,899.73,  or  in  the  alternative  in  the  same  sum  on  a  note  and  a  num- 
ber of  drafts  filed  and  made  part  of  the  petition. 

The  deposit  account  was  kept  in  the  name  of  the  "Vossburg 
Mineral  Springs  Co.,  Ltd."  The  note  is  signed  in  the  same  name  by 
"Henry  Mordecai,  President,"  and  the  drafts  were  drawn  by  him 
officially  to  the  order  of,  and  indorsed  by,  the  "Vossburg  Mineral 
Springs  Co.,  Ltd." 

In  eight  instances  shares  of  stock  of  said  company  were  attached  to 
drafts  as  collateral.  The  note  and  all  of  the  drafts  were  discounted 
by  the  plaintiff  bank,  and  the  net  proceeds  placed  at  credit  of  the 
company. 

The  petition  alleges  that  the  defendant  and  others,  constituting 
the  company,  so  called,  falsely  claimed  to  be  and  have  been  a  cor- 
poration established  under  the  laws  of  this  state,  whereas  it  was  in 
truth  and  to  the  knowledge  of  defendants  a  commercial  partnership 
only. 

The  petition  charges  that  the  pretense  that  the  Vossburg  Mineral 
Spring  Co.,  Ltd.,  was  a  corporation  was  nugatory  for  the  reason, 
among  others,  "that  no  original  or  other  subscriptions  made  for  the 
purpose  of  organizing  the  said  company  or  any  list  of  subscriptions 
was  recorded  in  the  office  of  the  recorder  of  mortgages  for  this  par- 
ish," as  is  required  by  §  686  of  the  Revised  Statutes  of  1870;  that 
the  charter  was  not  published  in  a  newspaper  or  daily  journal  as 
enjoined  by  the  same  section,  but  in  a  weekly  religious  journal  with 
a  limited  circulation  confined  to  the  members  of  a  certain  church 


632  PROVIDEN'T    BANK    &    TRUST    CO.  V.  SAXON'.  [cilAP.  I. 

organization;  that  the  company  never  had  a  true  capital  Hubj<cril)ed 
of  S5,000,  as  required  by  hiw;  that  the  pret<'n(lt'd  charter  does  not 
affix  any  manner  or  terms  of  payment  of  its  allej,?ed  stock  jus  en- 
joined by  Rev.  St.  1870,  §  685;  tliat  there  never  wjus  any  real  sul)- 
scription  to  stock  of  the  saitl  corporation,  or  any  intention  by  the 
parties  forming  the  same  to  so  subscribe;  that  there  were  never  any 
payments  for  such  stock  cither  made  or  intended  by  the  parties 
concerned. 

The  charter  was  not  annexed  to  the  petition,  and  its  contents  can 
be  ascertained  only  by  reference  to  the  allegations  of  the  pleader. 

Several  defects  "among  others"  are  pointetl  out,  but  there  is  no 
presumption  that  the  charter  was  perfect  in  all  other  resixicts,  or 
that  all  other  formalities  rcfjuired  by  law  were  observed. 

The  i)leatler,  after  alleging  tacts  sufficient  to  charge  defendants 
as  commercial  partners,  seems  to  have  anticipated  the  probable 
defense  that  defendants  were  not  members  of  a  commercial  part- 
nership, but  were  stockholders  in  a  de  jure  or  de  facto  corporation, 
and  therefore  not  liable  pcrsoimlly  for  the  claims  sued  on. 

It  is  not  alleged  in  the  petition  that  the  charter  was  recorded  in  the 
office  of  the  recorder  of  mortgages.  The  whole  argument  for  the 
defense  is  based  on  the  proposition  that  defendants  undertook  to 
form  a  corporation  under  the  existing  laws  of  this  State;  that  they 
had  executed,  recoriled  in  the  mortgage  office,  and  published  their 
charter;  that  the  corporation  so  formed  had  subsecjuently  done  busi- 
ness as  a  corporation;  and  that  it  had  l^een  recognized  jis  a  valid  cor- 
poration, and  all  of  its  acts  and  contracts  ratified  by  Act  No.  120, 
p.  281,  of  1904.1 

We  assume  that  the  act  was  passed  for  the  benefit  of  persons  who 
had  actually  and  in  good  faith  attempted  to  organize  corporations 
for  business  purposes,  but,  in  so  doing,  had  committed  erroi-s  and 
mistakes  in  the  proceetlings  or  in  the  instruments  of  incorporation. 

The  petition  charges  that  the  so-called  corporation  was  a  com- 
mercial partnership  doing  business  in  the  name  of  a  limited  liability 
company,  and  that  defendant  falsely  and  knowingly  pretended  that  the 
partnership  was  a  corporation  estal)lished  under  t  he  laws  of  the  State. 

It  is  charged  that  there  was  never  any  real  subscription  to  the 
capital  stock  or  any  intention  by  the  parties  forming  the  company 
to  so  subscribe,  and  that  there  never  were  payments  for  such  stock 
either  made  or  intended  to  be  made  by  the  parties  concerned. 

1  This  act  provided  "  that  whenever  persons  have  undertaken  to  form  a  corporation 
under  any  of  the  existing  laws  of  this  .State,  and  have  executed,  recorded  in  the  mort- 
gage office,  and  published  their  charters,  the  corporations  so  formed  and  subsequently 
doing  business  as  corporations,  are  hereby  recognized  and  declared  to  be  now  and 
hereafter,  for  the  term  stated  in  their  charters,  valid  corporations,  notwithstanding 
that  the  charters  may  have  authorized  the  carrj-ing  on  by  one  corporation  of  several 
branches  of  business,  the  carrjing  on  of  which  by  corporations  is  authorized  by  dif- 
ferent statutes  of  this  State,  and  notwithstanding  irregularities  in  the  proceedings 
and  instruments  of  the  incorporation." 


SECT.  I.]  PROVIDENT    BANK    &    TRUST    CO.  V.  SAXON.  633 

Admitting  all  the  allegations  of  the  petition  to  be  true,  it  follows 
that  the  corporation,  so  called,  was  but  a  name,  under  which  the 
defendants  conducted  a  commercial  business. 

The  allegations  of  the  petition  are  sufficient  to  show  a  cause  of 
action  against  the  defendants  as  commercial  partners,  and  do  not 
disclose  that  the  "  Vossburg  Springs  Company,  Ltd.,"  was  a  corpora- 
tion de  jure  or  de  facto  under  the  laws  of  this  State. 

The  pleader  might  have  well  rested  on  his  allegation  that  the 
defendants  were  commercial  partners,  without  anticipating  the 
defense.  The  questions  of  law  raised  are  of  the  utmost  importance, 
but  find  no  application  to  such  a  corporation  as  that  described  in  the 
petition,  consisting  of  a  name  and  nothing  more. 

This  court  has  decided  in  a  number  of  cases  that  the  fact  that  a 
creditor  has  contracted  with  a  company  holding  itself  out  as  a  cor- 
poration does  not  necessarily  work  an  estoppel  to  deny  its  legal 
corporate  existence.  Spencer  Field  &  Co.  v.  Cooks  et  al.,  16  La.  Ann. 
153;  Chaff e  v.  Ludeling  et  al.,  27  La.  Ann.  611;  Williams  v.  Hewitt, 
47  La.  Ann.  1076,  17  South.  196,  49  Am.  St.  Rep.  394;  Lehman  v. 
Knapp  et  al,  48  La.  Ann.  1154,  20  South.  674. 

It  is  therefore  ordered  and  decreed  that  the  judgment  appealed 
from  be  reversed,  and  it  is  now  ordered  and  decreed  that  the  excep- 
tions of  no  cause  of  action  be  overruled,  and  that  this  cause  be  re- 
manded for  further  proceedings  according  to  law;  costs  of  appeal  to 
be  paid  by  appellees. 

Note.  —  Where  the  associates  have  not,  in  assuming  to  incor- 
porate, acted  in  good  faith,  a  preliminary  question  arises.  It  seems 
always  to  have  been  the  law  in  this  country  that  a  charter  obtained 
by  fraud  was  voidable,  and  not  void  (as  to  the  English  law,  see 
Morgan  v.  Seaward,  2  M.  &.  W.  544,  561;  Macbride  v.  Lindsay, 
9  Hare,  574,  583;  Robinson  v.  London  Hospital,  22  L.J.  Ch.  754,  757). 
Thus,  if  the  legislature  is  induced  by  fraud  to  pass  a  special  act  of 
incorporation,  the  corporation  comes  into  being,  and  the  fraud  is  only 
a  cause  of  forfeiture  by  the  state.  Charles  River  Bridge  v.  Warren 
Bridge,  7  Pick.  (Mass.)  344,  370.  Similarly,  if  the  legislature  has  by 
a  special  or  general  law  authorized  a  designated  official  or  body  to 
issue  a  charter  or  a  certificate  (which  is  made  conclusive  evidence  of 
incorporation)  upon  the  performance  of  conditions  precedent,  and 
the  official  or  body  is  induced  by  fraud  to  issue  such  charter  or  certi- 
ficate. Rice  V.  Bank  of  Commonwealth,  126  Mass.  300  (Mass.  Laws  of 
1903,  chap.  437,  §  12,  provides  that  the  certificate  of  the  Secretary  of 
State  "shall  have  the  force  and  effect  of  a  special  charter");  NaVl 
Bank  v.  Rockefeller,  195  Mo.  15,  42  (the  statute  provides  that  the 
certificate  of  the  Secretary  of  State  "shall  be  taken  by  all  courts  of 
this  State  as  evidence  of  the  corporate  existence  of  such  corpora- 
tion"; the  court  held  that  the  certificate  was  equivalent  to  a  special 


034  IROVIDEXT    BANK    &    TUU^T    CO.  V.  SAXOX.  [CHAP.   I. 

act  of  the  legislature;  whether  this  was  a  sound  construction  of  the 
statute,  quaere);  Centre  Co.  v.  M'Conaby,  IG  Serg.  &  11.  (Pa.)  140, 
1  Pen.  &  W.  (Pa.)  426,  434;  fravaglini  v.  Societa  Italiane,  5  Pa.  Dist. 
444;  German  Ins.  Co.  v.  Strahl,  13  Phila.  (Pa.)  512.  Sec  al.so  Pat- 
tison  V.  Albany  Ass^n,  63  Cla.  373;  Ltijlin  Co.  v.  Sin-sheimer,  46  Md. 
345;  U.S.  Vinegar  Co.  v.  Schlegel,  443  N.Y.  537;  Cochran  v.  Arnold, 
58  Pa.  St.  399;  Wells  Co.  v.  Gastonia  Co.,  198  U.S.  177,  185.  Simi- 
larly, if  the  designated  official  or  body  is  induced  by  fraud  to  do  an 
act  the  performance  of  vviiich  is  one  of  the  conditions  precedent  to 
incorporation.  Duke  v.  Cahawba  Co.,  16  Ala.  372;  Litchfield  Hank 
V.  Church,  29  Conn.  137,  448;  Jones  v.  Dana,  24  Barb.  (X.Y.)  395; 
Tar  River  Co.  v.  Neal,  3  Hawks  (N.C.)  520. 

Wherever  the  legislature  has  authorized  the  formation  of  a  cor- 
j)oration  upon  the  performance  of  certain  conditions  precedent,  the 
courts  must  necessarily  determine  whether  the  legislature  intended 
to  require  a  certain  mental  state  in  the  corporators  as  one  of  these 
conditions.  Considering  the  difficulty  of  proof  on  such  a  point,  the 
courts  may  incline  against  such  a  construction  of  the  law.  See  Im- 
porting Co.  V.  Locke,  50  Ala.  332,  334;  Xicmcijer  v.  Little  Rock  Ry., 
43  Ark.  Ill,  120;  Aurora  Co.  v.  Lawrenceburgh ,  56  Ind.  80,  87;  Lin- 
coln Ass^n  V.  Graham,  7  Neb.  173;  Atty.-Gen.  v.  Stevens,  Saxt.  Ch. 
(N.J.)  369,  378;  Natl  Docks  Co.  v.  Central  R.R.,  32  N.J.  Eq.  755; 
Terhune  v.  Midland  Co.,  38  N.J.  Eq.  423;  Atty.-Gen.  v.  Am.  Tobacco 
Co.,  55  N.J.  Eq.  352,  369,  aff'd,  56  N.J.  Eq.  SA7;  Buffalo  Co.  v.  Hatch, 
20  N.Y.  157,  159;  Wellington  Co.  v.  Cashie  Co.,  114  N.C.  690;  Coch- 
ran V.  Arnold,  58  Pa.  St.  399,  405;  Windsor  Co.  v.  Carnegie  Co.,  204 
Pa.  St.  459,  and  cases  cited.  Cf.  Christian  Co.  v.  Fniitdalc  Co.,  121 
Ala.  340,  345;  Montgomery  v.  Forbes,  148  ]\Ia.ss.  249;  Augir  v.  Ryan, 
63  Minn.  373;  Hill  v.  Beach,  1  Bea.sl.  (N.J.)  31,  36;  Jersey  City  Co.  v. 
Dunght,  29  N.J.  Eq.  242  (the  learned  vice-chancellor  who  decided 
this  case  assumed,  46  N.J.  Eq.  130,  that  it  could  not  stand  with  32 
N.J.  Eq.  755.  But  see  49  N.J.  Eq.  329,  '33')) ;  Elizabeth  Co.  v.  Green, 
49  N.J.  Eq.  329  (by  five  dissenting  judges.  Whether  the  majority  was 
opposed  on  this  point  does  not  appear.  The  decision  is  explained  in 
52  N.J.  Eq.  Ill,  144,  on  a  ground  consistent  with  this  opinion  by  the 
dissenting  judges);  Farnham  v.  Benedict,  407  N.Y.  459,  469;  Brnn- 
dred  v.  Rice,  49  Ohio  St.  640;  McGreiv  v.  City  Produce  Exchange,  85 
Tenn.  572;  Le  Warne  v.  Meyer,  38  Fed.  494.  See  also  Carey  v.  Cin- 
cinnati Co.,  5  la.  357;  Chicora  Co.  v.  Crews,  6  S.C.  243,  275.  In  New 
Orleans  Co.  v.  Louisiana,  480  U.S.  320,  330,  Peckham,  J.,  said:  "If 
not  created  for  a  lawful  purpose,  the  company  was  not  created  at 
all."  There  is  a  dictum  to  the  same  effect  by  Lord  Heeschell  in 
Salomon  v.  Broderip,  [4897]  A.C.  22,  43. 

The  legislature  may,  however,  require  a  certain  mental  state  as  a 
condition  precedent  to  incorporation.  Thus  it  may  require  that  cer- 
tain subscriptions  or  payments  be  made  in  good  faith.    And,  it  is 


SECT.  I.]  PROVIDENT   BANK    &    TRUST    CO.  V.  SAXON.  635 

submitted,  where  the  legislature  requires  that  certain  statement's  be 
made  and  filed  or  recorded  in  a  public  office,  the  courts  should  hold 
that  the  legislature  intended  to  require  that  such  statements  be 

made  in  good  faith.  ,     xu    i     •  i 

Assume  that  such  requirement  is  made.  For  example,  the  legisla- 
ture requires  the  associates  to  state  the  amount  of  capital  stock  sub- 
scribed and  paid  in.  The  associates  make  statements  which  are  false 
and  which  are  known  to  be  false.  If  incorporation  fails  because  such 
statements  are  not  made  in  good  faith,  it  would  seem  to  be  clear  that 
the  associates  should  be  held  to  full  hability  on  their  contracts  To 
say  that  A,  the  other  contracting  party,  is  estopped  to  show  that  the 
associates  are  not  incorporated  when  the  incorporation  has  failed 
because  the  associates  made  a  representation  which  they  knew  was 
not  true,  and  A  has  acted  on  it  to  his  hurt,  would  be  contrary  to  the 
principles  underlying  the  law  of  estoppel.  There  is  no  equity  m 
estopping  A  under  these  circumstances;  the  equity  is  all  the  other 
way.  Here  then  is  a  case  where  justice  between  the  parties  and 
public  policy  both  require  that  the  associates  be  held  to  full  liability. 
One  may  be  permitted  to  be  astonished  at  a  doctrine  which  protects 
the  associates,  -  it  is  contrary  to  the  manner  in  which  the  courts 
deal  with  fraud  in  every  other  branch  of  the  law.  ,  ,,    ^  ,, 

In  Goto  V.  ColUn  Co.,  109  Mich.  45,  the  plaintiff  alleged  that  the 
statements  of  the  associates  in  their  certificate  of  incorporation  re- 
specting their  capital  were  false,  and  that  he  contracted  with  them 
relying  on  these  statements;  he  sought  to  hold  them  to  full  liability. 
A  demurrer  to  the  bill  was  sustained.  "The  company,  m  form  was 
duly  incorporated,  was  recognized  by  the  public  authorities,  and  hied 
its  annual  reports,  and  did  business  as  a  corporation.  The  complain- 
ants  dealt  with  it  as  a  corporation."  In  substance,  this  was  all  the 
consideration  which  the  court  gave  to  the  point.  The  decision  is  the 
more  remarkable  when  compared  with  Doyle  v.  Mizner,  42  Mich. 

332 

' '  In  Cochran  v.  Arnold,  58  Pa.  St.  399,  the  reasoning  of  the  court  goes 
as  far  as  the  decision  in  Gow  v.  Collin  Co.  But  the  statements,  al- 
though technically  untrue,  do  not  seem  to  have  been  made  m  bad  taith, 
and,  in  any  event,  the  other  contracting  party  knew  all  the  tacts. 

Laflin  Co.  v.  Sinsheimer,  46  Md.  315.  From  portions  of  the  opm- 
ion  it  would  appear  that  the  court  dealt  with  the  case  as  one  of  in- 
corporation secured  by  fraud.  But  elsewhere  (p.  320)  it  says  that 
the  validity  of  the  incorporation  cannot  be  collaterally  attacked  by 
proving  aliunde  the  certificate  of  its  incorporation  that  certam^pre- 
requisites  of  the  law  had  not  been  in  good  faith  complied  with. 

In  Wehh  V.  Rockefeller,  195  Mo.  57,  the  court  held  that  A,  who  had 
contracted  with  the  associates  as  a  corporation,  could  not  recover  m 
tort  from  them  because  he  was  not  of  the  class  intended  to  be  influ- 
enced by  the  representations  as  to  their  capital. 


C36  COTTENTIN    V.  ME^-ER.  [cHAP.   I. 

On  the  other  hand,  there  arc  the  following  authorities  in  sujjport  of 
the  principal  case.  In  Mantgomery  v.  Forbes,  148  Mass.  249,  the  tle- 
femhmt  falsely  stated  that  the  business  of  the  cor[iorati<jn  was  to  he 
carried  on  in  a  certain  State;  he  thereafter  purchased  goods  in  the 
name  of  the  corporat«ion,  and  was  held  to  full  liability.  There  is  a 
dictum  to  the  same  effect  in  Gartside  Co.  v.  Majwell,  22  Fed.  197. 
See  also  Cleaton  v.  Emery,  49  Mo.  App.  345;  Dmndson  v.  Ilobson, 
59  Mo.  App.  130;  /////  v.  Beach,  1  Beasl.  (N.J.)  31,  3G;  Booth  v. 
Wonderly,  3G  N.J. I..  250. 

In  Brundred  v.  Hice,  49  Ohio  St.  640,  650,  where  a  corporation  was 
not  organized  in  good  faith,  but  for  the  purpose  of  consununating 
an  illegal  agreement,  the  a.ssociates  were  held  accountable  for  moneys 
nominally  paid  to  the  corporation.  "The  act  of  incorporating  can  be 
of  no  avail  to  them  as  a  defense."  To  the  .same  effect  is  MdJrcw  v. 
City  Produce  Exchange,  85  Tenn.  572. 

If  the  attempt  at  incorporation  is  not  made  in  good  faith,  but  per- 
sons purcha.se  the  stock  in  good  faith,  they  should  not  I  e  exposed  to 
full  liability  to  those  who  have  contracted  with  the  corporation. 
American  Co.  v.  Heidenheimer,  80  Tex.  344.  Sec  also  Minor  v. 
Mechanics  Bank,  1  Pet.  (U.S.)  46,  66. 


COTTENTIN   v.   MEYER. 

so  N.J.L.  52.     1010. 

The  plaintiff  sought  to  recover  against  certain  individuals  for  breach 
of  a  contract  in  which  the  named  obligor  was  theCottentin  Hotel  Co. 

SwAYZE,  J.  We  think  the  evidence  justified  the  submission  to  the 
jury  of  the  question  whether  the  Cottentin  Hotel  Company'  was 
organized  as  a  corporation  at  the  time  the  plaintiff  made  the  con- 
tract upon  which  his  suit  was  brought.  If,  in  fact,  the  certificate 
was  not  signed  until  August,  there  was  no  de  facto  corporation  in  the 
preceding  April  and  the  case  is  not  controlled  by  the  rule  of  Ilacken- 
sack  Water  Co.  v.  De  Kay,  9  Stew.  Eq.  548,  559;  Stout  v.  Zulick,  19 
Vroom,  599,  and  Vanneman  v.  Young,  23  Id.  403.  Nor  does  it  come 
within  the  rule  of  Den  v.  Van  Houten,  5  Halst.  270,  and  the  numerous 
cases  in  other  jurisdictions  where  a  similar  situation  was  presented. 
Those  cases  rest  upon  the  doctrine  of  estoppel.  In  Den.  v.  Van 
Houten  the  mortgagor,  by  giving  a  mortgage  in  form  to  a  corpora- 
tion, represented  in  effect  to  the  assignee  of  the  mortgage  that  the 
original  mortgagee  was  in  fact  a  corporation. 

In  Close  v.  Glenwood  Cemetery,  107  U.S.  466,  Close,  by  making 
deeds  in  the  name  of  the  corporation  for  cemetery  plots,  represented 
that  there  was  an  actual  corporation  capable  of  owning  and  convey- 
ing the  lots.  There  are  cases  which  go  further  and  hold  that  one  who 


SECT.  I.]  NOTE.  637 

deals  as  with  a  corporation  and  thereby  obtains  a  benefit,  cannot 
afterwards,  when  sued  in  the  corporate  name,  deny  the  actual  exist- 
ence of  the  corporation.  It  is  as  Mr.  Machen,  in  his  recent  book  on 
Corporations,  points  out  (§  282),  difficult  to  see  how  the  principle 
of  estoppel  is  applicable  to  such  a  case,  since  it  can  hardly  be  sup- 
posed that  those  who  act  as  a  corporation  without  even  a  colorable 
organization,  can  be  misled  into  a  belief  that  they  are  actually  in- 
corporated by  the  representation  of  an  outsider  who  is  without  their 
means  of  knowledge.  Even  those  cases,  however,  fall  short  of  the 
present.  If,  in  fact,  Meyer  and  McKenna  were  merely  using  the  cor- 
porate name  in  which  to  make  their  own  contracts,  they  were  in  no 
way  misled  by  the  act  of  Cottentin  in  entering  into  a  written  contract 
which  expressly  described  the  Cottentin  Hotel  Company  as  a  New 
Jersey  corporation.  On  the  contrary  it  was  they  who  in  that  event  mis- 
led Cottentin  by  purporting  to  contract  as  a  corporation  and  they  can- 
not escape  liability  if,  in  fact,  Cottentin  Hotel  Company  was  merely 
their  trade  name.   This,  under  the  evidence,  was  a  jury  question. 

Note.  —  The  assumption  of  the  corporate  privilege  may,  it  is 
submitted,  be  called  naked  wherever  the  associates  have  not  filed 
or  recorded  or  published  their  certificate  of  incorporation  (or  similar 
paper)  in  at  least  one  of  the  ways  provided  by  law. 

Where  the  assumption  of  the  corporate  privilege  was  naked,  the 
associates  have  uniformly  been  held  to  full  liability  to  the  other  con- 
tracting party.  Forbes  v.  Whiitemore,  62  Ark.  229;  Pettis  v.  Atkins, 
60  111.  454;  Chaffe  v.  Ludeling,  27  La.  Ann.  607,  611;  Johnson  v. 
Corser,  34  Minn.  355  (see  the  explanation  of  this  case  in  52  Minn. 
239,  244);  Furniture  Co.  v.  Crawford,  127  Mo.  356,  364;  Abbott  v. 
Omaha  Smelting  Co.,  4  Neb.  416;  McVicker  v.  Co7ie,  21  Or.  353; 
Haslett  V.  Wotherspoon,  2  Rich.  Eq.  (S.C.)  395. 

See  also  Brooke  v.  Day,  129  Ga.  694  (no  colorable  requirements  with 
terms  of  charter) ;  Bank  v.  Sheldon,  86  Kan.  460. 

In  Bank  of  Watertown  v.  London,  45  N.Y.  410,  the  associates,  after 
the  expiration  of  their  charter,  agreed  to  continue  the  business,  and 
the  business  was  continued  ostensibly  by  a  corporation.  The  plaintiff 
became  the  owner  of  a  note  signed  in  the  name  of  the  corporation,  and 
which  he  believed  was  made  by  a  corporation  de  jure.  The  associates 
were  held  to  full  liability.  Cf.  the  dictum  in  Miller  v.  Coal  Co.,  31 
W.Va.  836,  840. 


NOTE. 


On  the  liability  of  the  agent  of  a  corporation,  by  assumption,  to  the 
other  contracting  party  see  Coleman  v.  Coleman,  78  Ind.  344,  346; 
Hurt  V.  Salisbury,  55  Mo.  310;  Lagrone  v.  Timmerman,  46  S.C.  372. 


638  SOCIETY    PEUUN    V.  CLEVELAND.  [CIIAP.  I. 


SECTION  2. 
WHERE  THERE    HA\i:    BEEN   NO   DEALINGS   BETWEEN 

Tin:  PARTu:s  on  a  corpoiute  basis. 


SOCIETY   PERUN   v.  CLEVELAND. 

4.'{  OJiio4ht.     I8«5. 

Action  l)y  city  of  ("k'vtland  to  foreclose  a  inort^ajje,  a.s  again.';t 
certain  subsequent  grantees,  niortpapees,  and  purchasers.  Perun,  a 
corporation.  January  28,  1874,  executed  ami  <lelivere<l  a  niortganc^  to 
the  city.  Tliis  niort^ajie  was  not  hied  for  record  until  Octoher  21, 
1879.  In  February,  1874,  certain  persons  attenipteil  to  organize, 
under  general  laws,  a  corporation  by  the  name  of  Society  Penin. 
In  May,  1874,  Perun  deliveretl  to  Society  Perun  its  deeil,  purporting 
to  convey  to  the  latter  the  preini.-*es  theretofore  mortgaged  to  the 
city.  Between  that  date  and  ( )(tolHT  21,  187!>,  So<'iety  Perun,  acting 
in  its  supposed  corporate  capacity,  executed  and  delivered  deeds  and 
mortgages,  purporting  to  convey  and  incumlxT  parcels  of  these  mort- 
gaged premises  to  various  parties,  who  are  made  <lefendants  in  the 
present  suit.  During  the  pendency  of  the  present  foreclosure  suit, 
it  was  adjudged,  in  a  tpio  warranto  proceeding,  instituted  by  the 
Attorney-General,  that  the  pei-sons  who  attempted  to  incorporate 
under  the  name  of  Society  Perun  had  not  been  legally  incorpf)rated, 
and  tiiat  their  attempted  organization  as  a  corporation  was  wholly 
void;  and  a  decree  of  ouster  was  renilered.  Upon  the  trial  of  the 
present  foreclosure  suit  in  the  District  Court,  the  plaintiff  gave  in 
evidence,  against  the  objection  of  the  defendants,  the  record  of  the 
quo  worrntito  proceedings.  Defendants  ofTered  evidence  tending  to 
prove  an  attempt  in  good  faith  to  incorporate  Society  Perun.  'J'his 
evidence  was  excluded,  and  defendants  excepted.  The  District 
Court  found,  among  other  things,  that,  as  to  the  city  of  Cleveland, 
Society  Perun  was  not  a  corporation  either  in  law  or  in  fact ;  that  the 
conveyance  to  it  by  Perun  was  void  as  against  the  city;  and  that  the 
claims  of  all  the  defendants  (except  certain  claims  for  taxes  and 
improvements)  were  subsequent  and  inferior  to  the  lien  of  the  city. 
To  reverse  the  judgment  rendered  upon  these  findings,  error  was 
brought. 

Owen,  J.  The  defendants  below,  conceding  that  Society  Perun 
had  never  been  a  corporation  de  jure,  maintain  that  the  court  below 
should  have  permitted  them  to  prove  that  such  society  was  a  de 
facto  corporation;  that  it  attempted,  in  good  faith,  to  become  a  body 


SECT.  II.]  SOCIETY    PERUN    V.  CLEVELAND,  639 

corporate ;  proceeded  to  act  and  transact  business  in  good  faith  under 
the  supposed  authority  of  incorporation,  and  that  its  acts  ought  not 
to  have  been  declared  to  be  wholly  void  as  against  the  city  of  Cleve- 
land. 

The  judgment  of  ouster  was  an  adjudication  between  the  State 
and  the  society  upon  the  right  of  the  latter  to  exercise  corporate 
franchises.  For  the  purposes  of  such  adjudication  it  was  competent 
for  this  court  to  consider  and  determine  what  had  been  its  status 
from  its  first  attempt  to  incorporate.  But  it  had  no  power  to  pass 
upon  or  determine  the  rights  of  parties  not  before  it. 

It  was  not  competent  for  this  court  to  determine  in  that  proceed- 
ing that  Society  Perun  had  never  been  a  corporation  de  facto,  or  that 
its  acts  and  business  transactions,  under  the  color  of  its  supposed 
charter  powers,  were  void.  The  authority  of  the  court  in  that  behalf 
was  derived  from  §  6774  (Rev.  Stats.),  which  provides:  "When  a 
defendant  is  found  guilty  of  usurping,  intruding  into,  or  unlawfully 
holding  or  exercising  an  office,  franchise,  or  privilege,  judgment  shall 
be  rendered  that  such  defendant  be  ousted  and  altogether  excluded 
therefrom,  and  that  the  relator  recover  his  costs." 

When  the  court  had  excluded  the  society  from  its  franchises  to  be 
a  corporation,  it  exhausted  its  jurisdiction  over  the  subject-matter. 
It  had  no  power  to  speak  concerning  whatever  rights  may  have  been 
acquired  by  the  society  as  a  corporation  de  facto,  or  by  third  parties 
in  their  transactions  with  it  as  an  acting  corporation. 

It  is  conceded  by  the  city  that  parties  who  had  recognized  the 
existence  of  the  society  by  their  transactions  with  it  as  a  supposed 
corporation  are  estopped  to  deny  its  corporate  existence.  But  it  is 
maintained  that  the  city,  having  engaged  in  no  transactions  with 
it,  is  free  to  challenge  its  existence  as  a  corporation  de  facto  as  well  as 
de  jure.  The  argument  is  that:  "No  case  can  be  found  where  it  is 
held  that  there  is  a  corporation  de  facto  against  persons  who  have  in 
no  way  recognized  its  existence  as  a  corporation,"  and  that:  "The 
notion  of  a  de  facto  corporation  is  based  on  the  doctrine  of  estoppel; 
when  estoppel  can  not  be  invoked  there  can  be  no  de  facto  corpora- 
tion." 

The  theory  that  a  de  facto  corporation  has  no  real  existence,  that 
it  is  a  mere  phantom,  to  be  invoked  only  by  that  rule  of  estoppel 
which  forbids  a  party  who  has  dealt  with  a  pretended  corporation  to 
deny  its  corporate  existence,  has  no  foundation,  either  in  reason  or 
authority.  A  de  facto  corporation  is  a  reality.  It  has  an  actual  and 
substantial  legal  existence.   It  is,  as  the  term  implies,  a  corporation. 

"It  is  a  self-evident  proposition  that  a  contract  can  not  be  made 
with  a  corporation  unless  the  corporation  be  in  existence  at  the  time. 
A  real  contract  with  an  imaginary  corporation  is  as  impossible,  in  the 
nature  of  things,  as  a  real  contract  with  an  imaginary  person.  It  is 
essential,  therefore,  in  order  to  estabhsh  the  existence  of  a  contract 


640  SOCIETY    PERUX    V.  CLEVELAND.  [CHAP.  I. 

with  a  corporation,  to  show  that  the  corporation  was  in  oxiHtence, 

at  least  de  fado,  at  the  time  the  contract  was  mach-."  Morawctz 
Private  Corporations,  §  137. 

It  is  hound  by  all  such  acts  lus  it  nii^ht  rightfully  pt-rfonn  aw  a 
corporation  dc  jure.  Where  it  has  atteniptctl  in  ^(mkI  faith  to  as- 
sume corporate  powers;  where  its  proceetlinga  in  that  l)chalf  are 
colorable,  and  are  approved  l>y  thosi*  ofliccrs  of  the  state  who  are 
authorized  to  act  in  that  regard;  where  it  has  honestly  proceecN'd  for 
a  nunilx'r  of  years,  without  interference  from  the  State,  to  transact 
business  as  a  corporation;  has  UtMi  reputed  and  dealt  with  as  a  duly 
incorporated  lx)tly,  and  valuable  rights  and  interests  have  l)cen 
acquired  and  transferred  by  it,  no  substantial  rea.**on  is  su^^<'ste(l 
why  its  corporate  existence,  in  a  suit  involving  such  trarii^aclions, 
should  l)c  subject  to  attack  by  any  other  party  than  the  State,  and 
then  only  when  it  is  called  upon  in  a  direct  proceeding  for  that  pur- 
pose, to  show  by  what  authority  it  assuiu«*s  to  Ih'  a  corporation. 

Proof  was  offered  u]Hm  \\\v  trial  Ixlow  toshow,  (1)  that  the  persons 
seeking  to  incorporate  iii-st  filed  with  the  Secretary'  of  State  a  certi- 
ficate which  fully  coinplie<l  with  the  requirements  of  the  statutes, 
and  free  from  the  defect  which  finally  prove<l  fatal  to  its  existence, 
but  which  was  disapproved  by  the  Attorney-( leneral;  (2)  that  the 
certificate  of  incorporation  which  was  finally  filed  with  the  S<'cretary 
of  State  recited  that,  "said  a.ssociation  has  U'cn  formed  juul  or- 
ganized for  the  mutual  protection  and  relief  of  its  members,  and  for 
the  payment  of  stipulated  sums  of  money  to  the  famili«'s  or  heirs  of 
the  deceased  memlK'i's  of  .said  association;  that  the  officers  of  said 
association  have  been  duly  chosen;  that  for  the  purj^oso  of  l)ecoming 
a  body  corporate  under  an  act  paj^^^d  by  the  general  a.sM'mbly  of  the 
State  of  Ohio,  entitled,  an  act  supplementary  to  an  act,  entitled  an 
act  to  provide  for  the  creation  and  regulation  ()f  incorporated  com- 
panies in  the  State  of  Ohio,  pashcnl  May  1,  18o2,  passed  April  20, 
1872";  (3)  that  this  certificate  was  approved  by  the  Secretary'  of 
State,  and  al.^o  by  the  Attornev-deneral,  as  provided  by  the  statutes 
(C9  Ohio  L.  loO);  (4)  that  it  j)roceeded  in.gcMxl  faith  to  tran.'^act  l)usi- 
ness  peculiar  to  corporations  provided  for  by  the  act  under  which 
it  attempted  to  incorporate. 

All  this  was  excluded,  and  the  decision  of  the  court  below  practi- 
cally rested  on  the  proof  offered  by  the  city,  that  Society  Perun  had 
been  ousted  of  its  franchises,  which  was  evidently  construed  as  de- 
termining that  such  society  had  from  the  first  no  corporate  existence, 
either  de  jure  or  de  facto,  and  consequently  no  capacity  to  receive  or 
impart  any  interest  in  or  title  to  real  estate  except  as  against  such 
parties  as  were  by  reason  of  their  recognition  of  or  dealings  with  it, 
estopped  to  denj^  its  incorporate  existence. 

Did  the  court  err?  This  fairly  presents  the  controlling  and  very 
important  question:  Was  it  competent  to  show,  as  against  a  party 


SECT.  II.]  SOCIETY   PERUN   V.  CLEVELAND.  641 

who  was  not  estopped  to  deny  its  corporate  existence,  that  Society 
Perun  was,  at  the  time  of  the  transactions  involved  in  controversy, 
a  corporation  de  facto  f 

In  Attorney-General  ex  rel.  Peitee  v.  Stevens,  Saxton  (N.J.  Eq.)  369, 
the  relator  sought  to  enjoin  the  Camden  and  Amboy  Railroad  and 
Transportation  Company  and  others  acting  under  its  authority  from 
erecting  a  bridge  over  a  navigable  stream.  The  claim  was  that  the 
act  authorizing  the  corporation  had  been  perverted  and  disregarded, 
and  that  there  was  no  legal  incorporation.  The  relators  were  in  no 
manner  estopped  to  attack  the  corporate  existence  of  the  respondent. 
The  court  held :  — 

"Where  a  set  of  men  claiming  to  be  a  legally  incorporated  com- 
pany under  an  act  of  the  legislature,  have  done  everything  necessary 
to  constitute  them  a  corporation,  colorably  at  least,  if  not  legally,  and 
are  exercising  all  the  powers  and  functions  of  a  corporation;  they  are 
a  corporation,  de  facto,  if  not  dejure;  and  this  court  will  not  interfere, 
in  an  incidental  way,  to  declare  all  their  proceedings  void,  and  treat 
them  as  a  body  having  no  rights  of  powers." 

The  chancellor,  speaking  for  the  court,  said:  — 

"Here,  then,  is  a  set  of  men  claiming  to  be  a  legally  incorporated 
company  under  the  act  of  the  legislature,  exercising  all  the  powers 
and  functions  of  a  corporation.  They  are  a  corporation  de  facto,  if  not 
de  jure.  Every  thing  necessary  to  constitute  them  a  corporation  has 
been  done,  colorably  at  least,  if  not  legally;  and  I  do  not  feel  at  lib- 
erty, in  this  incidental  way,  to  declare  all  their  proceedings  void,  and 
treat  them  as  a  body  having  no  rights  or  powers.  It  has  been  seen 
that  the  court  will  not  do  this  where  a  corporation  properly  organized 
has  plainly  forfeited  its  privileges;  and  there  is  but  little  difference 
in  principle  between  the  two  cases.  In  both  the  corporation  is  actu- 
ally in  existence,  but  whether  legally  and  rightfully  so  is  the  question. 
And  it  appears  to  me  that  if  the  court  can  take  cognizance  of  the 
matter  in  this  case,  it  must  in  all  others  where  it  can  be  brought  up, 
not  only  directly,  but  incidentally." 

This  case  is  approved  and  followed  in  National  Docks  R.  Co.  v. 
Central  R.R.  Co.,  32  N.J.  Eq.  755,  which  held:  "When  a  corporation 
exists  de  facto,  the  court  of  chancery  can  not,  at  the  instance  of  priv- 
ate parties,  restrain  its  operations  upon  the  ground  that  its  organiza- 
tion is  not  dejure.  In  such  case  the  proper  remedy  is  by  quo  warranto, 
or  information  in  the  nature  thereof,  instituted  by  the  Attorney- 
General."  The  rule  of  estoppel  found  no  place  in  this  case. 

In  S.  &  L.  G.  R.  Co.  v.  S.  &  C.  R.R.  Co.,  45  Cal.  680,  it  was  held 
that:  "if  a  corporation  de  facto  is  in  the  actual  possession  of  a  public 
highway,  under  a  grant  of  a  franchise  to  improve  and  collect  tolls  on 
the  same,  a  mere  trespasser  can  not  justify  his  entry  thereon  on  the 
ground  that  it  was  only  a  corporation  de  facto,  and  was  not  de  jure 
entitled  to  the  franchise." 


642  SOCIETY    PERCN    V.  CLEVELAND.  (CHAP.  I. 

In  Williams  v.  Kokomo  B.  &  L.  Asa'n.,  89  Ind.  339,  one  I^ach 
gave  to  an  acting  corporation  his  mortgage  on  real  e^<tate.  Sul>- 
sequtnt  to  the  execution  and  recording  ui  it,  lie  execute<i  anotlier 
mortgage  on  the  same  hind  to  W'ilHamson.  In  a  proceetling  to  fore- 
close the  junior  mortgage,  Wilhamson  maintained  that  the  pretended 
corporation  had  no  legal  existence,  by  reason  of  defects  and  omis- 
sions in  the  proceedings  to  incorjwrate,  and  that  the  senior  mortgage 
was  void.  He  was  in  no  manner  estopixxl,  by  ilealings  with,  or  rec- 
ognition of,  the  first  mortgagee  to  deny  its  corporate  existence.  The 
court  held  that:  "A  junior  mortgagee  can  not  defeat  a  senior  mort- 
gage by  showing  that  the  corjxjration  to  which  the  senior  mortgage 
was  executed  was  defectively  organizcnl,  if  it  1)C  a  cor])oration  de 
fado. ' '  Elliot,  J . ,  said : ' '  Where  persons  assume  to  incorporate  under 
the  laws  of  the  State,  and  in  part  comply  with  their  requirements, 
assume  corporate  functions  and  transact  business  as  a  corporation, 
private  persons  can  not  collaterally  question  the  right  of  such  an 
association  to  a  corporate  existence,  although  there  has  not  been  a 
full  compliance  with  the  provisions  of  the  statute.  Baker  v.  \eff, 
73  Ind.  68.  This  nile  is  not  limited  U)  cases  where  one  by  coutraci  admits 
corporate  existence,  but  is  a  nde  of  general  application."  It  is  nf)t  easy 
to  distinguish  the  principle  of  this  case  from  that  of  the  case  at  bar. 

In  Pape  v.  Capital  Bank,  20  Kan.  440,  Pape  and  wife  gave  their 
notes  to  "James  M.  Spencer  or  l)earer,"  and  their  mortgage  on  real 
estate  to  secure  them.  Spencer  transfcrrcil  the  notes  to  the  Capital 
Bank  of  Topeka,  an  acting  coqwration,  with  this  indorsement:  "  Pay 
the  bearer,  without  recourse  on  me;  James  M.  Spencer."  The  mort- 
gage was  also  transferred  to  the  bank,  which  procee<led  by  suit  to 
collect  the  notes  and  foreclose  the  mortgage.  Vnpc  and  wife  inter- 
posed the  defense  that  the  bank  was  not,  and  never  had  i>een,  a  body 
corporate,  by  reason,  among  others,  of  a  defective  organization.  The 
bank  had  assumed  corporate  functions  after  an  attempt,  in  good 
faith,  to  incorporate,  and  for  a  numlx'r  of  years  was  in  the  actual  and 
notorious  exercise  of  corporate  franchises.  Pape  had  transacted 
banking  business  with  the  plaintiff  prior  to  the  purchase  of  the  notes 
and  mortgage,  but  such  business  was  wholly  unconnected  with  the 
notes  and  mortgage  in  suit.  His  wife,  however,  had  not  in  any  man- 
ner recognized  the  existence  of  the  bank  as  a  corporate  body,  and  the 
doctrine  of  estoppel  was  not  invoked  to  aid  the  court  in  sustaining  a 
judgment  of  foreclosure  against  Pape  and  wife.  Brewer,  J.,  saj-B: 
"The  corporation  is  one  de  fado;  and  only  the  State  can  inquire,  and 
that,  in  a  direct  proceeding,  whether  it  ha  one  de  jure.  .  .  .  There 
must,  in  such  cases,  be  a  law  under  which  the  incorporation  can  be 
had;  there  must,  also,  be  an  attempt,  in  good  faith,  on  the  part  of  the 
corporators,  to  incorporate  under  such  law;  and  when,  after  this, 
there  has  been  for  a  series  of  years  an  actual,  open,  and  notorious 
exercise,  unchallenged  by  the  State,  of  the  powers  of  a  corporation, 


SECT.  II.]  SOCIETY    PERUN    V.  CLEVELAND.  643 

one  who  is  sued  on  a  note  held  by  such  corporation  will  not  be  per- 
mitted to  question  the  validity  of  the  incorporation  as  a  defense  to 
the  action.  No  mere  matters  of  technical  omission  in  the  incorpora- 
tion, no  acts  of  forfeiture  from  misuser  after  the  incorporation,  are 
subjects  of  inquiry  in  such  an  action.  This  is  not  upon  the  ground  of 
equitable  estoppel  but  upon  grounds  of  public  policy.  If  the  State,  which 
alone  can  grant  the  authority  to  incorporate,  remains  silent  dming 
the  open  and  notorious  assertion  and  exercise  of  corporate  powers, 
an  individual  will  not,  unless  there  be  some  powerful  equity  on  his 
side,  be  permitted  to  raise  the  inquiry."  .  .  . 

In  the  case  at  bar,  the  certificate  which  was  last  filed  by  the  so- 
ciety embraced  a  full  statement  of  the  objects  of  incorporation  and 
indicated  what  the  nature  of  its  business  must  necessarily  be,  and 
was  strongly  suggestive  of  the  manner  in  which  it  must  necessarily  l^e 
transacted;  and  while  it  is  not  our  purpose  to  call  in  question  the 
action  of  this  court  in  the  quo  warranto  proceedings,  we  have  no 
hesitation  in  saying  that  if  we  were  now  called  upon  to  determine 
whether  the  corporate  life  of  Society  Perun  should  be  taken,  the 
question,  upon  the  facts  offered  in  proof  at  the  trial  below,  would  not 
be  free  from  doubt  and  difficulty.  It  is  very  clear  that  the  proceed- 
ings to  incorporate  were  colorable;  and  so  far  as  this  fact  is  a  test  of 
the  existence  of  a  corporation  de  facto,  it  is  most  amply  established. 
That  there  was  proof  of  user  is  manifest  from  the  evidence  which 
was  received  without  objection. 

That  the  judgment  of  ouster  did  not  and  could  not  have  a  retro- 
active effect  upon  the  rights  of  the  society,  and  of  parties  who  had 
dealt  with  it  during  its  de  facto  ex-istence,  is  suggested  by  the  opin- 
ion of  Wright,  J.,  m  Gaff  v.  Flesher,  33  Ohio  St.  115. 

The  evidence  w^hich  was  offered  and  excluded  would,  if  credited, 
have  shown  Society  Perun  capable  of  holding  and  transferring  the 
legal  title  to  the  lands  in  controversJ^  Walsh  v.  Barton,  24- Ohio  St. 
43°;  Darst  v.  Gale,  83  111.  136;  Shewalter  v.  Pirner,  55  :\Io.  218;  Xot. 
Bank  v.  Matthews,  98  U.S.  628;  Goundie  v.  Northampton  Water  Co., 
7Penn.  St.  233;  Barroiv  v.  Nashville  Turn.  Co.,  9  Humph.  304; 
Kelhj  V.  People's  Trajis.  Co.,  3  Ore.  189;  Bogardus  v.  Trinity  Church, 
4  Sandf.  Ch.  758. 

The  public  and  all  persons  dealing  with  this  society  were  justified 
in  assuming  that  the  certificate  filed  with  the  Secretarj^  of  State,  and 
by  him  admitted  to  record  in  his  office,  had  been  approved  by  him, 
and  also  by  the  Attorne^'-General,  as  required  by  statute  (69  Ohio 
L.  150),  and  that  it  so  far  conformed  to  all  legal  requu-ements  that, 
as  provided  in  §  2  of  the  act  of  incorporation  (69  Ohio  L.  83),  "a  copy, 
duly  certified  by  the  Secretary'  of  State,  under  the  great  seal  of  the 
State  of  Ohio,  shall  be  e\'idence  of  the  existence  of  such  association." 

It  would  seem  that  such  approval,  record,  and  certificate,  fol- 
lowed by  uninterrupted  and  unchallenged  user  for  neariy  sLx  years. 


644  SOCIETY    PERUN    V.  CLEVELAND.  (CHAP.   I. 

of  all  of  which  proof  was  tendered,  wouhl  constitute  a  corfKjration 
lie  facto,  if  such  a  ho<ly  is,  under  any  circumstances,  entitled  to  le^al 
recognition. 

The  hi^licst  considerations  of  puhhc  poHcv  and  fair  deahtin  [jiot.-t 
against  treating  sucii  an  oruanization  as  a  nulHt  v.  ;ind  all  of  its  tran.>?- 
aetions  void. 

The  principle  of  the  aWovc  casi-s  is  to  Itc  distinguished  from  a  cjise 
where  a  mere  corporation  dc  ftnio  attem[)ts  to  a.sMTt  the  jxjwrr  of 
eminent  domain  hy  thr  appropriation  of  private  profHTty  to  puMic 
use.  It  has  been  held  that  the  exercis*'  of  this  right  (which  is  hut  a 
delegation  of  the  sovereign  power  of  the  State),  dejx'nds  u]Mm  the 
sufficiency  and  legal  validity  of  the  certificate  of  in<'orfK>ration  and 
public  record  of  its  organization.  li.Ii.  Co.  v.  ,^ullii(inl,  o  Ohicj  St. 
27C;  Atkinson  v.  H.R.  Co.,  15  Ohio  St.  21. 

The  case  of  Raccoon  Hirer  \av.  Co.  v.  Eagle,  20  Ohio  St.  238,  is 
relied  upon  by  the  defendant  in  error.  It  was  an  action  to  recover 
upon  a  stock  suiiscription.  .\  i)l<'a  of  nul  ticl  ct>rjutratiim  was  inter- 
posed. The  plaintiff  claimed  to  i)e  organized  under  an  act  to  au- 
thorize the  incorporation  of  companies  "for  the  purixiso  of  improv- 
ing any  stream  of  water  .  .  .  declared  navigable  by  any  law  of  the 
State  of  Ohio."  On  the  trial  the  plaintiff  <»ffere<l  in  evidence  a  c»>rti- 
ficate  by  which  it  appeared  that  the  company  was  forme<l  for  the 
purpose  of  improving,  etc..  Big  Kacc(K)n  River.  I'nfortunately  there 
was  no  navigable  stream  in  Ohio  by  that  name.  No  other  testimony 
was  offenul.  There  was  no  pioof  of  user.  There  was  no  defect  in  the 
form  of  the  proceedings  to  incorporate,  but  an  attempt  to  organize 
and  incorporate  for  a  purpo.se  impossible  of  accomplishment.  There 
was  neither  a  He  jure  nor  de  facto  corporation.  Judgment  was  proj^erly 
rendered  for  def(»ndant. 

In  excluding  proof  of  what  was  actually  done  looking  to  the  incor- 
poration of  Society  I'erun,  and  of  the  subsequent  acts  of  user,  which 
was  offered  in  evidence,  there  was  error. 

Judgment  reversed. 

Note.  —  See,  accord,  Denver  v.  Mullen,  7  Colo.  345,  358  (lessees  of 
a  de  facto  corporation  protected);  Duggan  v.  Colorado  Co.,  11  Colo. 
113  (mortgagee  protected);  Georgia  Co.  v.  Mercantile  Co.,  94  Ga. 
30G  (mortgagee  protected);  Finch  v.  lllnian,  10.')  Mo.  255  (grantee 
maintained  ejectment);  Crcnshaiv  v.  I'lhnan,  113  Mo.  033;  Lusk  v. 
Riggs,  102  N.W.  Rep.  88  (Neb.);  Saunders  v.  Farmer,  62  N.H.  572 
(gi-antee  maintained  a  writ  of  entrjO ;  Hackcnsack  Co.  v.  DcKoy,  36 
N.J.  Eq.  548,  559  (mortgagee  protected). 

See  also  the  reasoning  of  the  court  in  Quinn  v.  Shield.'^,  62  la.  129, 
139;  Keene  v.  Van  Reuth,  48  Md.  184,  193;  Elizabclhtown  Co.  v. 
Green,  49  N.J.  Eq.  329,  337;  American  Co.  v.  Heidenhdmer,  80 
Tex.  344,  348;  Ricketson  v.  Galligan,  89  Wis.  394.    In  Fay  v.  Noble, 


SECT.  II.]  BREWER  V.  THE    STATE  645 

7  Cush.   (Mass.)  188,  the  plaintiff  did  not  ask  for  relief  on  this 
ground. 

It  is  submitted  that  the  courts  should  go  far  in  denying  collat- 
eral attack  for  the  benefit  of  innocent  third  persons  where  the  only 
question  is  whether  the  corporation  by  assumption  may  be  a  conduit 
of  title.  But  in  American  Trust  Co.  v.  Minnesota  Co.,  157  111.  641 
(no  law),  and  Bradley  v.  Reppell,  133  Mo.  545  (expiration  of  charter), 
collateral  attack  was  permitted.  See,  however,  Sherwood  v.  Alvis, 
83  Ala.  115,  118;  Brickley  v.  Edwards,  131  Ind.  3,  7;  Reynolds  v. 
Myers,  51  Vt.  444,  445;  Smith  v.  Sheeley,  12  Wall.  (U.S.)  358;  County 
of  Leavenworth  v.  Barnes,  94  U.S.  70. 


BREWER  V.   THE  STATE. 

7  Lea  (Tenn.)  682.     1881. 

TuRNEY,  J.,  delivered  the  opinion  of  the  court. 

Brewer  was  indicted  and  convicted  in  the  circuit  court  of  Han- 
cock county,  for  selling  intoxicating  liquors  within  four  miles  of 
"McKinney  High  School,"  an  incorporated  institution  of  learning. 

The  proof  shows  the  sale  to  have  been  in  the  town  of  Sneedville, 
within  four  hundred  yards  of  the  building  in  which  the  school  was 
taught. 

The  act  of  1875,  chap.  142,  entitled  ''An  act  to  provide  for  the 
organization  of  corporations,"  makes  provision  for  the  organization 
of  such  corporations  as  the  "McKinney  High  School."  The  charter 
of  said  institution  was  passed  in  the  form  required  by  law,  and  was 
acknowledged  and  registered  and  transmitted  to  the  Secretary  of 
State,  but  his  certificate  and  the  fac  simile  of  the  seal  of  the  State  had 
not  been  registered  in  the  county  at  the  time  of  the  alleged  offense. 

By  §  3  of  the  act  it  is  provided:  "The  said  instrument  registered 
as  aforesaid,  shall  be  transmitted  to  the  Secretary  of  State,  who  shall 
copy  the  same  in  a  book  to  be  kept  for  that  purpose,  with  the 
probates,  acknowledgments,  certificates  of  clerk,  register,  etc.  The 
Secretary  of  State  shall  then  certify  in  the  original  instrument,  that 
the  same  has  been  registered  in  his  office,  to  which  certificate  shall  be 
affixed  the  great  seal  of  the  State,  and  upon  the  aflnixing  of  the  great 
seal  of  the  State  to  said  certificate  or  said  original  instrument,  and  the 
registration  of  said  Secretary's  certificate  and  the  fac  simile  of  said 
seal  in  the  register's  office  where  said  instrument  was  originally  reg- 
istered, the  formation  of  the  association  as  a  body  politic  and  cor- 
porate is  hereby  declared  complete,  and  the  validity  of  the  same 
shall  not  be  in  any  legal  proceeding  collaterally  attacked." 

As  we  have  seen,  these  things  were  not  done  when  the  offense 
is  alleged  to  have  been  committed;  hence  the  "McKinney  High 


G4G  EAST    NORWAY    LAKE    CHURCH    t'.   FROISLIE.  [CHAP.  I. 

School"  was  not  then  an  incorporated  institution  in  the  sense  lA  the 
statute,  the  defendant  is  therefore  not  guilty  of  the  olTense  charged. 

It  is  urged  on  the  part  of  the  State  that  §  20  of  the  act  enacts 
"that  the  Secretary  of  State  sliall  have  pubhshed  and  lx)und  with 
the  acts  of  each  general  assembly  a  certified  list  of  all  corporations 
organized  under  this  or  any  suhseriuent  act  of  the  Legislature,  since 
tlie  last  publication,  giving  the  name  and  date  of  organization  of  each 
corporation,  and  such  publicatiijn  shall  bo  legal  evidence  of  the  exist- 
ence of  such  corporations."  That  this  section  having  been  comphed 
with,  the  offen.se  was  complete. 

The  oi)ject  of  this  section  was  convenience  simply.  The  legal 
evidence  created  by  it  is  only  prima  farif,  and  may  be,  as  it  was  in 
this  case,  rebutted. 

Reversed. 


EAST  NORWAY   LAKE  ClIL  K(  II   v.   FROISLIE. 

.37  Minn.  447.     lSs7. 

The  plaintiffs  in  this  action  are  "The  Trustees  of  the  East  Nor- 
way Lake  Norwegian  Evangelical  Lutheran  Church  of  Kandiyohi 
County,  Minnesota,"  and  "The  Trustees  of  the  West  Norway  Lake 
Norwegian  Evangelical  Lutheran  Church  of  Kandiyohi  County, 
Minnesota,"  and  they  brought  the  action  in  the  District  Court  for 
Kandiyohi  County,  to  recover  the  po.ssession  of  certain  real  property 
detained  by  the  defendant,  and  of  which  the  plaintiffs  allege  that 
they  are  the  joint  owners.  The  answer  denies  plaintiffs'  incorpora- 
tion and  ownership. 

Mitchell,  J.  .  .  .  Defendants,  however,  attack  plaintiffs'  title. 
They  claim  that  they  were  never  legally  organized,  and  hence  were 
incapable  of  taking  or  holding  property.  The  points  made  in  support 
of  this  contention  are  that  the  nieetings  at  which  the  organizations 
were  attempted  to  l)e  made  were  not  held  after  suflicient  notice; 
that  the  certificates  of  incorporation  were  not  properly  executed,  ac- 
knowledged, or  recorded,  etc.;  and  that  Sp.  Laws  1878,  chap.  193, 
purporting  to  legalize  the  organizations,  is  unconstitutional.  L'ndcr 
the  view  we  take  of  the  case  it  is  wholly  unnecess:iry  to  consider  any 
of  these  questions.  The  plaintiffs  are  at  least  corporations  dc  facto. 
Such  a  corporation,  at  least  where  there  is  a  law  under  which  a  cor- 
poration might  have  been  legally  formed  with  such  power,  is  capable 
of  taking  and  holding  property  as  grantee  as  well  as  a  corporation 
de  jure,  and  conveyances  to  it  are  valid  as  to  all  the  world,  except  the 
state  in  proceedings  in  quo  warranto,  or  other  direct  proceedings  to 
inquire  into  its  right  to  exercise  corporate  franchises.  And  in  an 
action  by  it  to  recover  such  property,  no  private  person  will  be  al- 
lowed to  inquire  collaterally  into  the  regularity  of  its  organization. 


SECT.  II.]  EAST    NORWAY    LAKE    CHURCH    V.  FROISLIE.  647 

This  rule  is  not  founded  upon  any  principle  of  estoppel,  as  is  some- 
times assumed,  but  upon  the  broader  principles  of  common  justice 
and  public  policy.  It  would  be  unjust  and  intolerable  if,  under  such 
circumstances,  every  interloper  and  intruder  were  allowed  thus  to 
take  advantage  of  every  informality  or  irregularity  of  organization. 

Judgment  affirmed. 

Note.  —  There  is  authority  that  if  a  conveyance  purports  to  run 
to  a  corporation,  and  there  is  no  corporation  de  jure,  the  deed  is  void, 
and  the  grantor  may  successfully  assert  title  to  the  land  or  chattels 
against  the  associates.  Harriman  v.  Southam,  16  Ind.  190  (overruled 
in  Snyder  v.  Stuaehaker,  19  Ind.  462) ;  Whiting  v.  Barton,  204  Mass, 
169;  Douthitt  v.  Stinson,  63  Mo.  268  (distinguished  in  Reinhard  v. 
Virginia  Co.,  107  Mo.  616,  and  White  Oak  Society  v.  Murray,  145 
Mo.  622);  White  v.  Campbell,  5  Humph.  (Tenn.)  38;  Russell  v. 
Topping,  5  McLean  (U.S.)  194,  202  (but  this  cannot  stand  after 
Smith  V.  Sheeley,  12  Wall.  (U.S.)  358). 

But  by  the  weight  of  authority  it  is  held  that  (at  least  if  there  is  a 
de  facto  corporation  in  the  restricted  sense  stated  in  the  note  to 
Boyce  v.  Towsontown  Station,  supra)  the  transferor  and  those  in 
privity  with  him  are  estopped  to  assert  title.  Cahall  v.  Citizens  Ass'n, 
61  Ala.  232;  Bates  v.  Wilson,  14  Colo.  140;  Thompson  v.  Candor,  60 
111.  244;  Baker  v.  Neff,  73  Ind.  68;  Williamson  v.  Kokomo  Ass'n,  89 
Ind.  389  (junior  mortgagee  cannot  defeat  prior  mortgage  to  de  facto 
corporation) ;  Sword  v.  Wickersham,  29  Kan.  746;  Reinhard  v.  Virginia 
Co.,  i07  Mo.  616;  Frost  v.  Frosthurg  Co.,  24  How.  (U.S.)  278.  And  in 
Otol  Ass'n  V.  Doman,  95  N.W.  (Neb.)  327,  a  de  facto  corporation  main- 
tained a  proceeding  against  its  grantor  for  reformation  of  the  deed. 

Where  the  associates  have  expended  money  for  the  transfer  or  on 
the  property  transferred,  they  will  at  least  be  protected  in  equity. 
See  Walker  Y.  Taylor,  252  111.  424,  430;  Johnson  y.  Northern  Trust  Co., 
265  111.  263;  Whipple  v.  Parker,  29  Mich.  369,  381. 

It  is  submitted  that  the  courts  should  go  further.  The  circum- 
stances frequently  are  such  that  to  vest  the  title  in  the  associates 
would  more  nearly  accord  with  the  intent  of  the  parties  than  to 
declare  the  title  to  be  still  in  the  transferor.  Under  such  circum- 
stances, if  the  transfer  fails,  as  a  transfer  to  a  corporation,  it  ought 
to  be  held  to  avail,  as  a  transfer  to  the  associates. 

In  Maugham  v.  Sharpe,  17  C.B.  (n.s.)  443,  chattels  were  mortgaged 
to  ''The  City  Investment  and  Advance  Company."  The  mortgagor 
believed  he  was  conveying  to  a  corporation  (per  Erle,  C.J.,  at  p. 
462) ;  but  there  was  no  such  corporation  authorized  by  the  State. 
The  court  held  that  the  title  passed  to  the  individuals  doing  business 
under  that  name.  Williams,  J.,  said  (p.  463):  "I  apprehend,  the 
meaning  of  the  grant  is  plain :  the  deed  purports  and  intends  to  con- 
vey the  goods  to  those  persons  who  use  the  style  and  firm  of  the  City 


648  EAST    NORWAY    LAKE    CHURCH    V.  FROISLIB.  [CHAP.   I. 

Investmont  and  Advance  Company.  Thoy  may  or  may  not  \>e  a 
corporation;  but  vvlien  it  is  ascertained  that  those  who  carry  on  busi- 
ness under  that  name  are  the  defendants,  the  deed  operates  to  con- 
vey the  property  to  them."  Jones  v.  Aspen  Co.,  21  Colo,  203,  271; 
New  Haven  Wire  Co.  Cases,  57  ('onn.  3o2,  394;  accord.  See  also 
Farnsivorth  v.  Drake,  1 1  Ind.  101 ;  Fay  v.  Noble,  7  Cush.  (Mass.)  188, 
194;  American  Silk  Works  v.  Salomon,  G  T.  &  C.  (N.Y.)  352. 

The  Enfi;lish  courts  would  follow  Maugham  v.  Sharpe,  if  the  sub- 
ject of  the  conveyance  was  realty.  Wray  v.  Wray,  (1905]  2  Ch.  349. 
In  Byam  v.  Bickford,  140  Ma.^s.  31,  Devexs,  J.,  said  (p.  32):  "Hut 
the  South  Chelmsford  Hall  Association  was  a  body  well  known,  all 
the  members  of  which  could  be  ascertained;  and,  as  it  could  not  take 
as  a  corporation,  the  deed  may  properly  be  construed  as  a  grant  of 
the  estate  to  those  who  were  properly  described  by  this  title.  .  .  . 
The  persons  associated  in  the  society  were  thus  tenants  in  common 
of  the  land  conveyed."  See  also  Harl  v.  Seymour,  1 17  III.  598,  010; 
Clifton  Heights  Co.  v.  Randcll,  82  la.  89. 

Where  a  transfer  of  property  has  been  made,  in  form,  to  a  cor- 
poration, and  the  title  is  in  the  associates,  as  many,  if  not  in  them  as 
a  corporation,  the  court  should  not,  it  is  submittetl,  permit  collateral 
attack  upon  the  due  incorporation  of  the  associates  by  a  person  who 
has  illegally  interfered  with  that  property. 

If  there  is  a  transfer  to  a  dc  facto  corporation  (in  the  restricted 
sense  stated  above),  the  authorities  permit  a  suit  by  the  de  facto 
corporation  against  any  person  who  illegally  interferes  with  that 
property.  In  accord  with  the  principal  case,  see  Chinirpiy  v.  Bishop 
of  Chicago,  41  111.  14S;  Cincinn(di  Co.  v.  Danville  Co.,  75  111.  113  (in- 
junction to  restrain  irreparable  injury  to  property) ;  Williams  v.  Citi- 
zens Co.,  130  Ind.  71  (same);  B(/./ra/o Co.  v.  Carj/,' 20  N.Y.  75,  77-78; 
Remington  Co.  v.  O'Doughcrty,  05  N.Y.  570  (conversion);  Persse 
Work^  V.  Willett,  1  Rob.  N.Y.  131  (trespa.ss  upon  personality);. 4 mer- 
ican  Silk  Works  v.  Salotnon,  0  T.  &  C.  (N.Y.)  352  (conversion); 
Elizabeth  Academy  v.  Lindsey,  0  Ired.  (N.C.)  470  (conversion); 
Searsbiirgh  Co.  v.  Cidler,  6  Vt.  315,  323  ("For  the  purpose  ...  of 
protecting  the  property  .  .  .  from  tort-feasors,  it  is  enough  to  show  a 
corporation  de  facto' ^);  Baltimore  Co.  v.  Baptist  Church,  137  U.S. 
568,  572  (nuisance.  A  rfc /ado  corporation  may  maintain  an  action 
"against  any  one  .  .  .  who  has  done  it  a  wrong");  American  Co.  v. 
New  York,  68  Fed.  227.  But  cf.  Proprietors  of  Southold  v.  Horton, 
6  Hill  (N.Y.)  501;  Augusta  Co.  v.  Vertrees,  4  Lea  (Tenn.)  75;  Slo- 
cum  v.  Providence  Co.,  10  R.I.  112,  114. 

Similarly,  an  association  de  facto  may  recover  for  use  and  occupa- 
tion of  land.  Philippine  Sugar  Co.  v.  United  States,  39  Ct.  CI.  225. 

Similarly,  a  de  facto  corporation  may  maintain  proceedings  to 
remove  a  cloud  on  the  title  of  land  conveyed  to  it.  Keyes  v.  Smith, 
67  N.J.L.  190. 


SECT.   11.]  INDIANAPOLIS    FURNACE    CO.  V.  HERKIMER.  649 

Similarly,  if  the  holder  of  a  note  indorses  it  to  a  de  facto  corpora- 
tion, such  corporation  may  enforce  the  note  against  the  parties 
thereto.  Cozzens  v.  Chicago  Co.,  166  111.  213;  Wilcox  v.  Toledo  Co., 
43  Mich.  584,  590;  Haas  v.  Bank  of  Commerce,  41  Neb.  754. 

It  is  submitted  that  collateral  attack  may  properly  under  some 
circumstances  be  denied  to  a  wrongdoer,  even  if  there  was  not  a 
de  facto  corporation  (in  the  restricted  sense  stated  above).  Cf. 
Winget  v.  Quincy  Building  Ass'n,  128  111.  67,  supra;  Stoutimore  v. 
Clark,  70  Mo.  471,  supra;  Wilder  Mfg.  Co.  v.  Corn  Products  Refining 
Co.,  236  U.S.  165,  supra. 

But  in  American.  Trust  Co.  v.  Minnesota  Co.,  157  111.  641,  the 
courts  announce  the  doctrine  that  no  suit  against  a  wrongdoer  will 
be  permitted  in  the  name  of  the  corporation,  if  there  was  no  law 
under  which  such  a  corporation  could  have  been  legally  formed. 
See  also  Johnson  v.  Northern  Trust  Co.,  265  111.  263. 


INDIANAPOLIS   FURNACE  CO.   v.  HERKIMER. 

46  lud.  142.     1874. 

Complaint  by  the  appellant  against  the  appellee  on  the  following 
paper  subscribed  by  the  defendant :  — 

"Articles  of  association  of  the  IndianapoHs  Furnace  and  Mining 
Company,  organized  for  the  purpose  of  operating  in  the  counties  of 
Marion  and  Clay,  in  the  State  of  Indiana. 

"  Article  First.  The  name  of  said  company  shall  be  the  Indianapolis 
Furnace  and  Mining  Company. 

"Article  Second.  The  capital  stock  of  said  company  shall  be  one 
hundred  thousand  dollars,  and  be  divided  into  shares  of  fifty  dollars 
each,  to  be  paid  for  in  such  amounts  and  at  such  times  as  may  be 
ordered  by  the  board  of  directors. 

"Article  Third.  The  stockholders  shall  elect  directors,  who  shall 
from  their  number  elect  a  president,  secretary,  and  treasurer,  who 
shall  hold  their  office  for  one  year  and  until  their  successors  are 
elected  and  qualified. 

"  Article  Fourth.  The  board  of  directors  shall  have  the  control  and 
management  of  the  business  of  the  company,  except  as  they  may 
appoint  some  one  or  more  persons  to  take  charge  of  the  same,  in 
which  case  the  record  of  the  action  of  the  board  in  appointing  them 
shall  be  evidence  of  their  authority  to  act  for  said  company. 

"Article  Fifth.  The  board  of  directors  shall  have  power  to  make 
assessments  on  stock,  collect  the  same,  issue  certificates  therefor, 
and  declare  and  pay  dividends,  which  shall  be  at  least  twice  a  year. 

"Article  Sixth.  All  the  expense  incurred  by  the  company  shall  be 
paid,  and  all  the  indebtedness  of  the  same  shall  hkewice  be  discharged 


650  INDIANAPOUS    FURNACE    CO.  V.  HERKIMER.  [CHAP.   I. 

before  any  dividends  shall  l)C  paid  to  the  stockholders,  unless  the 
directors  sliall  direct  otherwise. 

"Article  Seventh.  We,  the  undersigned,  hereby  subscribe  to  all 
the  foregoing  articles,  provisions,  conditions,  antl  8tii)ulationH,  and 
agree  to  the  t)rganization  of  a  conipany  as  therein  stated,  binding 
ourselves  to  take  and  pay  for  the  nuniIxT  of  shares  of  stock  set  oppo- 
site our  names  respectively,  and  pay  for  the  same  at  such  times  and 
in  such  amounts  as  the  board  of  directors  may  order  the  same  to  be 
paid  for,  without  relief  from  valuation  or  appraisement  laws. 

"Subscribers'  Names.  No.  of  Shares. 

"J.  D.  Herkimer,  by  D.  Root,  100." 

WoRDEN,  J.  The  articles  of  association  signed  by  the  defendant, 
including  his  subscription  for  stock,  were  very  clearly  mere  prelimi- 
nary articles,  contemplating  a  future  pi'rfection  of  the  organization 
as  a  corporation.  The  defendant's  contract  did  not  purport  to  Ix) 
with  an  existing  corporation,  but  with  one  to  Ix?  brought  into  exist- 
ence in  the  future.  The  averment  in  the  complaint  that  the  plaintiff 
was,  at  the  time  the  subscription  was  made,  an  existing  corporation, 
cannot  change  the  nature  and  legal  efTect  of  the  defendant's  con- 
tract. That  contract  was,  in  legal  effect,  that  the  defendant  would 
take  and  pay  for  the  stock  subscril)ed  for,  in  case  the  organization 
should  be  perfected  and  the  corporation  brought  into  legal  existence, 
and  not  otherwise.  Such  preliminary  sui^scriptions  seem  to  enure 
to  the  benefit  of  the  corporation  when  formed.  Heaston  v.  The  Cin- 
cinnati, etc.,  Railroad  Co.,  sitpra. 

But  unless  the  subsequent  steps,  necessary  to  bring  into  existence 
the  corporation,  were  taken,  there  was  no  corporatif)n  to  whose 
benefit  the  contract  coukl  enure,  and  the  defendant  could  not  bo 
liable;  and  it  should  have  been  averred  in  the  complaint  that  such 
steps  had  been  taken.  Wert  v.  The  Crawfnrd.si'iUr  and  Alnmn  Turn- 
pike Co.,  19  Ind.  242;  Williams  v.  The  Franklin  Tawmship  Academical 
Association,  20  Ind.  310. 

In  such  case,  the  estoppel  growing  out  of  a  contract  with  a  party 
as  an  existing  corporation  does  not  apply.  In  the  case  last  cited 
the  court  say: 

"This  rule  of  estoppel  does  not  apply  to  a  suit  brought  on  a  sub- 
scription made  with  a  view  to  the  organization  of  a  corporation,  and 
as  preliminary  thereto,  where  other  acts  are  required  by  the  law  as 
a  condition  precedent  to  the  exercise  of  corporate  powers." 

[The  court  held  that  the  conditions  precedent  to  the  formation  of  a 
corporation  had  not  been  performed,  and  that  therefore  the  defend- 
ant could  not  be  required  to  pay  for  the  stock  subscribed.] 

Note.  —  See,  accord,  Schloss  v.  Montgomery  Co.,  87  Ala.  411; 
Nelson  v.  Blakey,  47  Ind.  38;  Reed  v.  Richmond  Co.,  50  Ind.  342,  83 
Ind.  9;  Rikhoff  v.  Brown's  Co.,  68  Ind.  388;  Coppage  v.  Mutton,  124 


SECT.  II.]       NEW    YORK    CABLE    CO.  V.  MAYOR    OF    NEW    YORK.  651 

Ind.  401 ;  Allman  v.  Havana  Co.,  88  111.  521 ;  Richmond  Ass'n  v.  Clarke, 
61  Ms.  351;  Taggart  v.  Western  Co.,  24  Md.  563;  Katama  Land  Co. 
V.  Holley,  129  Mass.  540;  Columbia  Co.  v.  Dixon,  46  Minn.  463,  465; 
Capps  V.  Hastings  Co.,  40  Neb.  470;  Dorris  v.  Sweeney,  60  N.Y.  463; 
Greenbrier  Exposition  v.  Rodes,  37  W.Va.  738.  See  also  Mclntire  v. 
McLain  Ass'n,  40  Ind.  104;  ,S^owJe  v.  /^togg,  72  111.  397;  Mansfield  Co. 
V.  Drinker,  30  Mich.  124;  Crocfcer  v.  Crane,  21  Wend.  (N.Y.)  211; 
Wilmington  Co.  v.  Wright,  5  Jones  (N.C.)  304.  But  cj.  Willard  v. 
Church  of  Rockville  Centre,  66  111.  55. 


NEW  YORK  CABLE  CO.  v.  MAYOR,  etc.,  OF  NEW  YORK. 

104  N.Y.  1.     1887. 

Appeal  from  order  of  the  General  Term  of  the  Supreme  Court  in 
the  first  judicial  department,  made  December  1,  1884,  denying  a 
motion  on  the  part  of  the  petitioner,  the  New  York  Cable  Railway 
Company,  to  confirm  the  report  of  commissioners  appointed  by  the 
Supreme  Court  to  determine  whether  the  railways  described  in  the 
petition  of  said  company  ought  to  be  constructed  and  operated. 

The  report  of  the  commissioners  was  in  favor  of  the  petitioner. 
The  refusal  to  confirm  their  report  was  upon  the  ground  that  the 
petitioner  had  no  legal  right  to  construct  or  operate  a  railway. 

Rapallo,  J.  .  .  .  Third.  It  is  claimed  that  this  court  overlooked 
the  authorities  cited  on  the  appellants'  points,  to  the  effect  that  a 
defect  in  articles  of  association  or  in  the  affidavits  annexed  thereto, 
is  not  fatal  to  the  existence  of  a  corporation  or  its  faculty  to  acquire 
franchises,  but  that  the  State  alone  can  interpose  and  take  advantage 
of  such  defects. 

This  court  did  not  deem  it  necessary  to  comment  in  its  opinion 
upon  those  authorities,  for  the  simple  reason  that  we  did  not  deem 
them  applicable  to  the  case  at  bar.  In  order  to  sustain  proceedings 
by  which  a  body  claims  to  be  a  corporation,  and  as  such  empowered 
to  exercise  the  right  of  eminent  domain,  and  under  that  right  to  take 
the  property  of  a  citizen,  it  is  not  sufficient  that  it  be  a  corporation 
de  facto.  It  must  be  a  corporation  de  jure.  Where  it  is  sought  to  take 
the  property  of  an  individual  under  powers  granted  by  an  act  of  the 
legislature  to  a  corporation  to  be  formed  in  a  particular  manner 
the  constitutional  protection  of  the  rights  of  private  property  re- 
quires that  the  powers  granted  by  the  legislature  be  strictly  pursued, 
and  all  the  prescribed  conditions  be  performed.  Where  the  power  is 
conferred  upon  a  corporation,  duly  formed,  it  will  not  be  defeated 
simply  because  the  corporation  has  done  or  omitted  some  act  which 
may  be  a  cause  of  forfeiture  of  its  rights  and  franchises,  for  it  rests 
with  the  State  to  determine  whether  such  forfeiture  will  be  enforced. 


652    NEW  YORK  CABLE  CO.  V.   MAYOR  OF  NEW  YORK.   [CHAr.  I. 

Judicial  proceedings  are  necessary  to  enforce  such  a  forfeiture,  and 
it  may  Ix*  waived.  That  was  the  pt)int  to  which  the  opinion  in  the 
matter  of  the  lirooklyn,  etc.,  lidilrwid  Company  (72  X.V.  21')).  cited 
by  the  appellant  was  (Jirectcfl.  It  was  assumed  that  this  distinction 
was  well  understood,  and  a  considerable  portion  of  the  opinicjii  of  this 
court  in  the  present  case  was  devoted  to  showing  that  the  omissions 
and  defects  in  the  organization  of  the  company  were  failures  to 
comply  with  the  conditions  precedent  io  the  existence  of  the  jM'ti- 
tioner  as  a  corporation,  and  the  exerci.se  hv  it  of  the  right  of  eminent 
domain,  instead  of  being  mere  causes  of  forfeiture  of  rights  actjuired. 

Note.  — See,  accord,  Piper  v.  lihiHlcs,  80  Ind.  300  (a.s.sessment  by 
de  facto  turnpike  company);  Mclntire  v.  MclAiin  /l.s.s';j,  40  Ind.  104 
(assessment  by  de  facto  drainage  company);  Newton  Co.  v.  Nof singer, 
4.3  Ind.  506  (same);  Knight  v.  Flatrock  Co.,  45  Ind.  134  (jus.sessment 
of  tax  in  aid  of  de  facto  turnpike  company);  Williamaon  v.  Kolcomo 
Ass'n,  80  Ind.  3S0,  .302  (condemnation);  Hopkins  v.  Kan.sa.s  Citij  Co., 
79  Mo.  08  (condemnation);  St.  Joseph  Co.  v.  Shamf>aiigh,  IOC)  Mo. 
557,  566  (condemnation);  Hampton  v.  Clinton  Co.,  65  N.J.L.  158,  KK) 
("There  is  no  doubt  that. non-compliance  with  conditions  precedent 
•to  incorporation  will  defeat  a  condemnation");  .Mailer  of  i'nion  Co., 
112  N.Y.  61  (condemnation);  .Ua//rrn/AVu'  York  Co.,  35  Hun  (N.Y.) 
220  (same.  On  appeal,  00  N.Y.  12) ;  Matter  of  Broadway  Co.,  73  Ilun 
(N.Y.)  7,  13  (same);  Kinston  Co.  v.  Stroud,  132  N.C.  413  (same. 
Cf.  Wellington  Co.  v.  Cashie  Co.,  114  N.('.  600);  Atlantic  Co.  v. 
Sullirant,  5  Ohio  St.  276  (same);  Atkinson  v.  Marietta  Co.,  15  Ohio 
St.  21  (same);  Pmeers  v.  Hazelton  Co.,  .33  Ohio  St.  420  (.same.); 
Tulare  District  v.  Shepard,  185  U.S.  1,  17  (.same).  See  al.so  Niemeyer 
V.  Little  Rock  Ry.,  43  Ark.  Ill ;  Fales  v.  Whiting,  7  Pick.  (Ma.ss.)  225; 
Trenton  Co.  v.  United  Co.,  60  N..J.  Fa\.  .5(K);  Farnham  v.  Benedict,  107 
N.Y.  150;  New  Orleans  Co.  v.  Loui.<tiana  Co.,  11  Fed.  277. 

In  Sisters  of  Charity  v.  Morris  Railroad  Co.,  84  N.J.L.  310,  it  was 
held  that  when  in  proceedings  to  condemn  land  by  a  corporation, 
the  facts  as  to  due  incorporation  are  riuestioncd  or  the  inferences 
are  disputable,  the  proceedings  should  l)e  held  until  the  legality  of 
the  corporation  can  be  settled  once  for  all  upon  an  information  by 
the  Attorney-General. 

There  is  considerable  authority  contra  to  the  principal  case.  Central 
of  Georgia  Co.  v.  Union  Springs  Co.,  144  Ala.  630;  McAuley  v. 
Cohmibus  Co.,  83  111.  348;  Pe(rria  Co.  v.  Peoria  Co.,  105  111.  110; 
Chicago  Co.  v.  Chicago  Co.,  112  111.  580;  Morrison  v.  Forman,  177  III. 
427;  Eddleman  v.  Union  Co.,  217  111.  409,  414;  Detroit  Co.  v.  Camp- 
hell,  140  Mich.  384,  394  (rel\'ing  on  44  Mich.  .387,  and  81  Mich.  378, 
which  only  decided  that  the  question  could  not  be  litigated  in 
certiorari  proceedings);  Postal  Co.  v.  Oregon  Co.,  23  Utah,  474,  482. 
See  also  Oshorn  v.  People,  103  111.  224;  Ward  v.  Minnesota  Co.,  119 


SECT.   II.]  GUCKERT    V.  HACKE.  653 

111.  287;  Reisner  v.  Strong,  24  Kan.  410,  417;  Portland  Co.  v.  Bobh, 
88  Ky.  226;  Farnham  v.  Delaware  Co.,  61  Pa.  St.  265.  But  note  the 
explanation  of  the  Illinois  doctrine  made  in  Henry  v.  Ceniralia  Co., 
121  111.  264,  267. 


GUCKERT  V.   HACKE. 

159  Pa.  303.     1893. 

At  the  trial  before  Porter,  J.,  it  appeared  that  plaintiff  entered 
into  a  contract  to  make  some  alterations  and  repairs  in  a  building 
occupied  by  the  Hughes  &  Gawthrop  Co.  In  October,  1890,  a  certi- 
ficate of  incorporation  in  proper  form  was  presented  by  the  Hughes 
&  Gawthrop  Co.  to  the  governor,  asking  for  a  charter.  The  certifi- 
cate was  approved  and  letters  patent  were  duly  issued.  All  of  the 
details  required  by  the  act  of  April  29,  1874,  P.L.  77,  were  complied 
with,  excepting  only  the  recording  of  the  certificate  in  the  recorder's 
office  of  Allegheny  County.  The  certificate  was  not  recorded  until 
June,  1891.  In  the  mean  time,  plaintiff,  without  knowledge  of  the 
incorporation,  made  the  contract  with  Gawthrop,  upon  which  he 
sued.  Subsequently  he  accepted  a  note  for  the  debt,  signed  with  the 
corporate  name. 

Mr.  Chief  Justice  Sterrett.  It  is  essential  to  the  creation  of 
a  corporation  under  an  enabling  statute  that  all  material  provisions 
should  be  substantially  followed;  and,  exemption  from  personal  lia- 
bility being  one  of  the  chief  characteristics  distinguishing  corpora- 
tions from  partnerships  and  unincorporated  joint-stock  companies, 
it  follows  that  those  who  transact  business  upon  the  strength  of  an 
organization  which  is  materially  defective  are  individually  liable,  as 
partners,  to  those  with  whom  they  have  dealt.  What  provisions  are 
material  must  be  gathered  from  the  relation  of  each  to  the  purpose 
and  scope  of  the  act;  and  when,  therefore,  successive  steps  are  pre- 
scribed for  the  creation  of  corporations,  these  must  obviously  be  re- 
garded as  imperative.  Enabling  statutes,  on  the  principle  of  expressio 
unius  est  exclusio  alterius,  impliedly  prohibit  any  other  mode  of  doing 
the  act  which  they  authorize ;  they  must  be  strictly  construed :  Suth- 
erland on  Stat.  Construction,  §  454.  Hence  it  has  been  uniformly 
held  that  requirements  in  respect  of  filing  charters  are  imperative: 
Childs  V.  Smith,  55  Barb.  45;  Smith  v.  Warden,  86  Mo.  382;  Abbott 
V.  Smelting  Co.,  4  Neb.  416;  Beach  on  Corporations,  §  162. 

It  is  plain  even  from  a  cursory  reading  of  the  Act  of  April  29,  1874, 
P.L.  77,  that  recording  of  the  certificate  "in  the  office  for  the  record- 
ing of  deeds,  in  and  for  the  county  where  the  chief  operations  are  to 
be  carried  on,"  was  intended  to  be  made  one  of  the  conditions  prec- 
edent to  corporate  existence.  That  was  the  last  of  successive  steps 
required  to  be  taken,  and  the  right  to  begin  the  transaction  of  cor- 


C54  OUCKERT    V.  IIACKE.  [CHAP.  I. 

porate  busine&s  was  made  to  deponti  upon  the  taking  of  that  step. 
"From  thenceforth,"  the  act  expressly  declares,  the  suhsonlx-rs  and 
their  associates  and  successors  "shall  l>e  a  corjKjration  for  tln'  pur- 
poses and  upon  the  terms  named  in  the  said  charter."  One  of  the 
purposes  of  the  act  Ix'ing  exemption  from  jx-rsonal  liability  in  the 
transaction  of  business,  it  is  obviously  material  that  the  public  should 
have  notice,  and  notice  by  recortl  was  accordingly  pn»scrilH'<l.  Failure 
to  record  was  failure  to  comply  with  one  of  the  express  conditions  (jf 
incorporation,  and  cons<'fjuently  of  ex»>mption  from  liability. 

It  may  be  conceded  that  had  plaintiff  dealt  with  defendants  as  a 
corporation  he  would  have  l>een  estop[XMl  from  claiming  against  them 
in  any  other  capacity,  even  though  they  failed  to  record  their  charter: 
Spafir  V.  Hank,  1)4  Pa.  42\).  liut  it  is  not  pretended  that  he  had  any 
knowledge  of  the  existence  of  the  charter;  and  there  was  certainly 
nothing,  either  in  the  name  under  which  they  ditl  business  or  in  their 
conduct,  which  should  have  put  him  u|X)n  in(|uiry.  In  these  circum- 
stances he  was  amply  justifictl  in  dealing  with  them  as  partners.  It 
was  through  their  default  ^  not  his  —  that  they  were  so  treated ;  and 
it  would  Ix?  manifest  injustice  that  he  should  lose  his  admittedly 
honest  claim. 

In  the  absence  of  an  express  agreement  the  acceptance  of  a  note 
from  the  def(>ndants,  as  a  corporation,  after  plaintiff  had  jx^rformed 
his  part  of  the  contract,  cannot  ojx^rate  by  way  of  election  or  e.>^t op- 
pel.  The  relation  of  the  parties  wjus  fixtxl  by  their  status  when  the 
original  contract  was  made,  and  cannot  1m*  changed  by  gratuitous 
inference.  The  memlx'rs  of  the  alleged  cori)oration  were  the  defend- 
ants, and  were  not  injured  by  the  acceptance  of  the  note.  The  prin- 
ciple which  treats  the  acceptance  of  a  note  as  additional  security  to 
and  not  as  satisfaction  of  a  mechanic's  lien  (Jones  v.  Shawhan,  4  W. 
&  S.  2.')?)  is,  with  even  more  justice,  applicable  here. 

It  follows  from  what  has  been  said  that  the  instructions  com- 
plained of  are  erroneous. 

Judgment  reversed  and  a  venire  facias  de  novo  awarded. 

Note.  — See,  accord,  Christian  Co.  v.  Lumber  Co.,  121  Ala.  340; 
Field  V.  Cooks,  IG  La.  Ann.  153;  N.Y\  Bank  v.  Crowell,  177  Pa.  St. 
313;  Slocum  v.  Head,  105  Wis.  431;  C/ai/sen  v.  Head,  110  Wis.  405. 
See  also  Williams  v.  Hewitt,  47  La.  Ann.  1070,  1082;  Johnson  v.  Oker- 
strotn,  70  Minn.  303,  311;  Queen  City  Co.  v.  Crawford,  127  Mo.  356, 
363;  Vanhom  v.  Corcoran,  127  Pa.  St.  255,  268  (cf.  Alleghemj  Bank  v. 
Bailey,  147  Pa.  St.  Ill);  Mitchell  v.  Jensen,  29  Utah,  346,  360. 

As  to  the  liability  of  the  associates  for  a  tort  committed  by  an 
agent,  see  the  article  in  20  H.L.R.  456,  and  particularly  note  30  on 
p.  474. 


SECT.  I.]  BRITISH   SOUTH   AFRICA    CO.  V.  DE    BEERS.  655 


CHAPTER  II. 

COLLATERAL  ATTACK  UPON  THE  POWERS  OF  A 

CORPORATION.    HEREIN  OF  THE  EXPRESSION 

"ULTRA  VIRES." 


SECTION   L 
THE  ENGLISH  AUTHORITIES. 


BRITISH  SOUTH  AFRICA  CO.  v.  DE  BEERS 
CONSOLIDATED  MINES,  LTD. 

[1910]  1  Ch.  354. 

'  The  plaintiff  was  incorporated  by  Royal  charter  dated  October 
29,  1889,  for  the  purpose  of  carrying  on  certain  operations  in  South 
Africa.  The  powers  granted  it  were  extensive,  but  the  charter  con- 
tained the  following:  "Nothing  in  this  our  charter  shall  be  deemed 
to  authorize  the  company  to  set  up  or  grant  any  monopoly  of  trade." 
The  plaintiff  asked  the  court  to  declare  that  a  certain  exclusive 
license  granted  (in  form)  by  it  to  the  defendant  was  void  as  being  a 
monopoly,  and  therefore  ultra  vires  the  plaintiff.  The  court  was  of 
opinion  that  the  exclusive  license  did  not  amount  to  a  monopoly,  but 
gave  the  following  opinion  as  to  the  effect  of  an  ultra  vires  act  by  the 
plaintiff. 

SwiNFEN  Eady,  J.  It  must  not  be  assumed  that,  if  a  chartered 
company  does  some  act  which  it  is  forbidden  to  do  by  its  charter, 
that  act  is  necessarily  void  as  ultra  vires. 

In  Riche  v.  Ashhury  Railway  Carriage  and  Iron  Co.,  L.R.  9  Ex.  224, 
all  the  judges  in  the  Exchequer  Chamber  agreed  that  a  corporation 
at  common  law  has  as  an  incident  given  by  law  the  same  power 
to  contract  and  subject  to  the  same'restrictions  that  a  natural  per- 
son has,  although  the  court  was  equally  divided  upon  the  question 
whether  the  acts  which  were  ultra  vires  a  statutory  corporation 
were  capable  of  ratification. 

Blackburn,  J.,  in  delivering  the  judgment  of  himself,  Brett  and 
Grove,  JJ.,  which  so  far  as  regards  a  statutory  corporation  was 
overruled  by  the  House  of  Lords,  referred  to  Sutto7i's  Hospital  Case, 
10  Rep.  la,  30b,  and  said  (L.R.  9  Ex.  263) :  "This  seems  to  me  an  ex- 
press authority  that  at  common  law  it  is  an  incident  to  a  corporation 


056  BRITISH    SOUTH    AFRICA    CO.  V.  DE    BEERS.  (CHAP.  II. 

to  use  its  common  seal  for  the  piiri)ose  of  hintling  itself  to  anything  to 
which  a  natural  [)eison  could  hind  himself,  and  to  deal  with  its  prop- 
erty as  a  natural  person  misht  deal  with  his  own.  And  further,  that 
an  attempt  to  forbid  this  on  the  i)art  of  the  Kin^,  even  by  express  neg- 
ative words,  does  not  bind  at  law.  Nor  am  I  aware  of  any  authority 
in  conflict  with  this  case.  If  there  are  conditions  contained  in  the 
charter  that  the  corporation  shall  not  do  particular  things,  and  these 
thinfi;sare  nevertheless  doni-,  it  gives  ground  for  a  proceeding  by  so. 
fa.  in  the  name  of  the  Crown  to  repeal  the  letters  patent  creating  the 
corporation:  sec  Eastern  Archipelago  Co.  v.  Reg.,  i  1853)  2  E.  tk  B.  S5(). 
But  if  the  Crown  take  no  such  steps,  it  does  not,  as  I  conceive,  lie  in  the 
mouth  either  of  the  corporation,  or  of  the  person  who  has  contracted 
with  it,  to  .say  that  the  contract  into  which  they  have  entered  was 
void  as  beyond  the  capacity  of  the  corporation.  I  am  aware  of  no 
decision  by  which  a  cor|K)ration  at  common  law  hius  \wvn  permitted 
to  do  so.  I  take  it  that  the  true  rule  of  law  is,  that  a  cori)oration  at 
common  law  has,  as  an  incident  given  by  law,  the  same  |)()wer  to 
contract,  and  sul)ject  to  the  same  restrictions,  that  a  natural  person 
has." 

AuniinALD,  J.,  in  delivering  the  judgment  of  him.self,  Keating 
and  (^lAiN,  JJ.,  whose  o[)ini()n  as  regards  a  statutory  corporation 
ultimately  prevailed  in  the  House  of  I^irds,  said  (L.R.  *.)  Ex.  202): 
"I  admit  that  at  common  law  (lus  was  resolved  in  the  ca«e  of  Sutton's 
Hospital,  10  Rep.  la,  30b),  when  a  corporation  is  duly  created  all 
other  incidents  are  tacite  annexed,  such  as  ability  to  purchase  and 
alien,  to  sue  and  be  sued,  and  to  us(^  what  seal  they  will;  and  that 
even  a  clause  in  their  charter  restraining  them  from  aliening  or 
demising  but  in  a  certain  form,  though  an  ordinance  testifying  the 
desire  of  the  Crown,  is  to  be  deemed  but  a  precept  and  not  binding 
in  law,  so  that  a  corporation  thus  constituted  acquires  rights  of 
contracting  as  extensive  a.s  those  of  a  natural  person." 

In  Baroness  Wenlock  v.  River  Dee  Co.,  36  Ch.D.  675,  n.,  685,  n., 
BowEN,  L.J.  says:  "At  common  law  a  corporation  created  by  the 
King's  charter  has,  prima  facie,  and  has  been  known  to  have  ever 
since  Sutton's  Hospital  Case,  10  Rep.  la,  301),  the  power  to  do  with 
its  property  all  such  acts  as  an  ordinary  person  can  do,  and  to  bind 
itself  to  such  contracts  as  an  ordinary  person  can  bind  himself  to; 
and  even  if  by  the  charter  creating  the  corporation  the  King  imposes 
some  direction  which  would  have  the  effect  of  limiting  the  natural 
capacity  of  the  body  of  which  he  is  speaking,  the  common  law  has 
always  held  that  the  direction  of  the  King  might  be  enforced  through 
the  Attorney-General;  but  although  it  might  contain  an  essential 
part  of  the  so-called  bargain  between  the  Crown  and  the  corpora- 
tion, that  did  not  at  law  destroy  the  legal  power  of  the  body  which 
the  King  had  created." 

At  p.  11  of  the  9th  edition  of  his  work  on  the  Companies  Acts 


SECT.  I.]       ASHBURY    RY.  CARRIAGE    AND    IRON    CO.  V.  RICHE.  657 

Buckley,  L.J.,  states  the  law  thus:  ''At  common  law  a  corporation 
created  by  charter  can  by  its  common  seal  bind  itself  to  anything 
to  which  a  natural  person  could  bind  himself,  and  can  deal  with 
its  property  as  a  natural  person  might  deal  with  his  own.  So  that 
not  only  can  the  chartered  company  bind  itself  by  acts  as  to  which 
no  power  is  affirmatively  given  by  the  charter,  but  even  if  the 
charter  by  express  negative  words  forbid  any  particular  act,  the 
corporation  can  nevertheless  at  common  law  do  the  act,  and  if  it 
does  it,  is  bound  thereby,  and  the  result  is  only  that  ground  is  given 
for  a  proceeding  by  scire  facias  in  the  name  of  the  Crown,  repealing 
the  charter." 

If  it  were  necessary  to  determine  the  question,  I  should  decide 
that  the  objection  raised  by  the  plaintiff  company  that  the  agree- 
ments are  not  binding  because  they  are  ultra  vires  wholly  fails. 


ASHBURY   RAILWAY  CARRIAGE  AND   IRON  CO.   v. 

RICHE. 

L.R.  7  H.L.  653.     1875. 

A  COMPANY  called  "the  Ashbury  Railway  Carriage  and  Iron  Co." 
was  incorporated  under  the  Companies  Act,  1862.  (25  &  26  Vict, 
chap.  89.) 

The  memorandum  of  association  of  the  said  company  contained 
the  following:  "The  objects  for  which  the  company  is  established  are 
to  make  and  sell,  or  lend  on  hire,  railway-carriages  and  waggons, 
and  all  kinds  of  railway  plant,  fittings,  machinery,  and  rolling-stock; 
to  carry  on  the  business  of  mechanical  engineers  and  general  con- 
tractors; to  purchase  and  sell,  as  merchants,  timber,  coal,  metals,  or 
other  materials;  and  to  buy  and  sell  any  such  materials  on  commis- 
sion, or  as  agents." 

The  directors  of  the  Ashbury  Company  entered  into  an  arrange- 
ment, in  behalf  of  the  company,  under  which  the  Messrs.  Riche  were 
to  construct  a  railway  in  Belgium,  and  the  Ashbury  Company  was 
to  supply  the  funds  for  the  payment  of  this  construction  work. 

The  plaintiffs  claimed  that  this  contract  had  been  ratified  by  the 
stockholders  of  the  Ashbury  Company. 

Later,  the  Ashbury  Company  repudiated  this  contract  as  being 
ultra  vires.  Messrs.  Riche  brought  this  action  for  damages  for  breach 
of  contract. 

Lord  Cairns,  Lord  Chancellor.  [After  holding  that  the  contract  in 
question  was  ultra  vires  of  the  Ashbury  Company.] 

Those  being  the  results  of  the  documents  to  which  I  have  referred, 
I  will  ask  your  Lordships  now  to  consider  the  effect  of  the  act  of 
Parliament  —  the  Joint  Stock  Companies  Act  of  1862  —  on  this 


658         ASHBURY   RY.  CARRIAGE    AND    IRON    CO.  V.  RICHE.       [CHAP.  II. 

state  of  things.  And  here,  my  Lords,  I  eannot  but  regret  that  by 
the  two  judges  in  the  Court  of  Exciie(iuer  the  accurate  and  j)recisc 
bearing  of  that  act  of  Parhanient  upon  the  present  case  appears  to 
me  to  have  been  entirely  overlooked  or  misapprehended;  and  that  in 
the  Court  of  Exchecjuer  Chamber,  speaking  of  the  opinion  of  those 
learned  judges  who  thought  that  the  decision  of  the  Court  of  Ex- 
chequer should  be  maintained,  the  weight  which  was  given  to  the 
provisions  of  this  act  of  Parliament  appears  to  me  to  have  entirely 
fallen  short  of  that  which  ought  to  have  been  given  to  it.  Your 
Lordships  are  well  aware  that  this  is  the  act  which  put  upon  its 
present  permanent  footing  the  regulation  of  joint-stock  companies, 
and  more  especially  of  those  joint-stock  companies  which  were  to  be 
authorized  to  trade  with  a  limit  to  their  liability. 

The  provisions  under  which  that  system  of  limiting  liability  was 
inaugurated,  were  provisions  not  merely,  perhaps  I  might  sa}'  not 
mainly,  for  the  benefit  of  the  shareholiiers  for  the  time  being  in 
the  company,  but  were  enactments  intended  also  to  provide  for  the 
interests  of  two  other  very  important  bodies;  in  the  first  place, 
those  who  might  become  shareholders  in  succession  to  the  persons 
who  were  shareholders  for  the  time  IxMng;  and  secondly,  the  out- 
side public,  and  more  particularly  those  who  might  be  creditors  of 
companies  of  this  kind.  And  I  will  ask  your  Lordshiiw  to  observe, 
as  I  refer  to  some  of  the  clauses,  the  marked  and  entire  difTerencc 
there  is  between  the  two  documents  which  form  the  title  deeds  of 
companies  of  this  description  —  I  mean  the  Memorandum  of  Asso- 
ciation on  the  one  hand,  and  the  Articles  of  Association  on  the  other 
hand.  With  regard  to  the  memorandum  of  association,  your  Lord- 
ships will  find,  as  has  often  already  been  pointed  out,  although  it 
appears  somewhat  to  have  been  overlooked  in  the  present  case,  that 
that  is,  as  it  were,  the  charter,  and  defines  the  limitation  of  the 
powers  of  a  company  to  be  established  under  the  act.  With  regard 
to  the  articles  of  association,  those  articles  play  a  part  su])sidiary 
to  the  memorandum  of  association.  They  accept  the  memorandum 
of  association  as  the  charter  of  incorporation  of  the  company,  and 
so  accepting  it,  the  articles  proceed  to  define  the  duties,  the  rights 
and  the  jiowers  of  the  governing  body  as  jjetween  themselves  and 
the  company  at  large,  and  the  mode  and  form  in  which  the  business 
of  the  company  is  to  l)e  carried  on,  and  the  mode  and  form  in  which 
changes  in  the  internal  regulations  of  the  company  may  from  time 
to  time  be  made.  With  regard,  therefore,  to  the  memorandum  of 
association,  if  you  find  anything  which  goes  beyond  that  memoran- 
dum, or  is  not  warranted  by  it,  the  question  will  arise  whether  that 
which  is  so  done  is  ultra  vires,  not  only  of  the  directors  of  the  com- 
pany but  of  the  company  itself.  With  regard  to  the  articles  of  asso- 
ciation, if  you  find  an\ihing  which,  still  keeping  within  the  memo- 
randum of  association,  is  a  violation  of  the  articles  of  association,  or 


SECT.  I.]      ASHBURY   RY.  CARRIAGE    AND    IRON    CO.  V.  RICHE.  659 

in  excess  of  them,  the  question  will  arise  whether  that  is  anything 
more  than  an  act  extra  vires  the  directors,  but  intra  vires  the  com- 
pany. 

The  clauses  of  the  statute  to  which  it  is  necessary  to  refer  are 
four:  in  the  first  place,  the  sixth  clause.  That  provides  that  ''Any 
seven  or  more  persons  associated  for  any  lawful  purpose  may,  by 
subscribing  their  names  to  a  memorandum  of  association,  and  other- 
wise complying  with  the  requisitions  of  this  Act  in  respect  of  regis- 
tration, form  an  incorporated  company,  with  or  without  limited 
liabilit}'."  My  Lords,  this  is  the  first  section  which  speaks  of  the 
incorporation  of  the  company;  but  your  Lordships  will  observe  that 
it  does  not  speak  of  that  incorporation  as  the  creation  of  a  corpora- 
tion with  inherent  common  law  rights,  such  rights  as  are  by  common 
law  possessed  by  every  corporation,  and  without  any  other  limit 
than  would  by  common  law  be  assigned  to  them,  but  it  speaks  of 
the  company  being  incorporated  with  reference  to  a  memorandum 
of  association;  and  you  are  referred  therebj''  to  the  provisions  which 
subsequently  are  to  be  found  upon  the  subject  of  that  memorandum 
of  association. 

The  next  clause  which  is  material  is  the  eighth:  "Where  a  com- 
pany is  formed  on  the  principle  of  having  the  liability  of  its  members 
limited  to  the  amount  unpaid  on  their  shares,  hereinafter  referred 
to  as  a  company  limited  by  shares,  the  Memorandum  of  Association 
shall  contain  the  following  things"  (I  pass  over  the  first  and  second, 
and  I  come  to  the  third  item  which  is  to  be  specified) :  ''The  objects 
for  which  the  proposed  company  is  to  be  established."  That  is, 
therefore,  the  memorandum  which  the  persons  are  to  sign  as  a  pre- 
liminary to  the  incorporation  of  the  company.  They  are  to  state 
"the  objects  for  which  the  proposed  company  is  to  be  established"; 
and  the  existence,  the  coming  into  existence,  of  the  company  is  to 
be  an  existence,  and  to  be  a  coming  into  existence  for  those  objects 
and  for  those  objects  alone. 

Then,  my  Lords,  the  eleventh  section  provides:  "The  memoran- 
dum of  association  shall  bear  the  same  stamp  as  if  it  were  a  deed, 
and  shall  be  signed  by  each  subscriber  in  the  presence  of,  and  be 
attested  by,  one  witness  at  the  least,  and  that  attestation  shall  be 
a  sufficient  attestation  in  Scotland,  as  well  as  in  England  and  Ireland. 
It  shall,  when  registered,  bind  the  company  and  the  members 
thereof  to  the  same  extent  as  if  each  member  had  subscribed  his 
name  and  affixed  his  seal  thereto,  and  there  were  in  the  memoran- 
dum contained,  on  the  part  of  himself,  his  heirs,  executors,  and 
administrators,  a  covenant  to  observe  all  the  conditions  of  such 
memorandum,  subject  to  the  provisions  of  this  act."  Your  Lord- 
ships will  observe,  therefore,  that  it  is  to  be  a  covenant  in  which 
every  member  of  the  company  is  to  covenant  that  he  will  observe 
the  conditions  of  the  memorandum,  one  of  which  is  that  the  objects 


♦iCO         AHHDIRY    RV.  CARRIAGE    AND    IRON    CO.  V.  BICUE.       [cilAP.  IL 

for  which  the  foiupany  i-s  e«tahn.shtil  arc  the  object*  inentiorKxJ  in 
the  meiii(jmii(kim,  aiul  that  he  not  only  will  ol«4'r\e  tluit,  hut  will 
ohs4_'rve  it  suhject  to  the  provi.sion.s  of  this  aet.    Well,  hiit  the  very 
next  provision  of  the  act  contained  in  the  twelfth  Hcction  i^  thin: 
"Any  company  limited  hy  shares  may  so  far  motlify  the  coiulitioas 
containcfl  in  its  memorandum  of  association,  if  authorif***!  to  «|o  so 
by  its  regulations  as  originally  framed,  or  Jis  altereil  by  >;  .tlu- 

tion  in  manner  hereinafter  mentioned,  as  to  increase  ii.   .......il  by 

the  issue  of  new  shares  of  such  amount  as  it  thinks  expedient,  or  to 
consolidate  and  ilivide  its  cai)itid  into  shares  of  '  "      , 

its  existing  shares,  or  to  convert  its  paid-up  yi 
save  as  aforesaid,  and  siive  as  is  hen-inafter  pnjvide*!  in  the  case  of 
a  change  of  name,  no  alteration  shall  l>e  nuwle  by  any  company  in 
the  conditions  contained  in  its  memorandum  of  iiss^K-iation."    The 
covenant,  thereft)re,  is  not  njen'ly  that  c  will  oliservc 

the  conditi<ms  u|K)n  which  the  company  i—  :.  but  that  no 

change  shall  Ix?  made  in  tho«<e  conditions;  and  if  there  is  a  covenant 
that  no  change  shall  U*  ma*le  in  the  o'       *    f  r  which  the  ». 
is  estabiisht'd,  I  apprchtrnl  that   that  .      within  it  th« 

nu'iit  that  no  object  shall  U'  purstunl  by  the  com|)any,  or  attempted 
to  Ik'  attaintnl  by  the  company  in  practii***,  except  an  object  which  is 
mentioned  in  the  memorandum  of  association. 

Now,  my  Lonls.  if  that  is  so  —  if  that  is  the  condition  u\mh\ 
which  the  corporation  is  established  —  if  that  is  the  purix»se  for 
which  the  corporation  is  established  —  it  is  a  nuHle  of  incorporation 
which  contains  in  it  lH)th  that  which  is  aflinnative  and  that  which 
is  negative.  It  states  alHrmatively  the  ambit  ami  extent  of  vitality 
an<l  |)ower  which  by  law  are  given  to  the  corjxiration,  and  it  states, 
if  it  is  necessary  so  to  state,  negatively,  that  nothing  shall  l>e  done 
beyond  that  ambit,  and  that  no  attempt  shall  l)e  made  to  u.se  the 
cori>orate  life  for  any  other  purfKistMhan  that   .  '     '  ''ie<|. 

Now,  my  Lords,  with  n^gard  to  the  articles  «.;  -  ne 

how  completely  ditTerrnt  the  character  of  the  legislation  is.  The 
fourtwnth  .section  deals  with  tluKse  articles:  "The  memorandum  of 
a.ssociation  may,  in  the  ciisc  of  a  company  limite<l  by  shans?,  and 
shall,  in  theca.stM>f  a  company  limit<'<l  '  ritie.  rir  unlimited,  U* 

accompanied,  when  registered,  by  artiri.  ■  xiation,  signeil  by  the 

subscril)ers  to  the  memorandum  of  association,  and  prescribing  such 
regulations  for  the  companv  a.s  the  subs<Tilx*rs  to  the  memorandum 
of  association  tleem  ex|XHlicnt."  They  are  to  \)o  the  masters  of  the 
resulations  which  (always  keeping  within  the  limit  allowed  by  law) 
they  may  tleem  exjx'dient  for  the  internal  regulation  of  the  company. 
"The  articles  shall  be  expressed  in  separate  paragraphs,  numl)ere<l 
arithmetically.  Thoy  may  adopt  also  any  of  the  provisions  contained 
in  the  table  marked  A.  in  the  first  schedule  hereto."  I  need  not  read 
the  remainder  of  that  section. 


SECT.  I.]       ASHBURY    RY.  CARRIAGE    AND    IRON    CO.  V.  RICHE.  661 

But  your  Lordships  must  take,  in  connection  with  that,  the 
fiftieth  section  of  the  act.   That  provides  that  ''subject  to  the  pro- 
visions of  this  act,  and  to  the  conditions  contained  m  the  memoran- 
dum of  association,  any  company  formed  under  tins  act  may    m 
general  meeting,  from  time  to  time,  by  passing  a  special  resolution 
in  manner  hereinafter  mentioned,  alter  all  or  any  of  the  regulations 
of  the  company  contained  in  the  articles  of  association,  or  m  the 
table  marked  A.  in  the  first  schedule,  where  such  table  is  applicable 
to  the  company,  or  make  new  regulations  to  the  exclusion  of  or  m 
addition  to,  all  or  any  of  the  regulations  of  the  company.     Of  the 
internal  regulations  of  the  company  the  members  of  it  are  absolute 
masters,  and,  provided  they  pursue  the  course  marked  out  in  the 
act,  that  is  to  say,  holding  a  general  meeting  and  obtaimng  the  con- 
sent of  the  shareholders,  they  may  alter  those  regulations  from  time 
to  time;  but  all  must  be  done  in  the  way  of  alteration  subject  to  the 
conditions  contained  in  the  memorandum  of  association    That  is  to 
override  and  overrule  any  provisions  of  the  articles  which  may  be  at 
variance  with  it.  The  memorandum  of  association  is,  as  it  were,  the 
area  beyond  which  the  action  of  the  company  cannot  go;  inside  that 
area  the  shareholders  may  make  such  regulations  for  their  own 
government  as  they  think  fit. 

My  Lords,  that  reference  to  the  act  will  enable  me  to  dispose  ot 
a  provision  in  the  articles  of  association  in  the  present  case  which 
was  hardly  dwelt  upon  in  argument,  but  which  I  refer  to  in  order 
that  it  may  not  be  supposed  to  have  been  overlooked  It  appears 
that  there  has  come  into  the  articles  of  association  of  this  company 
one  which  is  in  these  words:  "An  extension  of  the  company  s  busi- 
ness beyond  or  for  other  than  the  objects  or  purposes  expressed  or 
implied  in  the  memorandum  of  association  shall  take  place  only  in 
pursuance  of  a  special  resolution."  In  point  of  fact,  no  resolution 
for  the  extension  of  the  business  of  the  company  was  m  this  case 
come  to;  but  even  if  it  had  been  come  to,  it  would  have  been  entirely 
inept  and  inefficacious.  There  was,  in  this  fourth  article,  an  attempt 
to  do  the  very  thing  which,  by  the  act  of  Parliament,  was  prohibited 
to  be  done  —  to  claim  and  arrogate  to  the  company  a  power  under 
the  guise  of  internal  regulation  to  go  beyond  the  objects  or  purposes 
expressed  or  implied  in  the  memorandum. 

Now,  my  Lords,  bearing  in  mind  the  difference  which  I  have  just 
taken  the  liberty  of  pointing  out  to  yom'  Lordships  between  the 
memorandum  and  the  articles,  we  arrive  at  once  at  all  which  appears 
to  me  to  be  necessary  for  the  purpose  of  deciding  this  case,  i  have 
used  the  expressions  extra  vires  and  intra  vires.  I  prefer  either  ex- 
pression very  much  to  one  which  occasionally  has  been  used  m  the 
judgments  in  the  present  case,  and  has  also  been  used  m  other  cases, 
the  expression  "illegality."  +     i    i 

In  a  case  such  as  that  which  your  Lordships  have  now  to  deal 


G62        AftHBURY    KY.  CAIUWAOE    AKD   WON    CO.  V.  RICHE.       [CHAP.  IL 

with,  it  is  not  a  question  whether  the  contract  suecl  ujxin  involves 
that  which  is  malum  pruhibHum  or  malum  in  se,  or  la  a  contract  con- 
trary to  puhHc  pohcy,  and  illc'Kal  in  itiiclf.  I  aJ«uino  the  contract  in 
itself  to  l)e  p<'rfe<tly  le^al,  to  have  nothing  in  it  ohrioxious  to  the 
doctrine  involvt-d  in  the  exjJH'ssions  which  I  have  umiI.  The  (|ueH- 
tion  is  not  as  to  the  legality  of  the  contract;  the  (|uet<tion  is  as  to  the 
cf)inix*tency  and  fxjwer  of  the  company  to  make  the  contract.  Now, 
I  :ini  clearly  of  opinion  that  this  contract  was  entirely,  as  I  have  said, 
iK'Vond  the  ohjects  in  the  memorandum  f>f  aAsociatinn.  If  so,  it 
was  thereby  placed  Ix'yond  the  jxjwers  of  the  company  to  make  the 
contract.  If  so,  my  Lords,  it  is  not  a  question  whetlier  the  contract 
ever  w:us  ratified  or  wius  not  ratifittl.  If  it  wrus  a  contract  voi<l  at 
its  Ix'ginning,  it  wjus  void  U-eause  the  company  could  not  make  the 
contract.  If  every  shareholder  of  the  company  had  Iknmi  in  the  rtK>m, 
and  every  shareholiler  of  the  com[)any  had  said,  "That  is  a  contract 
which  we  desire  to  make,  which  we  authorize  the  directors  to  make, 
to  which  we  .sanction  the  placing  the  seal  of  the  ••ompany,"  the  case 
would  not  have  stcHxl  in  any  different  |x>sition  from  that  in  which 
it  stands  now.  The  shareholders  would  thereby,  by  unanimous  con- 
sent, have  been  attempting  to  do  the  vcr>'  thing  which,  by  the  act 
of  Parliament,  they  were  prohibited  from  <loing. 

But,  my  Lords,  if  the  shareholders  of  this  company  could  not 
ab  ante  have  authorize<l  a  contract  of  this  kind  to  Ix'  made,  how 
could  they  subsequently  .sanction  the  contract  after  it  had,  in  point 
of  fact,  been  made.  I  endeavoured  to  follow  as  accurat«'ly  Jis  I  could 
the  verj'  able  argument  of  Mr.  Benjamin  at  your  Ixmlshiiw'  Bar 
on  this  point;  but  it  appeared  to  me  that  this  was  a  diflicully  with 
which  he  wjus  entin^ly  unable  to  grapple.  He  endeavoure<l  to  con- 
t(>nd  that  when  the  shareholders  had  found  that  .something  had 
been  done  by  the  directors  which  ought  not  to  have  been  done,  they 
might  Ix  authori/etl  to  make  the  U'st  they  could  of  a  difliculty  into 
which  they  had  thus  been  thrown,  and  therefrom  might  be  deemed 
to  po.s.se.ss  power  to  .sanction  the  contract  Ix'ing  proceeded  with.  My 
Lords,  I  am  unable  to  adopt  that  suggestion.  It  ap|Mai-s  to  me  that 
it  would  be  perfectly  fatal  to  the  whole  scheme  of  legislation  to  which 
I  have  referred,  if  you  were  to  hold  that,  in  the  first  place,  directors 
might  do  that  which  even  the  whole  company  could  not  do,  and  that 
then,  the  shareholders  finding  out  what  had  Ix'en  done,  coulil  sanction, 
subsequently,  what  they  could  not  antecedently  have  authorized. 

My  Lords,  if  this  be  the  proper  view  of  the  act  of  Parliament, 
it  reconciles,  as  it  appears  to  mc,  the  opinion  of  all  the  judges  of  the 
Court  of  Exchequer  Chamlx}r;  lx?cau.se  I  find  Mr.  Justice  Black- 
burn, whose  judgment  was  concurred  in  l)y  two  other  judges  who 
took  the  same  view,  cxpres.sing  himself  thus  (Law  Rep.  9  Ex.  262): 
"I  do  not  entertain  any  doubt  that  if,  on  the  true  construction  of  a 
statute  creating  a  corporation  it  appears  to  be  the  intention  of  the 


SECT.  I.]       ASHBURY   RY.  CARRIAGE    AND    IRON    CO.  V.  RICHE.  663 

legislature,  expressed  or  implied,  that  the  corporation  shall  not  enter 
into  a  particular  contract,  every  court,  whether  of  law  or  equity, 
is  bound  to  treat  a  contract  entered  into  contrary  to  the  enactment 
as  illegal,  and  therefore  wholly  void,  and  to  hold  that  a  contract 
wholly  void  cannot  be  ratified."  My  Lords,  that  sums  up  and  ex- 
hausts the  whole  case.  In  vay  opinion,  beyond  all  doubt,  on  the  true 
construction  of  the  statute  of  1862,  creating  this  corporation,  it 
appears  that  it  was  the  intention  of  the  legislature,  not  imphed, 
but  actually  expressed,  that  the  corporation  should  not  enter,  having 
regard  to  its  memorandum  of  association,  into  a  contract  of  this 
description.  If  so,  according  to  the  words  of  Mr.  Justice  Blackburn, 
every  court,  whether  of  law  or  of  equity,  is  bound  to  treat  that  con- 
tract, entered  into  contrary  to  the  enactment,  I  will  not  say  as 
illegal,  but  as  extra  vires,  and  wholly  null  and  void,  and  to  hold  also 
that  a  contract  wholly  void  cannot  be  ratified. 

My  Lords,  that  relieves  me,  and,  if  your  Lordships  agree  with  me, 
relieves  your  Lordships  from  any  question  with  regard  to  ratifica-. 
tion.  I  am  bound  to  say  that  if  ratification  had  to  be  considered  I 
have  found  in  this  case  no  evidence  which  to  my  mind  is  at  all  suffi- 
cient to  prove  ratification;  but  I  desire  to  say  that  I  do  not  wish  to 
found  my  opinion  on  any  question  of  ratification.  This  contract,  in 
my  judgment,  could  not  have  been  ratified  by  the  unanimous  assent 
of  the  whole  corporation. 

Note.  —  In  earlier  cases  there  are  opinions  which  do  not  treat 
an  ultra  vires  contract,  even  of  a  statutory  corporation,  as  being 
beyond  the  legal  capacity  of  the  corporation.  Thus  Lord  St.  Leon- 
ards in  Eastern  Counties  Ry.  Co.  v.  Hawkes,  5  H.L.  Cas.  331  (1855), 
said  (p.  373)  he  was  disposed  "to  restrain  the  doctrine  of  ultra  vires 
to  clear  cases  of  excess  of  power,  with  the  knowledge  of  the  other 
party,  express,  or  implied  from  the  nature  of  the  corporation  and  of 
the  contract  entered  into." 

But  the  reasoning  of  Lord  Cairns  in  the  principal  case  has  been 
accepted  as  settling  the  English  law.  The  authorities  in  accord  are 
very  numerous.  Nor  can  the  corporation  be  held  on  any  theory  of 
estoppel.   Great  North-West  Ry.  Co.  v.  Charleshois,  [1899]  A.C.  114. 

If  the  corporation  has  not  legal  capacity  to  make  the  contract,  it 
follows  that  the  corporation  can  neither  be  sued,  nor  sue,  upon  it. 

Torts.  Suppose  all  the  shareholders  of  a  company  authorize  the 
directors  to  carry  on  a  business  in  the  name,  with  the  funds  and  for 
the  benefit  of  the  corporation,  and  that  a  person  employed  by  the 
directors  for  this  purpose,  while  acting  within  the  scope  of  his 
emplo^Tnent,  commits  a  tort  upon  the  plaintiff.  Assuming  the  busi- 
ness is  ultra  vires  of  the  company,  can  the  plaintiff  recover  from  the 
company?  Note  Lord  Cairns' s  language:  "It  states  affirmatively 
the  ambit  and  extent  of  vitality  and  power  which  by  law  are  given 


GG4  AYERS    V.  fiOUTII    AUSTRAUAN    BAN'KINQ   CO.        [ciIAP.  II. 

to  the  corporation,  and  it  states,  if  it  is  necessary  «o  to  state,  nef^- 
tively,  that  notliing  .shall  Ik"  done  lx»yond  that  amhit,  and  that  ik. 
attempt  .shall  Ik*  made  to  use  the  coriX)rate  life  for  any  other  |)urj«,-. 
than  that  which  i.s  no  sfM>ei(ied."  Lindley  on  ('on)i>atiieH  (tith  e<l.), 
pp.  2i;i,  257:  "Agents  cannot  have  a  more  extensive  authority  than 
their  principaKs  can  legally  confer  upon  them;  an<l  this  princijile  at 
once  limits  the  authority  of  all  agents  of  incor[)orated  re 
The  cai)acity  of  such  companies  is  itself  limite«l,  and  they  r  r 
legally  hound  by  any  acts  of  their  directors  or  otFicers  in  which  the 
companies  theni-sclves  arc  legally  incompetent  to  engage.  .  .  .  All 
that  is  nccessar>'  to  charge  the  company  (in  tort)  is  that  the  act  com- 
plained f)f  should  he  intra  vires  anil  not  ultra  rin'.<t,  etc."  Clerk  tt 
Lintlsell  on  Torts  ((ith  ed.),  p.  62,  note  ((/):  "To  fix  a  corporation 
with  liability  for  the  acts  of  its  agents,  two  conditions  must  be  ful- 
fille(l;  1st,  the  act  must  have  l)eon  within  the  scope  of  the  agent's 
employment;  2nd,  that  employnient  must  have  Ixx'n  within  the 
scope  of  tlu>  coqwrate  powers."  Hut  Salmond,  although  formerly  of 
this  opinion  (see  Salmond  on  Torts,  2d  e<l.,  p.  50),  says  in  his  Sum- 
mary of  the  I.AW  of  Torts,  p.  43:  "The  rule  that  a  corjwration  is  not 
bound  by  contracts  which  are  xdtra  nren  is  commonly  .said  to  apply 
also  to  torts  which  are  ultra  rires,  in  thesen.st^  thatthev  are  commit  ted 
in  the  course  of  some  activity  which  is  Ix^yond  the  limits  of  the  cor- 
poration's powers.  There  is,  however,  no  sufficient  authority  for  any 
such  exemption  of  cf)rporations  from  the  con.s<H|u<'nces  of  their  dis- 
regard of  the  limits  of  their  pow(>rs.".  The  stu<!ent  should  consider 
whether  (assuming  that  Salmond  accepts  the  rea.soning  of  Lord 
Cairns  in  the  principal  case  as  sounfl)  he  has  not  l)egged  the  ques- 
tion by  six^iking  of  "their"  rlisregard.  The  fundamental  question  in 
any  corporate  problem  is:  To  what  acts  of  human  beings  shall  cor- 
porate significance  Ix;  given? 


AYERS  V.  THE  SOUTH   AUSTRALIAN  BANKING   CO. 

L.R.  3  P.C.  648.     1871. 

The  South  Au.stralian  Banking  Company  was  incorporated  by 
charter,  which  contained  a  clause  declaring  that  it  should  not  l)e 
lawful  for  the  company  to  advance  money  on  the  security  of  mer- 
chandise. Its  officers  advanced  its  money  on  the  security  of  mer- 
chandise, the  lien  IxMng,  in  form,  in  favor  of  the  corporation.  Ayers, 
and  others,  withheld  this  merchandise  from  the  corporation,  and 
it  brought  trover. 

The  Lord  Justice  Mellish.  Another  objection  wa.s  taken  by 
Mr.  Manisty  on  the  terms  of  the  charter  —  the  clause  in  the  charter 
which  says,  it  shall  not  be  lawful  for  the  bank  to  make  advances 


SECT.  I.]  AYERS    V.  SOUTH    AUSTRALIAN    BANKING    CO.  665 

on  merchandise.  Now,  unquestionably,  a  great  many  questions 
might  be  raised  on  the  effect  of  that  clause  in  the  charter  which  may 
be  of  very  great  importance,  but  which  also  being  of  great  diffi- 
culty, their  Lordships  do  not  think  it  necessary  to  give  anj^  opinion 
upon.  There  may  be  a  question  as  to  what  are  the  transactions 
which  come  really  within  the  clause,  and  whether  this  particular 
case  does  come  within  it.  There  may  be  also  question  whether, 
under  any  circumstances,  the  effect  of  violating  such  a  provision 
is  more  than  this,  that  the  Crown  may  take  advantage  of  it  as  a 
forfeiture  of  the  charter,  but  the  only  point  which  it  appears  to  their 
Lordships  is  necessary  to  be  determined  in  the  present  case  is  this, 
that  whatever  effect  such  a  clause  may  have,  it  does  not  prevent 
property  passing,  either  in  goods  or  in  lands,  under  a  conveyance 
or  instrument  which,  under  the  ordinary  circumstances  of  law, 
would  pass  it.  The  only  defence  which  can  be  set  up  here  (there  is  no 
plea  of  illegality)  is  under  the  plea  of  not  possessed,  that  the  right 
of  property  and  the  right  of  possession  never  passed  to  the  plaintiffs. 
Their  Lordships  are  of  opinion,  that  whatever  other  effect  it  has,  it 
cannot  have  the  effect  of  preventing  the  property  passing.  If  that 
were  otherwise,  the  consequences  might  be  most  lamentable,  because 
if  the  property  never  passed  to  them,  they  could  not  themselves 
convey  any  property  to  third  persons.  Transactions  of  the  most 
honest  description  might  be  set  aside.  They  might  do  what  is  a 
very  common  thing,  make  advances  and  take  bills  of  exchange  with 
the  bills  of  lading  attached.  If  it  is  to  be  said  that  the  property 
in  the  goods  mentioned  in  the  bill  of  lading  does  not  pass  to  them, 
then  any  purchaser  to  whom  they  might  sell  the  goods  under  the 
bill  of  lading  would  get  no  title,  and  the  original  owner  who  had 
received  the  full  proceeds  of  the  goods,  or  a  large  advance  upon 
them,  might  say,  ''Oh,  the  property  never  passed  to  the  South 
Austrahan  Bank,  and, " therefore,  it  never  passed  to  you."  Mr. 
Manisty  admitted  that  he  could  find  no  authority  for  the  proposi- 
tion, that  any  violation  of  such  a  condition  of  a  charter  would 
prevent  the  property  in  goods  passing  to  the  person  to  whom  an 
instrument  otherwise  valid  professed  to  pass  it,  and  their  Lordships 
are  of  opinion,  that  whatever  other  effect  the  violation  of  such  a 
condition  may  have,  it  has  not  the  effect  of  preventing  the  property 
in  the  goods  passing,  or  of  preventing  an  action  of  trover  being  main- 
tained if  there  is  a  wrongful  conversion. 

Note.  —  Lindley  on  Companies  (6th  ed.),  p.  215,  relying  on  this 
case,  says:  "An  act  or  a  contract  which  is  ultra  vires  and  therefore 
invalid  is  not  necessarily  devoid  of  all  legal  effect."  The  context 
indicates  that  by  "legal  effect"  is  meant  "legal  corporate  effect." 
And  Buckley  on  Companies  (8th  ed.),  p.  17,  says:  "It  would  seem 
that  a  proprietary  right  belonging  to  a  company  may  be  enforced 


666  IN   RE    DAVID    PAY.VE    A    CO.,  LTD.  (cHAP.  II. 

antl  prot(;cted,  even  if  acquired  by  an  ultra  vires  expenditure  of 
capital." 

Hut  the  South  Au.straHan  BankinK  Company  waa  a  chartered 
corporation.  The  studi-ut  shouhl  con.sider  whether  (ju<.sumiiin  the 
reasoning  of  Lord  Cairns  in  Ashhury  Co.  v.  liiche,  mirra,  i.s  sound)  a 
simihir  result  can  l)e  reached  with  respect  to  a  statutor>'  corporation. 
Sec  DainH'  Case,  L.U.  12  I">i.  5 Hi;  (Ireal  Eadern  Hxj.  Co.  v.  Turner, 
L.R.  8  Ch.  149;  In  re  Ihnnjleld  Coal  Co.,  L.R.  17  Ch.D.  76,  97; 
National  Telephone  Co.,  Ltd.  v.  Constables  of  St.  Peter  Port,  [1900] 
A.C.  317,  321. 


In  re  D.WID   VXTSE  &  CO.,  LTD. 

I1904I   2  C*h.  COS. 

The  directors  of  David  Pav-ne  &  Co.,  Limited,  borrower!  money 
by  i.ssuinp;  a  (K-lwuture  in  the  nanu'  of  the  company.  They  intended 
to  api)ly,  aiul  did  apply,  thi.s  money  in  the  name  of  the  company  to 
accomplish  an  object  out*<ide  the  objects  of  the  company  as  stated 
in  the  nieinorandum  of  as.s<)ciation.  The  liquiflator  in  the  windinp-up 
of  tiie  eonipany  aj)plied  for  a  declaration  that  the  del>enture  was 
ultra  vires  and  void,  and  did  not  constitute  a  charge  on  the  under- 
taking or  assets  of  the  company. 

Buckley,  J.  [After  holding  that  the  lender,  the  Exploring  Land 
and  Minerals  Company,  had  no  notice  of  the  intended  mi.'<a[)plica- 
tion.)  That  leaves  only  this  matter  to  Ik*  considered.  If  an  act  ultra 
irires  the  corporation  Imj  done,  it  may  Ix?  immaterial  whether  the  other 
party  to  that  act  hatl  knowledge  or  had  not  knowledge  that  the 
corporation  could  not  do  it,  and  in  that  state  of  things  the  investi- 
gation of  knowledge  which  I  have  made  would  l>ecoine  irrelevant. 
Was  the  borrowing  by  David  Payne  *l'  Co.  for  the  purposes  of  pay- 
ing 2000Z.  to  Johnston  and  4000/.  to  the  Johnston  companies  ultra 
virc^,  so  that,  notwithstanding  the  absence  of  knowledge,  the  thing 
which  they  in  fact  sealed  does  not  bind  them?  That  arises  upon  a 
clause  in  the  memorandum  (^f  a.ssociation  and  one  of  the  articles. 
The  clause  in  the  memorandum  is  a  power  to  l)orrow  and  raise 
money  for  the  purpckses  of  the  company's  business,  and  art.  114  (D) 
gives  power  to  the  directors  to  Ixirrow  or  rai.so  or  secure  any  sum  or 
sums  of  money  on  the  security  of  the  property  of  the  company  by 
the  issue  of  del)entures,  and  so  on.  WTiat  is  the  effect  of  clau.ses  of 
that  kind?  Suppose  under  a  memorandum  such  as  this  a  board, 
after  passing  proper  resolutions,  go  to  their  bankers,  or  to  anybody 
else,  and  say,  "Lend  us  10,000/."  Is  it  the  duty  of  the  lending  com- 
pany then  to  say,  "I  look  at  your  memorandum"  —  which  cer- 
tainly they  are  bound  to  look  at  —  "and  I  find  that  you  can  only 
raise  money  for  the  purposes  of  your  business;  I  cannot  safely  lend 


SECT.  I.]  IN  RE   DAVID   PAYNE    &    CO.,  LTD.  667 

to  you  until  5^ou  show  me  you  are  borrowing  for  the  purposes  of  your 
business"  ?  In  other  words,  is  it  a  condition  attached  to  the  exercise 
of  the  power  that  the  money  should  be  borrowed  for  the  purposes 
of  the  business,  or  is  that  a  matter  to  be  determined  as  between  the 
shareholders  and  the  directors?  In  my  view,  the  introduction  into 
any  memorandum  of  association  of  a  power  to  borrow  is,  generally 
speaking,  unnecessaiy.  Everj^  trading  company  has  power  to  borrow 
for  the  purposes  of  its  business,  and  the  introduction  of  this  clause 
is  only  to  express  in  words  what  would  otherwise  be  the  law.  A 
limitation  of  the  borrowing  to  borrowing  for  the  purposes  of  the 
company's  business  is  necessary,  of  course.  A  corporation  cannot  do 
anj^thing  except  for  the  purposes  of  its  business,  borrowing  or  any- 
thing else;  everything  else  is  beyond  its  power,  and  is  ultra  vires.  So 
that  the  words  "for  the  purposes  of  the  company's  business"  are  a 
mere  expression  of  that  which  would  be  involved  if  there  were  no 
such  words.  If  you  found  a  power  to  borrow  which  would  arise  only 
on  the  happening  of  a  particular  event,  then  I  think  it  would  lie 
upon  the  lender  to  say,  "I  cannot  lend  to  you  until  j^ou  can  satisfy 
me  that  the  condition  has  been  complied  with";  but  where  the  power 
is  merely  a  general  power  to  borrow,  limited  only,  as  it  must  be, 
for  the  purposes  of  the  company's  business,  I  think  the  matter  is  to 
be  treated  in  this  way  —  that  the  lender  cannot  investigate  what 
the  borrower  is  going  to  do  with  the  money;  he  cannot  look  into  the 
affairs  of  the  company  and  say,  "Your  purposes  do  not  require  it 
now;  this  borrowing  is  unnecessary;  you  must  show  me  exactly  why 
you  want  it,"  and  so  on.  That  is  all  matter  lying  between  the  share- 
holders and  the  directors.  If  this  borrowing  was  made,  as  it  appears 
to  me  at  present  it  was  made,  for  a  purpose  illegitimate  so  far  as  the 
borrowing  company  was  concerned,  that  may  very  well  be  a  matter 
on  which  rights  may  arise  as  between  the  shareholders  and  directors 
of  that  company.  It  may  have  been  a  wrongful  act  on  the  part  of 
the  directors.  But  I  do  not  think  that  a  person  who  lends  to  the 
company  is  by  any  words  such  as  these  required  to  investigate 
whether  the  money  borrowed  is  borrowed  for  a  proper  purpose  or  an 
improper  purpose.  The  borrowing  being  effected,  and  the  money 
passing  to  the  company,  the  subsequent  application  of  the  money 
is  a  matter  in  which  the  directors  may  have  acted  wrongly;  but  that 
does  not  affect  the  principal  act,  which  is  the  borrowing  of  the  money. 
On  general  principles,  I  may  point  out,  it  would  be  perfectly  impos- 
sible to  work  such  a  clause  as  this  in  any  other  way.  A  corporation, 
every  time  it  wants  to  borrow,  cannot  be  called  upon  by  the  lender 
to  expose  all  its  affairs,  so  that  the  lender  can  say,  "Before  I  lend  you 
anything  I  must  investigate  how  you  carry  on  your  business,  and  I 
must  know  why  you  want  the  money,  and  how  you  apply  it,  and 
when  you  do  have  it  I  must  see  you  apply  it  in  the  right  way."  It  is 
perfectly  impossible  to  work  out  such  a  principle.   I  think  here  the 


668  BARONESS   WENLOCK   V.  RIVER    DEE   CO.  [CIIAP.  II. 

power  to  borrow  was  a  power  resting  in  the  ilirectors.  It  did  not  lie 
on  the  Exploriiij;  Land  and  Minerals  (,'oinpr.ny  to  say,  "We  cannot 
lend  anything  to  you  until  you  say  exactly  what  you  are  goinj;  to  do 
with  it  when  you  have  j^ot  it." 

For  these  reasons  it  seems  to  me  the  Exploring  Land  and  Minerals 
Company,  who  have  paid  this  money  and  taken  this  del>rnture 
without  notice  that  the  money  wa.s  going  to  l>e  applied  as  it  was.  are 
not  affected  by  anything  arising  in  regard  to  tliat.  I  therefore  think 
that  they  are  entitled  to  hold  the  debenture. 

Note.  —  In  Norwich  v.  Norfolk  Ry.  Co.,  4  E.  &  B.  397,  Ix)rd 
Campbell,  C.J.,  said  (p.  443):  "The  mere  circumstance  of  a  cove- 
nant by  directors  in  the  name  of  the  comi)any  being  ullra  rirct,  as 
between  them  and  the  shareholdei-s,  does  not  neces.sarily  disentitle 
the  covenantee  to  sue  ui)on  it.  For  example,  if  the  directors  of  a 
railway  company  were  to  enter  into  a  contract  under  the  seal  of  the 
comjiany  for  the  purchase  of  a  large  quantity  of  iron  rails  and  to  p:iy 
for  them  at  a  fixed  price,  as  tlie  vendor  had  reasonable  ground  for 
supposing  that  the  rails  were  wanted  for  the  purpose  of  the  railroad, 
it  would  Ix?  no  defence  to  an  action  for  the  price,  or  for  not  accepting 
them,  that  the  rails  were  illegally  purcha-sed  on  speculation,  to  be 
resold  in'  the  directors  for  their  own  prf)rit.  Hut  suppose  that  the 
directors  of  a  railway  company  should  purcha>H>  a  thousand  gross  of 
green  spectacles,  as  a  speculation,  and  should  put  the  seal  of  the 
company  to  a  deed  covenanting  to  pay  for  these  goods,  here  would  be 
a  clear  excess  of  authority  on  the  part  of  the  directors;  this  excess  of 
authority  would  necessarily  be  known  to  the  covenantee;  and,  he  be- 
ing in  pari  delicto,  I  conceive  that  the  maxim  would  apply  potior  est 
conditio  possidentis.  This  would  Ix?  an  illegal  contract  to  misapply  the 
funds  of  the  company;  and  the  illegality  might  i)eset  up  as  a  defence." 

But  cf.  Firbank's  Executors  v.  Humphreys,  L.R.  18  Q.B.D.  54. 


BARONESS  WENLOCK  v.  RIVER  DEE  CO. 

L.R.  36  Ch.D.  074.     1887. 

The  River  Dee  Company,  a  corporation,  was  empowered  to  bor- 
row any  sum  not  exceeding  £2r),000.  A  loan  of  a  mucli  larger  sum 
was,  in  form,  made  by  Lord  Wenlock  to  the  corporation.  In  an 
action  by  the  executors  of  the  lender,  the  company  sought  to  defend 
on  the  ground  that  the  loan  was  ultra  vires. 

Lord  Esher,  M.R.  In  this  case  Lord  Wenlock's  executors  have 
brought  an  action  against  the  River  Dec  Company  in  order  to  recover 
a  very  large  sum  with  interest  upon  a  covenant  contained  in  a  mort- 
gage deed,  and  it  is  undoubted  that  Lord  Wenlock  did  advance  a 


SECT.  I.]  BARONESS   WENLOCK   V.  RIVER   DEE    CO. 


669 


very  large  sum  upon  a  mortgage  which  was  given  to  him  under  the 
seal  of  the  company  and  upon  a  contract  which  those  who  m  fact 
mads  it  with  him  represented  to  be  a  contract  with  the  company. 
The  defence  is,  that  although  the  money  was  in  fact  advanced  upon 
such  representation,  namely,  that  it  was  money  to  be  advanced  to 
the  company,  and  although  the  mortgage  and  the  covenant  are  a 
mortgage  and  a  covenant  under  the  seal  of  the  company,  yet  that 
the  company  is  not  liable  to  this  action  substantially  in  covenant, 
because  it  is  alleged  by  the  company  that  those  who  made  that 
covenant  and  who  made  that  mortgage  had  no  authority  to  bind  the 
company  by  the  use  of  the  seal  for  that  purpose.  If  that  defence  be 
a  vahd  one  there  can  be  no  doubt  about  the  hardship  thereby  in- 
flicted upon  Lord  Wenlock,  and  in  this  case  a  hardship  much  greater 
than  usual,  because  this  is  not  simply  the  case  of  directors  either 
wilfully  or  inadvertently  doing  that  which,  if  it  were  upheld,  would 
bind  a  number  of  shareholders  who  are  not  directors,  but  actually 
in  this  case  if  this  covenant  and  this  mortgage  cannot  be  upheld  it 
is  a  covenant  and  a  mortgage  made  by  people  who  are  said  to  be  the 
agents  of  the  company,  but  who  in  truth  and  in  fact  are  the  only 
persons  interested  in  the  company.  It  is  as  if  all  the  shareholders  of 
the  company  were  to  make  this  representation  and  obtain  money 
and  then  put  forward  the  defence  when  an  action  is  brought  against 
the  company,  that  although  they,  the  shareholders,  had  misled  the 
person  into  advancing  his  money,  nevertheless  the  company  is  not 
liable.   If  this  action  were  really  the  defence  of  those  who  induced 
Lord  Wenlock  to  advance  his  money  upon  the  representation  made 
by  them  —  if  this  action  is  defended  in  the  name  of  the  company  by 
them  —  I  hesitate  to  express  the  feeling  which  I  have  as  to  such  con- 
duct; but  if  this  action  is  really  defended,  although  in  the  name  of 
the  company,  on  behalf  of  the  Credit  Foncier,  I  can  pass  no  opinion 
upon  whether  it  is  a  just  or  righteous  defence  or  not,  because  I  know 
nothing  of  the  circumstances  under  which  they  became  the  persons 
having  the  command  of  this  defence. 

[After  holding  that  the  company  had  power  to  borrow  £25,000 
but  no  more.]  Therefore  to  the  extent  of  £25,000,  but  to  that  extent 
only,  those  who  were  acting  for  this  company  had  power  to  borrow 
on  mortgage  containing  a  covenant,  and  that  being  so,  they  having 
borrowed  money  from  Lord  Wenlock,  although  they  exceeded  their 
authority  when  they  borrowed  more  than  £25,000,  to  the  extent  of 
£25,000  they  did  not  exceed  their  authority,  and  the  company  is 
bound.  Therefore  Lord  Wenlock,  taking  this  to  be  an  action  on 
covenant,  is  entitled  upon  that  covenant,  and  in  respect  of  that 
covenant,  to  recover  to  the  extent  of  £25,000,  and  the  proper  interest 
calculated  in  the  ordinary  way.  But  when  we  have  to  deal  with  the 
money  which  was  obtained  from  Lord  Wenlock  on  this  covenant 
given  in  the  name  of  the  company  and  under  the  seal  of  the  com- 


670  FURNIVALL    V.  C00MBE8.  [cilAP.  H. 

pany,  but  beyond  the  authority  of  those  who  so  borrowed  the  money 

in  tlio  luiinoof  the  coiniKitjy,  it  is  clear  that  the  phiintifTn,  ils  to  that, 
cannot  recover  by  action  on  the  covenant,  because  the  covenant  is 
an  unauthorized  covenant  Ijeyond  the  extent  of  £25,000.  The  phiin- 
tiffs  may  recover  in  respect  of  some  other  rijjht,  but  there  is  no  riniit 
which  can  l>ind  tlie  company  at  hiw  accorchnj?  to  the  connnon  hiw  of 
Enfijland,  therefore  their  rif^ht,  if  any,  is  an  ecjuitable  ri^ht.  I  shall 
not  pretend  to  go  further  witli  regard  to  the  equitable  right  than  to 
say  that  if  any  of  the  money  borrowed  in  this  way  from  Ix)rd  Wen- 
lock  has  been  expentled  in  paying  proper  debts  of  the  company  then, 
allliough  those  who  received  the  money  from  Lord  Wenlock  were 
not  authorized  to  bind  the  company,  yet  I^oril  VVenlock's  representa- 
tives may  in  equity  recover  from  the  company  so  much  of  that 
money  as  was  expeniled  in  paying  debts  of  the  company. 

Note.  —  Affirmed  in  the  House  of  Lords,  L.K.  10  A.C.  354. 
Lord  Blackbur.n  said  that,  although  he  still  thought  his  opinion 
in  the  case  of  Ashbury  Co.  v.  liiche  (see  L.ll.  9  Ex.  240)  was  "better 
than  that  of  noble  anil  learnetl  lords  who  decided  against  it,"  he  was 
of  opinion  tiiat  the  law  there  laid  down  applied  not  only  to  com- 
panies formed  under  the  Companies  Act,  i)ut  "to  all  companies 
created  by  any  statute  for  a  particular  purpose." 

For  earlier  cases,  see  Trou])\s  Case,  29  Beav.  35:i;  Blockbiirti  Society 
V.  Cunliljc,  L.R.  22  Ch.D.  (31;  In  re  Cork  ct  Yoiujlud  liy.  Co.,  L.ll. 
4  Ch.  748. 

The  right  to  recover  to  the  limited  extent  allowed  in  the  principal 
case  would  seem  not  to  depend  on  the  absence  of  knowletlge  by  the 
lender  that  the  loan  was  }iltra  vires.  See  Reversion  Fuml  Co.,  J  Ad.  v. 
Mai  son  Cosway,  Ltd.,  [1913]  1  K.B.  364. 

In  Ernest  v.  Croysdill,  8  W.R.  73G,  the  directors  of  one  railway 
company  made  an  unauthorized  advance  to  a  second  railway  com- 
pany, some  of  the  proceeds  of  which  came  into  the  hands  Oi  the 
defendant,  the  official  manager  of  the  second  railway  company.  The 
plaintiff,  who  represented  the  first  railway  company,  was  allowed  to 
recover  the  amount  of  such  proceeds  from  the  defendant,  with 
interest  at  four  per  cent,  from  the  time  the  defendant  received  them. 


FURNIVALL  v.  COOMBES. 

5  M.  &  G.  736.     1S43. 

A  covEN.\NTED  \nth  C,  D,  E,  and  F,  to  do  certain  repairs  to  the 
parish  church  of  Z;  and  in  consideration  of  covenants  on  A's  part, 
C,  D,  E,  and  F,  "churchwardens,  and  overseers  of  the  poor  of  the 
parish  of  Z,  for  themselves  and  for  their  successors,  churchwardens, 


SECT.  I.]  FURNIVALL  V.   COOMBES.  671 

and  overseers  of  the  said  parish,  and  their  assigns,  did  thereby  cove- 
nant with  A,  his  executors  and  administrators,  that  they,  the  said 
churchwardens  and  overseers  of  the  poor,  their  successors  or  assigns, 
should  and  would  well  and  truly  pay,  or  cause  to  be  paid,  unto  A" 
the  sum  specified,  by  certain  instalments.  After  this  covenant  the 
deed  proceeded  as  follows:  "Provided  always  that  nothing  in  these 
presents  contained,  shall  extend,  or  be  deemed,  adjudged,  construed, 
or  taken  to  extend,  to  any  personal  covenant  of,  or  obligation  upon, 
the  said  several  persons  parties  thereto,  of  the  third  part,  or  in  any- 
wise personally  affect  them,  any  or  either  of  them,  their,  or  any  or 
either  of  their  executors,  administrators,  goods,  effects,  or  estates  in 
their  private  capacity,  but  shall  be,  and  is  intended  to  be,  binding 
and  obligatory  upon  churchwardens  and  overseers  of  the  poor  of  the 
parish  of,  etc.,  and  their  successors  for  the  time  being,  as  such  church- 
wardens and  overseers  of  the  poor,  but  not  further  or  otherwise." 

TiNDAL,  C.J.  The  first  question  is,  whether  this  is  a  personal 
covenant,  or  is  it  a  covenant  by  the  defendants  as  a  corporate  body. 
It  must  fall  within  the  one  class  or  the  other.  Churchwardens  and 
overseers,  though  they  are  by  statute  a  corporate  body  for  some 
purposes,  cannot  enter  such  a  covenant  as  this  in  a  corporate  char- 
acter; and  if  not,  then  the  contract  must  be  a  personal  covenant.  If 
it  be,  the  next  question  is,  what  does  it  bind  the  defendants  to  do? 
At  all  events,  it  binds  them,  while  they  remain  in  office,  to  pay. 
Looking  at  the  proviso,  however,  it  is  utterly  inconsistent  with  the 
covenant.  [Here,  his  lordship  read  the  proviso.]  Therefore,  if  the 
defendants  have  entered  into  a  covenant  which,  to  any  extent,  binds 
them  personally,  this  proviso  is  at  variance  with  such  covenant,  and 
consequently  must  be  rejected  as  repugnant  according  to  the  authori- 
ties cited.  ...  It  would  have  been  a  different  thing  if  the  defendants 
had  so  shaped  their  covenant  as  to  make  the  payment  come  only 
out  of  the  parish  fund. 

Note.  —  In  East  Anglian  Rys.  Co.  v.  Eastern  Counties  Ry.  Co., 
11  C.B.  775,  Jervis,  C.J.,  said  (p.  813):  "If  the  contract  is  illegal, 
as  being  contrary  to  the  act  of  Parliament,  it  is  unnecessary  to  con- 
sider the  effect  of  dissentient  shareholders;  for,  if  the  company  is  a 
corporation  only  for  a  limited  purpose,  and  a  contract  hke  that  under 
discussion  is  not  within  their  authority,  the  assent  of  all  the  share- 
holders to  such  a  contract,  though  it  may  make  them  all  personally 
liable  to  perform  such  contract,  would  not  bind  them  in  their  cor- 
porate capacity,  or  render  liable  their  corporate  funds." 


672  macgkegor  v.  dovtir  &  deal  rv.  co.         [chap.  ii. 

MacGREGOR  v.  DOVER  &   DEAL   KV.   CO. 

18  Q.B.  618,     1852. 

The  South  Eastern  Railway  Company  was  incorporated  for  the 
purpose  of  making  and  maintaining  that  railway,  with  power  to 
raise  moneys  for  the  purposes  of  the  act.  The  projectors  of  an  in- 
tended Dover  A  Deal,  etc.,  Railway  hail  contemplated  hrin^inn  '^ 
bill  before  Parliament  for  the  estai)lishment  of  such  railway,  but 
were  in  doubt  as  to  proceeding.  M,  a  i)erson  interested,  and  having 
influence,  in  the  South  Eastern  Company,  undertook  that,  if  the  pro- 
jectors of  the  Dover,  etc.,  Riiilway  would  |)n)ceed  in  endeavouring 
to  obtain  their  act,  and,  if  successful,  would  haiul  over  their  scheme 
to  the  South  Eiustern  Company,  that  company,  if  the  bill  were  re- 
jected, would  insure  them  against  loss  by  such  rejection,  and  would 
pay  their  I'arliamentary  ex|K'n.s(»s.  No  clause  in  the  company's  act 
empowered  them  so  to  apply  their  funds.  The  bill  wius  proceeded 
with,  and  rej(>cte»l  by  Parliament. 

This  action  was  brought  against  M  for  breach  of  this  contrast. 

Aldehsox,  Ii.  The  Solicitor  General  argued  that  this  promise 
of  the  defendant  was  in  truth  a  promis(>  that  the  South  Eastern 
Railway  Company  should  do  an  illegal  thing,  and  that  the  prom- 
ise was  therefore  void:  and  we  are  of  that  opinion.  This  is  not 
like  the  promise  of  a  party  that  an  act  impossible  to  be  done  shall 
be  done  by  the  defendant  or  by  some  third  person;  but  it  is  a 
promise  that  an  act  shall  be  done  contrary  to  the  public  law  of 
the  countiy,  of  which  both  parties  are  bound  to  take  notice.  The 
act  is  therefore  illegal;  and  the  promise  that  it  shall  be  done  is  a 
void  promise. 

The  question  is,  we  think,  determined  by  the  decision  of  the 
Court  of  Common  Pleas  in  East  Anglian  Railways  Company  v. 
Eastern  Counties  Railway  Company,  11  Com.  B.  775.  It  is  there  laid 
down  that  a  railway  company  incorporated  by  act  of  Parliament  is 
bound  to  apply  all  the  funds  of  the  company  for  the  purposes  directed 
and  provided  for  by  the  act,  and  for  no  other  purpose  whatsoever; 
and  then,  the  defendants  having,  inter  alia,  covenanted  to  pay  the 
costs  of  soliciting  bills  then  pending  in  Parhament,  it  was  held  that 
the  act  incorporating  the  defendants,  being  a  public  act,  must  be 
presumeil  to  be  known  to  the  plaintiffs,  and  that  they  could  not 
recover,  inasmuch  as  the  covenant  entered  into  by  the  defendants 
was  beyond  the  scope  of  their  authority  as  a  corporation,  and  was 
therefore  illegal  and  void.  The  court  there  say  that  such  a  contract 
is  illegal,  because  it  is  contrary  to  the  act  of  Parliament  which  was 
passed  to  give  them  certain  powers  as  a  corporation  for  pui)lic  pur- 
poses of  advantage  to  the  country  at  large  as  well  as  for  the  private 
profit  of  the  individual  members  of  the  corporation;  and  they  add 


SECT.  I.]  EICHAEDSON    V.   WILLLVMSON.  673 

that  the  actual  assent  of  the  whole  body  of  shareholders  would  make 
no  real  difference  in  the  matter. 

If  this  be  so,  both  plaintiffs  and  defendant  here  must  be  taken, 
with  full  knowledge  of  the  powers  conferred  on  the  South  Eastern 
Railway  Company,  to  have  made  a  contract  by  which  the  defendant 
is  to  bind  the  company  to  do  an  illegal  act;  not  merely  an  act  which 
they  have  no  power  to  do,  but  an  act  contrary  to  public  policy  and 
the  provisions  of  a  public  act  of  Parliament.  This,  we  think,  is  a 
void  contract,  and  one,  therefore,  wliich  cannot  form  the  proper 
ground  for  a  suit  in  a  court  of  law. 


RICHARDSON  v.  WILLIAMSON. 

L.R.  6  Q.B.  276.     1871. 

Declaration  on  the  common  money  counts. 

Plea:  never  indebted.  Issue  joined. 

At  the  trial  before  Hannen,  J.,  at  the  London  sittings  after  Easter 
term,  1870,  it  appeared  that  the  action  was  brought  to  recover  50L, 
the  balance  of  70L,  which  the  plaintiff  had  lent  to  The  Imperial  Per- 
manent Benefit  Building  Society,  on  the  deposit  of  wliich  she  received 
the  following  document,  stamped  as  a  receipt,  signed  by  the  two 
defendants,  who  were  directors  of  the  society:  — 

"Imperial  Permanent  Benefit  Building  Society, 
"London,  17th  June,  1867. 

"This  is  to  certify  that  Mrs.  A.  E.  Richardson,  of,  etc.,  has  this 
day  deposited  the  sum  of  70L  with  the  Imperial  Permanent  Benefit 
Building  Society  for  a  period  of  three  months  certain,  upon  which 
interest  at  the  rate  of  dl.  per  cent,  per  annum  will  be  allowed. 

;;j-W-  Williamson,  I  j3.^^^^^^^_ 
"C.  L.  Law^son,         j 

"Wm.  Richardson,  Secretary. 

"Memorandum.  —  The  above  deposit  may  be  withdrawn  at  any 
time  subsequent  to  17th  Sept.,  1867,  upon  receipt  of  fourteen  days 
previous  notice  of  such  intended  withdrawal." 

.  The  plaintiff  withdrew  201.  on  the  7th  of  May,  1868,  and  after 
giving  notice  to  withdraw  the  rest,  she  was  unable  to  obtain  it;  and 
a  correspondence  ensued,  in  which  the  defendants  said  there  were 
plenty  of  funds,  but  not  immediately  available.  Being  unable  to  get 
her  money,  the  plaintiff  took  legal  advice,  and  was  advised  that  she 
had  no  remedy  against  the  society,  which  was  established  under  the 
Benefit  Building  Societies  Act  (6  &  7  Wm.  4,  chap.  32),  and  the  rules 
of  the  society  containing  no  power  to  borrow  money;  she  accordingly 
brought  the  present  action,  seeking  to  make  the  defendants  personally 
liable. 


674  RICHARDSON    V.  WILLIAMSON.  [CHAP.  II. 

CoCKBURN,  C.J.  The  defendants  as  directors  appear  to  have  pro- 
ceeded to  borrow  money  on  behalf  of  the  society  without  ascertaining 
whether  they  had  power  to  do  so,  and  they  apply  to  the  public  to 
advance  money  on  the  faith  of  the  solvency  and  liability  of  the  soci- 
ety. It  turns  out  that  they  had  no  authority  to  do  this,  the  society 
having  no  power  to  borrow  money.  It  cannot  be  supposed  that  the 
plaintiff  on  lending  money  to  the  society  did  so  with  the  knowledge 
that  the  society  was  not  authorized  to  borrow;  and  it  was  not  till  she 
wanted  her  money  back  that  she  ascertained  the  real  position  of 
affairs,  and  is  met  by  the  defence  that  the  society  is  not  liable.  For- 
tunately, there  is  a  mode  by  which  persons  acting  as  the  defendants 
have  done  can  be  reached,  and  the  loss  thrown  on  the  right  parties. 
By  the  law  of  England,  persons  who  induce  others  to  act  on  the  sup- 
position that  they  have  authority  to  enter  into  a  binding  contract  on 
behalf  of  third  persons,  on  it  turning  out  that  they  have  no  such 
authority,  may  be  sued  for  damages  for  the  breach  of  an  implied 
warranty  of  authority.  This  was  decided  in  Collen  v.  Wright,  7 
E.  &  B.  301  (E.  C.  L.  R.  vol.  90),  26  L.J.  (Q.B.)  147,  8  E.  &  B.  647 
(E.  C.  L.  R.  vol.  92),  27  L.J.  (Q.B.)  215,  and  other  cases;  and  the 
necessary  amendment  may  be  made  in  the  present  case.  Then  I 
think  upon  the  facts  the  inference  is,  that  the  defendants  do  repre- 
sent upon  this  instrument  that  they  are  authorized  on  behalf  of  the 
society  to  borrow  money,  and  that  the  society  will  be  liable  on  this 
contract  of  loan.  It  is  quite  true,  as  the  defendants'  counsel  con- 
tended, that  the  plaintiff  intended  to  deal  with  the  society;  and  the 
ground  of  the  amended  cause  of  action  is  that  the  defendants  induced 
her  to  deal  with  the  society  by  representing  they  had  authority  when 
they  had  not. 

Blackburn,  J.  I  am  of  the  same  opinion.  It  appears  that  the 
plaintiff  on  advancing  her  money  received  a  certificate,  signed  by  two 
directors,  that  she  had  deposited  the  money  with  the  society  for  three 
months,  and  that  after  that  it  would  be  repaid  with  interest  after 
fourteen  days  notice.  I  think  it  clear  that  the  defendants,  the  two 
directors  who  signed  this  certificate,  did  by  that  represent  that  they 
had  authority  to  borrow  the  money  on  behalf  of  the  society,  and 
that  the  society  would  be  bound  to  repay  it  on  proper  demand. 
As  they  had  no  such  authority,  it  follows,  on  the  principle  of  the 
decision  in  Collen  v.  Wright,  that  the  plaintiff  is  entitled  to  re- 
cover from  the  defendants  the  damages  she  has  suffered  from  not 
being  able  to  sue  the  society,  on  showing  that  the  defendants 
professed  to  be  able  to  bind  the  society.  But  as  the  declaration 
only  contains  the  common  monej^  counts,  it  will  be  necessary  that 
an  amendment  should  be  made.  Had  the  society  been  insol- . 
vent,  the  damages  would  have  been  possibly  nil.  The  correspond- 
ence shows  that  the  society  has  ample  funds,  and,  therefore,  the 
damages  will  be  the  same  as  what  she  would  have  recovered  from 


SECT.  I.]  RICHARDSON    V.  WILLIAMSON.  675 

the  society  had  it  been  Hable,  that  is,  the  amount  of  her  loan  and 
interest. 

Note.  —  The  Imperial  Permanent  Benefit  Building  Society  was 
an  unincorporated  society.  See  6  &  7  Wm.  4,  c.  32,  and  10  Geo.  4,  c.  56. 
Under  10  Geo.  4,  c.  56,  the  members  of  such  a  society  were  to  adopt 
B.ules  setting  forth,  among  other  things  the  "Purposes  for  which 
such  society  is  intended  to  be  established"  (section  iii),  and  a  tran- 
script of  these  Rules  was  to  be  filed  in  a  specified  public  office  (sec- 
tion iv). 

In  Beattie  v.  Lord  Ebury,  L.R.  7  Ch.  777,  Mellish,  L.J.,  said 
(p.  800) :  "I  have  no  doubt  myself  that  it  would  be  held  that  if  there 
is  no  misrepresentation  in  point  of  fact,  but  merely  a  mistake  or  mis- 
representation in  point  of  law,  that  is  to  say,  if  the  person  who  deals 
with  the  agent  is  fully  aware  in  point  of  fact  what  the  extent  of  the 
authority  of  the  agent  is  to  bind  his  principal,  but  makes  a  mistake 
as  to  whether  that  authority  is  sufficient  in  point  of  law  or  not,  under 
those  circumstances  I  have  no  doubt  that  the  agent  would  not  be 
liable.  For  instance,  supposing  when  an  agent  comes  and  professes 
to  make  a  contract  on  behalf  of  his  principal,  instead  of  trusting  his 
representation  that  he  has  power  to  bind  liis  principal  the  person 
dealing  with  the  agent  were  to  ask  to  see  his  authority,  and  a  power 
of  attorney  executed  by  the  principal  was  shewn  to  him,  and  he  took 
the  opinion  of  his  lawyer  as  to  whether  the  power  of  attorney  was 
sufficient  to  bind  the  principal,  and  was  advised  that  it  was  sufficient 
to  bind  the  principal,  and  then  after  that  a  contract  was  made,  and  it 
turned  out  when  the  point  was  raised  in  a  Court  of  Law  that  the 
power  of  attorney  was  insufficient  —  under  such  circumstances  I  am 
clearly  of  opinion  that  there  would  be  no  warranty  on  the  part  of 
the  agent  that  the  power  of  attorney  was  good  in  point  of  law.  The 
first  case  mentioned  on  the  subject  was  CoUen  v.  Wright,  8  E.  &  B. 
647.  That  was  a  simple  case,  where  the  steward  of  a  gentleman 
executed  an  agreement  for  a  lease  in  his  name,  and  when  a  suit  was 
brought  for  specific  performance  it  turned  out  that  the  gentleman 
had  never  given  any  authority  to  the  steward  to  make  an  agreement 
for  a  lease  in  his  name.  Specific  performance  was  therefore  refused. 
The  plaintiff  then  brought  an  action  against  the  steward  to  recover 
damages,  and  was  held  entitled  to  recover.  There  it  is  perfectly 
plain  that  the  defendant  had  made  a  misrepresentation  in  point  of 
fact. 

"  The  next  case  was  the  case  of  Richardson  v.  Williamson,  Law  Rep. 
6  Q.B.  276.  There  the  plaintiff  lent  £70  to  a  benefit  building  society, 
and  received  a  receipt  signed  by  the  defendants,  as  two  of  the  direc- 
tors, certifying  that  the  money  had  been  lent,  and  then  it  turned 
out  that  in  point  of  law  they  had  no  power  to  borrow  money.  But, 
then,  their  power  to  borrow  money  depended  upon  whether  they 


G76  RICHARDSON    I'.  WILLIAMBON.  (CHAP.  II. 

luul  made  a  rule  to  borrow  money,  Ixjcause  a  benefit  building  soeiety 
may  receive  money,  at  any  rate  to  a  certain  amount,  on  dciKjsit,  if 
it  has  a  rule  enaljiiuK  i^  mo  to  receive  money.  Therefore  that  was 
taken  as  a  representation  by  the  directors  that  they  had  such  a  rule, 
and  that  the  borrowinj;  was  within  the  rule  when,  in  point  of  fact, 
there  was  no  such  rule  at  all."  See  ahso  lia.sfuhdl  v.  Furd,  L.H.  2  ICq. 
750. 

In  Riche  v.  Ashbury  Co.,  L.Il.  9  Kxch.  224,  Mautin,  H.,  wiid 
(p.  249):  "That  the  directors  would  Ix?  liable  ujxjn  the  contracts 
sued  on  there  can  be  no  doubt." 

For  ciuses  in  which  the  plaintiff  had  no  means  of  knowing  that  the 
corporation  had  no  power  to  make  the  contract,  and  in  which  the 
court  was  of  opinion  that  the  corporation  was  not  liable,  and  that 
the  directors  were  liable  see  Firlxiuk  v.  Humphreys,  L.R.  IS  Q.B.  54; 
Weeks  V,  Propert,  L.U.  8  C.P.  427.  See  also  lliggins  v.  Livingstone, 
4  Dow,  341,  355. 


SECT.  II.]  NIMS    V.  MOUNT   HERMON    BOYs'    SCHOOL.  677 


SECTION  2. 
UNITED  STATES  AUTHORITIES. 

A.  Torts. 


NIMS  V.  MOUNT  HERMON  BOYS'  SCHOOL. 

160  Mass.  177.     1893. 

Knowlton,  J.  The  defendant  is  an  educational  corporation.  The 
plaintiff  seeks  to  recover  damages  for  an  injury  received  through 
the  negligence  of  a  ferryman  in  managing  a  boat  on  which  he  was 
a  passenger,  and  which,  as  he  alleges,  the  defendant  was  using  at  a 
public  ferry  in  the  business  of  carr3dng  passengers  for  hire.  At  the 
request  of  the  defendant,  the  presiding  justice  ruled  that  there  was 
no  evidence  to  warrant  a  finding  for  the  plaintiff,  and  directed  a 
verdict  for  the  defendant.  The  defendant  contends  that  the  ruling 
should  be  sustained  on  one  or  both  of  two  grounds.  It  says  in  the 
first  place,  that,  if  it  maintained  the  ferry  and  hired  and  paid  the 
ferryman,  the  business  was  ultra  vires,  and  therefore  it  is  not  liable 
for  neghgence  in  the  management  of  the  boat.  Secondly,  it  contends 
that  there  was  no  evidence  to  connect  the  corporation  with  the  busi- 
ness of  running  the  ferry-boat,  or  to  show  that  the  ferryman  was  its 
servant. 

It  is  a  general  rule  that  corporations  are  liable  for  their  torts  as 
natural  persons  are.  It  is  no  defence  to  an  action  for  a  tort  to  show 
that  the  corporation  is  not  authorized  by  its  charter  to  do  \^Tong. 
Recovery  may  be  had  against  corporations  for  assault  and  batteiy, 
for  libel  and  for  malicious  prosecution,  as  weU  as  for  torts  resulting 
from  negligent  management  of  the  corporate  business.  Moore  v. 
Fitchhurg  Railroad,  4  Gray,  465;  Reed  v.  Home  Savings  Bank,  130 
Mass.  443;  Fogg  v.  Boston  &  Lowell  Railroad,  148  Mass.  513; 
Philadelphia,  Wilmington,  &  Baltimore  Railroad  v.  Quigley,  21  How. 
202,  209;  Merchants'  Bank  v.  State  Bank,  10  Wall.  604;  National 
Bank  v.  Graham,  100  U.S.  699;  Gruber  v.  Washington  &  Jamesville 
Railroad,  92  N.C.  1 ;  Husseij  v.  Norfolk  Southern  Railroad,  98  N.C.  34. 
If  a  corporation  by  its  officers  or  agents  unlawfully  injures  a  person, 
whether  intentionally  or  negligently,  it  would  be  most  unjust  to 
allow  it  to  escape  responsibility  on  the  ground  that  its  act  is  ultra 
vires.  The  only  plausible  ground  on  which  the  defendant  in  the  pres- 
ent case  can  contend  that  it  should  be  exempt  from  liability  for  the 
negligence  of  its  servant  in  managing  the  ferry-boat  is  that  the 


678  NIMS    V.  MOUNT    IIERMON    BOYh'    SCHOOL.  (ciIAP.  11. 

contract  to  carry  the  plaintiff  was  ultra  vires,  and  therefore  invalid, 
and  tluit  tlu'  duty  for  ncf^iect  of  which  the  plaintiff  sues  anjse  out  of 
the  contract,  and  disa{)|K'ars  with  it  when  the  contract  apix-ars  to  Ik* 
void.  The  defendant  may  argue  that  the  plaintiff  caruiot  maintain 
an  action  for  a  breach  of  the  contract  to  u.se  proper  care  to  carry  him 
safely,  and  that  he  stands  no  Ix'tter  when  he  sues  in  tort  for  failure 
to  do  the  duty  which  grew  out  of  the  contract. 

In  liissi'U  V.  Michigan  Southern  ct  Surthern  Indiana  Railroad, 
22  N.Y.  258,  the  plaintiff  founditl  his  action  on  the  negligence  of 
the  two  defendants  while  jointly  running  cars  on  a  railroad  in  a 
State  to  which  the  charter  of  neither  of  them  extended,  and  it  wa.s 
conceded  that  the  defendants  were  acting  ultra  vires.  The  plaintiff 
recovered,  Comstock,  C.J.,  holding  in  an  elaborate  opinion  that  the 
corporations  were  liable  under  their  contract,  notwithstanding  that 
the  contract  was  ultra  rircs,  and  that  if  they  could  not  l)e  held  under 
their  contract  they  could  not  U'  helil  at  all,  inasmuch  lus  the  only 
negligence  alleged  was  a  failure  to  use  the  care  which  the  contract 
called  for.  Sf:ldkn,  J.,  in  an  equally  full  and  elalnirate  opinion,  held 
that  the  contract  for  carriage  was  invalid,  and  that  there  could  lx» 
no  re(OV(>ry  umlcr  it,  nor  for  negligence  foimded  upon  it;  i)ut  it  wjus 
his  opinion  tliat,  if  the  contract  were  s<M  aside,  the  defendants  owed 
the  plaintiff  a  duty  founded  on  his  relation  to  them  as  an  occupant, 
with  their  permission,  of  a  place  in  their  car,  and  that  the  improper 
management  of  the  car  wius  a  neglect  of  that  duty  for  which  the 
plaintitT  could  recover.  Clkrkf.,  J.,  agreed  with  this  view,  and  all 
but  one  of  the  other  judges  concurred  in  a  decision  for  the  plaintiff, 
without  stating  the  ground  on  which  they  thought  the  decision  should 
be  placed.  This  case  was  followcvl  in  Bujfctt  v.  Troij  S:  Bnstim  Hail- 
road,  40  N.Y.  1()S,  in  which  it  was  held  that  a  railroad  corporation 
was  liable  for  negligence  of  the  driver  of  a  stage-coach  which  it  was 
running  without  a  legal  riglit  to  do  a  lousiness  of  that  kind;  but  the 
opinion  does  not  show  whether  the  decision  is  founded  on  tlie  opinion 
of  CoMSTOCK.  C.T.,  given  in  tlu^  former  ca.se.  or  on  that  of  Spilden,  J. 
Like  decisions  have  been  made  under  similar  facts  in  Central  Railroad 
&  Banking  Co.  v.  Smith,  76  Ala.  572;  Neip  York,  Lake  Erie,  &  Western 
Railway  v.  Haring,  18  Vroom,  137;  and  Hutchinson  v.  Western  tt* 
Atlantic  Railroad,  6  Heisk,  G.'U. 

In  the  present  case  we  think  it  makes  no  difference  that  the  de- 
fendant was  not  a  manufactunng  or  trading  corporation,  but  was 
chartered  for  educational  purposes  only.  It  could  acquire  and  hold 
property,  make  contracts,  and  do  an\i:hing  else  incidental  to  the 
maintenance  of  the  school.  Doubtless  some  of  its  officers  or  agents 
thought  it  would  be  an  advantage  to  its  students  and  managers 
to  have  a  public  fcrr\'  at  the  place  where  the  plaintiff  was  injured. 
Its  maintenance  of  such  a  ferr>'  was  ultra  nres,  but  its  acts  in  that 
respect  were  not  different  in  kind  from  the  ordinary  acts  of  corpora- 


SECT.  II.]  NIMS    V.  MOUNT    HERMON    BOYs'    SCHOOL.  679 

tions  in  excess  of' the  powers  given  them  by  their  charter.  We  are 
of  opinion,  therefore,  that  if  the  defendant  while  running  the  ferry- 
boat accepted  the  plaintiff  as  a  passenger  to  be  transported  for  hire, 
and  undertook  to  carry  him  across  the  river,  he  was  in  the  boat  as 
a  licensee,  it  owed  him  the  duty  to  use  proper  care  to  carry  him  safely, 
and,  whether  an  action  could  be  maintained  for  a  breach  of  the 
contract  or  not,  it  is  liable  to  the  plaintiff  in  an  action  of  tort  for 
neglect  of  that  duty. 

The  other  question  in  the  case  is  whether  there  was  e\ddence  that 
the  corporation  operated  the  ferry.  Under  its  by-laws  the  manage- 
ment of  the  corporation  is  vested  in  a  board  of  trustees.  It  does  not 
appear  that  any  vote  was  ever  taken  in  regard  to  the  ferry,  and  it 
was  not  shown  that  any  officer  of  the  corporation  took' out  the  hcense 
which  was  granted  to  the  defendant  by  the  county  conmiissioners, 
under  Pub.  Sts.  chap.  55,  §  1,  to  keep  the  ferry,  but  the  records  of  the 
county  commissioners  show  that  such  a  license  was  granted,  and  that 
a  bond  with  sureties  was  given  to  the  county  of  Franklin,  with  the 
condition  properly  to  perform  the  duty  of  a  ferryman,  executed  in 
behalf  of  the  defendant  bj^  one  who  was  designated  as  superintend- 
ent, and  witnessed  by  the  defendant's  cashier  and  paymaster.  It 
further  appeared  that  the  title  to  the  property  used  at  the  ferry  was 
taken  by  Ambert  G.  Moody,  one  of  the  trustees  of  the  defendant, 
who  was  then  a  student  in  Amherst  College,  and  that  he  paid  for  it 
only  a  nominal  sum  above  the  mortgage  existing  upon  it,  and  that 
he  and  the  defendant's  superintendent,  who  had  charge  of  its  farm, 
emploj^ed  one  Deane  to  operate  the  ferry,  who  was  paid  by  the 
month,  and  who  turned  over  the  balance  of  the  receipts  of  the  ferry 
above  his  wages  to  the  defendant's  cashier  and  pa>Tiiaster.  For  the 
month  of  April  Deane  was  paid  for  his  services  by  the  defendant's 
paymaster  out  of  the  defendant's  funds.  In  June,  1890,  a  new  ferry- 
boat was  constructed  under  an  arrangement  with  Ambert  G.  Moody 
and  Dwight  L.  JNIoody,  both  of  whom  were  trustees  of  the  corpora- 
tion, and  was  paid  for  by  the  paymaster  out  of  the  funds  of  the 
corporation.  For  six  months,  and  until  there  was  a  change  in  the 
management  of  the  ferry,  the  defendant's  cashier  and  pajinaster 
sent  to  the  treasurer,  who  lived  in  New  York,  monthly  accounts, 
showing  monthly  receipts  and  expenses  on  account  of  the  ferrJ^ 
Accompanying  the  first  of  these  accounts  was  a  statement  that  the 
school  was  running  the  ferry  and  paying  the  bills.  The  treasurer 
was  himself  a  trustee  of  the  corporation.  He  subsequently  rendered 
his  official  report  to  the  corporation,  which  was  audited  by  another 
of  the  trustees,  who  did  not  examine  the  items  in  person,  but  caused 
the  examination  to  be  made  by  a  man  in  his  emplojTnent.  This 
report  was  accepted  by  the  trustees  and  placed  on  file.  The  items 
of  receipts  and  expenditures  were  entered  on  the  books  of  the 
treasurer  in  an  account  under  the  title  "ferry."    The  treasurer's 


680  NIMS    V.  MOUNT    IIKltMON    DOYh'    BCIIOOL.  (cilAP.  II. 

report  was  not  put  in  evidence,  ami  was  not  produced,  although  the 
defen(hint  was  notified  to  produce  it. 

There  is  no  evidence  of  original  authority  from  the  defendant  to 
anybody  to  operate  the  ferry  on  its  account,  hut  the  evidence  i.s 
plenary  that  fK'rson.s  connected  with  the  tnanatiemcnt  of  it.**  l)U.«»ine.ss 
assumed  so  to  ofKirate  it.  Tiie  important  (piestion  i.s  whether  there 
was  evidence  that  the  cori)oration  ratified  the  acts  of  these  persons. 
We  are  of  opinion  that  tliere  was  evidence  from  which  the  jur>' 
mijiht  have  found  such  ratification.  It  is  not  nec(^sar>'  tliat  the 
ratification  sliouKI  Ix*  l»y  a  formal  vote.  It  is  enounh  if  the  corjvira- 
tion,  acting  through  its  managing  officers,  knowing  that  the  husine-ss 
had  \)wn  done  by  those  who  assumed  to  act  as  its  agents  in  doing  it, 
and  that  the  income  of  the  l)usiiu^s  had  Ixx'n  receive<l  and  the 
exix'iises  of  it  paid  by  its  treasurer  in  his  official  capacity,  and  that 
the  balance  of  the  receipts  almve  the  exi)eniiitures  was  in  its  treas- 
ure', adopted  the  action  of  its  treasurer,  and  elected  to  keep  the 
money.  It  was  a  fair  inference  of  fact,  especially  when  the  corpora- 
tion failed  to  produce  the  treasurer's  report  after  notice  to  produce 
it,  that  the  report  containe<l  a  true  statement  of  the  accounts  which 
related  to  the  ferr>',  and  that  it  was  accept e<l  with  full  knowledge 
on  the  part  of  the  truste<'s  of  what  it  contained.  Whether  there  was 
a  ratification  by  the  corporation  was  a  cjuestion  of  fact  for  the  jury 
on  all  the  evidence. 

If  there  was  such  a  ratification,  it  carried  with  it  the  con.sequences 
which  would  have  followed  an  original  authority.  In  Denipsey  v. 
Chambers,  154  Ma.ss.  880,  it  was  held,  after  nnich  considerati<in,  that 
latification  of  an  unauthorized  act  would  make  the  i)rincipal  liable 
in  an  action  of  tort  for  an  injury  resulting  from  negligence  of  the 
agent  in  doing  the  act. 

We  arc  of  opinion  that  the  case  should  have  been  submitted  to 
the  jur\'. 

Exceptions  sustained. 

Note.  —  .\  corporation  may  be  liable  for  tort  committed  in  the 
course  of  an  nUra  rires  undertaking,  Soiith  d'  \orlh  Alabama  R.R. 
Co.  V.  ChappeU,  61  Ala.  o27;  First  \ationaI  Bank  v.  Henry,  159 
Ala.  367;  First  National  Bank  v.  Strang,  138  111.  317,  356;  Feital  v. 
Middlesex  R.R.  Co.,  109  Mass.  398;  Alexander  v.  Relfe,  74  Mo.  495, 
517;  Xeiv  York,  Ijike  Erie  d'  Western  Ry.  Co.  v.  Haring,  47  X.J.L. 
137;  Bi^^ell  v.  Michigan  Southern,  22  N.Y.  258;  Buffett  v.  Troy  & 
Boston  R.R.  Co.,  40  N.Y.  168;  Hannon  v.  Siegel-Cooper  Co.,  167  N.Y. 
244  (a  corporation,  proprietor  of  a  department  store,  held  liable  for 
malpractice  in  the  business  of  dentistry.  "Though  it  was  beyond 
the  corporate  powers  of  the  defendant  to  engage  in  the  business  this 
docs  not  relieve  it  from  the  torts  of  its  servants  committed  therein") ; 
Gruber  v.  Railroad  Co.,  92  N.C.  1;  Searle  v.  First  National  Bank,  2 


SECT.  II.]  NIMS    V.  MOUNT   HERMON    BOYs'    SCHOOL.  681 

Walker  (Pa.)  395;  Hutchinson  v.  Western  R.R.  Co.,  6  Heisk.  (Tenn.) 
634;  Zinc  Carbonate  Co.  v.  First  National  Bank,  103  Wis.  125; 
National  Bank  v.  Graham,  100  U.S.  699  ("corporations  are  liable  for 
x«very  wrong  they  commit,  and  in  such  cases  the  doctrine  of  ultra 
yrVes  has  no  application").  But  see,  contra,  Gunn  v.  Central  R.R.,  74 
Ga.  509;  Bathe  v.  Decatur  Agricultural  Society,  73  Iowa,  11;  Weckler 
V.  First  National  Bank,  42  Md.  581,  595. 

Salt  Lake  City  v.  Hollister,  118  U.S.  256.  The  question  was  whether 
a  municipal  corporation  was  subject  to  internal  revenue  taxation 
under  the  laws  of  the  United  States  for  engaging  in  the  business  of 
distilling  spirits:  The  defense  was  that  it  was  ultra  vires  for  the  cor- 
poration to  engage  in  such  a  business.  The  court  held  that  the  cor- 
poration was  liable.  Mr.  Justice  Miller  said  (p.  259) :  "  It  would  be  a 
fine  thing,  if  this  argument  is  good,  for  all  distillers  to  organize  into 
milling  corporations  to  make  flour,  and  proceed  to  the  more  profit- 
able business  of  distilling  spirits,  which  would  be  unauthorized  by 
their  charters  or  articles  of  incorporation;  for  they  would  thus 
escape  taxation  and  ruin  all  competitors.  It  is  said  that  the  acts 
done  are  not  the  acts  of  the  city,  but  of  its  officers  or  agents  who 
undertook  to  do  them  in  its  name.  This  would  be  a  pleasant  farce 
to  be  enacted  by  irresponsible  parties,  who  give  no  bond,  who  have 
no  property  to  respond  to  civil  or  criminal  suits,  who  make  no  profit 
out  of  it,  while  the  cit}^  grows  rich  in  the  performance.  It  is  to  be 
taken  as  a  fair  inference  on  this  demurrer  that  all  that  the  city  might 
have  done  was  done  in  establishing  this  business.  The  officers  who, 
it  is  said,  did  this  thing,  must  be  supposed  to  have  been  properly 
appointed  or  elected.  Resolutions  or  ordinances  of  the  governing 
body  of  the  city  directing  the  establishment  of  the  distiller}^  and  fur- 
nishing money  to  buy  the  plant,  must  be  supposed  to  have  been 
passed  in  the  usual  mode.  Everything  must  have  been  done  under 
the  same  rules  and  by  the  same  men  as  if  it  were  a  hospital  or  a  town 
hall.  If  the  demurrer  had  not  admitted  this,  it  could  no  doubt  have 
been  proved  on  an  issue  denying  it.  But  the  argument  is  unsound 
that  whatever  is  done  by  a  corporation  in  excess  of  the  corporate 
powers,  as  defined  by  its  charter,  is  as  though  it  was  not  done  at  all. 
A  railroad  company  authorized  to  acquire  a  right  of  way  by  such 
exercise  of  the  right  of  eminent  domain  as  the  law  prescribes,  which 
undertakes  to  and  does  seize  upon  and  invade,  by  its  ofiicers  and 
servants,  the  land  of  a  citizen,  makes  no  compensation,  and  takes 
no  steps  for  the  appropriation  of  it,  is  a  naked  trespasser,  and  can 
be  made  responsible  for  the  tort.  It  had  no  authority  to  take  the 
man's  land  or  to  invade  his  premises.  But  if  the  governing  board 
had  directed  the  act,  the  corporation  could  be  sued  for  the  tort,  in 
an  action  of  ejectment,  or  in  trespass,  or  on  an  implied  assumpsit 
for  the  value  of  the  land.  A  plea  of  ultra  vires,  in  this  case,  would  be 
no  defence.   The  truth  is,  that,  with  the  great  increase  in  corpora- 


682  CENTRAL  n.n.  co.  i'.  hmith.  (chap.  II. 

tions  in  very  recent  times,  and  in  their  extension  to  nearly  all  the 
business  transactions  of  life,  it  has  Ixvn  found  necessary  to  hold 
them  n-sponsiltlc  for  acts  not  strictly  within  their  corfx>rate  |X)wers, 
but  done  in  their  corporate  name,  and  by  corixjration  officers  who 
were  competent  to  exercise  all  the  corporate  |X)wers.  When  such 
acts  are  not  founded  on  contract,  but  are  arbitrar>'  exercises  of  pf)wer 
in  the  nature  of  torts,  or  are  quasi-criminal,  the  corporation  may  l)e 
held  to  a  pecuniary  responsibility  for  them  to  the  party  injured." 


CENTRAL   R.R.   CO.  v.  SMITH. 

70  Ala.  572.     1S84. 

Appeal  from  Circuit  Court. 

Action  by  Smith  against  the  appellant,  descril)cd  as  " a  corporation 
created  by  the  laws  of  Ceorjiia,  and  doing  businei^s  in  Alabama  by 
agents."  Plaint ifl'  .seeks  to  recover  damages  for  injuries  sustained  by 
the  sinking  of  the  steaml)oat  George  W.  WijUy,  while  running  on  the 
Chattahoochee  River;  the  plaintiff  having  been  a  pa.ssenger  at  the 
time. 

The  complaint  alleged  that  the  defendant  corporation  was  a  com- 
mon carrier,  and  was,  in  connection  with  one  Whitesides  (who  was 
not  sued),  the  owner  and  proprietor  of  .said  steamlwat,  and  engaged 
in  running  and  operating  it  for  the  transpctrtation  of  pa.<5sengers  and 
freight  for  a  reward;  and  that  tlie  accident  and  injury  were  caused  by 
the  negligence  of  the  officers  and  persons  in  charge  of  the  boat,  and 
its  unsound  and  rotten  condition.  The  defendant  pleaded  not  guilty, 
and  a  special  plea  which  averred,  in  substance,  that  it  had  no 
authority  under  its  charter  to  engage  in  ruiming  a  steamboat  on  the 
Chattahoochee  River,  and  that  the  persons  who  were  engaged  in 
running  said  steamboat,  at  the  time  of  the  alleged  loss  and  injur}', 
were  not  the  agents  or  servants  of  said  defendant.  Issue  was  joined 
on  both  of  these  pleas. 

The  court,  at  defendant's  request,  instructed  the  jury  that  the 
defendant  had  no  power  under  its  charter  to  own  or  operate  the 
steamboat.  The  court,  however,  at  plaint ilT's  request,  added  to 
this  instruction:  "But  this  will  not  excuse  defendants,  if  the 
evidence  shows  they  did  operate  it."  To  this  addition,  defendant 
excepted. 

Clopton,  J.  [The  court  held,  on  other  grounds,  that  there  must  be 
a  new  trial.  It  further  held  that  the  corporation  had  no  power,  under 
its  charter,  to  own  and  operate  the  steamboat  in  association  with  a 
natural  person.]  The  question  is,  what  is  the  liability  of  a  corporation 
for  a  tort,  committed  while  transacting  a  business  without  and  be- 
yond the  purview  of  the  corporate  powers  and  purposes?    This  is 


SECT.  II.]  CENTRAL    R.R.  CO.  V.  SMITH.  683 

followed  by  another  question ;  by  what  authority,  and  in  what  man- 
ner, can  a  corporation  be  subjected  to  such  liability?  ,  .  . 

Before  the  duties  and  responsibilities  attach,  the  corporation  must 
undertake  and  engage  in  the  business,  and  thereby  assume  its  bur- 
dens. Of  this  there  can  be  no  implication,  from  the  isolated  fact, 
that  some  officer  or  agent  has  engaged,  in  the  name  of  the  company, 
in  running  and  operating  the  boats;  in  other  words,  there  can  be  no 
implication  that  a  corporation  has  made  a  contract,  or  engaged  in 
business  transcending  its  powers.  Green's  Brice's  Ultra  Vires,  304. 
It  may  be  inferred  from  proved  circumstances,  as  other  facts,  but  is 
not  the  subject  of  implication.  Corporations  are  responsible  for  the 
wrongs  committed  by  their  officers,  agents,  or  servants,  while  in  the 
course  of  their  emplojinent ;  but,  if  the  officer,  agent,  or  servant, 
"go  beyond  the  range  of  his  employment  or  duties,  and  of  his  own 
will  do  an  unlawful  act  injurious  to  another,  the  agent  is  liable,  but 
the  master  or  employer  is  not."  Gilliam  v.  S.  &  N.  R.R.  Co.,  70  Ala. 
268.  The  limitation  is,  the  scope  of  the  employment,  or  delegated 
authority.  If  an  officer  or  agent  can  not  directly  subject  the  corpora- 
tion to  liability  for  his  tortious  act  beyond  the  range  and  course  of 
his  emploj^ment,  though  done  while  engaged  in  its  performance, 
for  what  reason,  or  on  what  principle  is  it,  that  an  officer  or  agent 
can,  by  making  an  unlawful  transaction,  and  engaging  in  an  un- 
authorized and  unlawful  business,  in  the  name  of  the  company, 
without  the  authority  of  the  corporation,  indirectly  subject  it  to 
liability  for  the  negligent  or  intentional  wrongs  of  the  agents  or 
servants  employed  by  him  in  the  performance  of  such  contract,  or 
in  carrying  on  such  business?  While  corporations  should  be  held 
to  a  strict  responsibility  for  the  wrongful  acts  of  their  employees, 
when  done  in  the  course  of  their  emplo,>Tnent,  and  connected  with 
the  execution  of  the  business  for  which  incorporated,  they  should  be 
protected  against  the  consequences  of  unauthorized  acts  of  their 
officers  or  agents,  committed  in  excess  of  its  powers,  and  uncon- 
nected with  the  business  or  purposes  of  their  incorporation  and 
organization,  especially  when  dealing  with  persons  charged  with 
notice  of  their  powers,  and  the  nature  and  extent  of  the  employment 
and  authority  of  the  officer  or  agent. 

In  Brakaji  v.  N.J.  R.  &  T.  Co.,  32  N.J.  Law,  328,  it  is  said:  "In 
considering  the  question  whether  the  agent  has  the  authority  of  the 
corporation,  so  as  to  make  it  answerable  for  his  act,  the  purposes 
for  which  the  company  was  incorporated  must  not  be  overlooked. 
An  authority  given  even  by  the  board  of  directors,  in  express  terms, 
will  not,  in  all  cases,  be  the  authority  of  the  corporation.  The 
directors  are  only  agents  themselves,  and  their  powers  are  neces- 
sarily limited  within  the  scope  of  the  purposes  for  which  the  corpora- 
tion was  created,  beyond  which  they  are  not  authorized  to  bind  the 
corporation.    To  fix  the  liability  of  a  corporation  for  the  tortious 


684  CENTRAL    R.R.  CO.  V.  HMITII.  [CIIAP.  II. 

acts  of  one  of  its  oniijloyccs  tlone  in  (>l)f<li<'nco  to  the  conunundn  of 
its  oflicors,  the  act  must  Ix*  connected  with  tlie  transaction  of  the 
business  for  which  the  company  was  incorjx^rated.  If  the  directors 
should  order  an  a^cnt  to  take  a  [R-rson  out  of  his  house  and  In^at 
him;  or  if  tlie  dinctors  of  a  hankinj;  company  should  purchas<'  a 
steamboat,  and  en^aKe  in  transporting  passengers,  the  corfwration 
would  not  be  liable  for  the  misfeasance  or  nonfeasance  of  agents 
employed  in  that  business."  It  is  true  that  the  l)oard  of  directors 
may  Ih'  invested  by  the  charter,  or  general  law,  with  such  manage- 
ment and  authority  as  practically  to  constitute  it  the  corporation; 
but,  by  the  provisions  of  the  charter  of  the  defendants,  the  directors 
are  aj^ents  and  rei^rcsentatives,  with  authority  limited  by  the  scof)e 
of  the  powers,  business,  and  puri)<)ses  of  the  cor|M>ration.  It  will  In* 
observed  that  the  business  was  not  carried  on  in  the  name  of  the 
corporation.  As  there  is  no  implied  authority  of  any  officer  or  agent 
to  make  an  rdlra  fires  contract,  or  transaction,  and  on  that  ground 
merely  l)ind  the  corjjoralion,  it  follows,  that  if  the  bf)ats  were  i)ur- 
chased  and  engaged,  in  connection  with  W'hitesides,  in  the  business 
of  transporting  persons  and  freight  on  the  Chattahoochee  River, 
by  the  president,  suix'rintendent,  or  even  the  directors,  the  cor- 
poration is  not  bound  thereby,  and  is  not  liable  for  the  negligent 
or  wrongful  acts  of  the  pei-sons  einfjloyed  in  such  business,  unless 
the  transaction  was  previously  authorized,  or  suksequently  ratified 
by  the  corporation.  Without  such  authority  or  ratification,  the 
persons  thus  emiiloyed  are  not  the  agents  or  employees  of  the  cor- 
poration. As  the  imuKMliate  or  direct  act  of  the  officer  or  agent,  in 
such  case,  can  not  bind  the  corporation,  his  mere  knowledge  of,  and 
acquiescence  in  the  prosecution  of  such  business,  are  not  tantamount 
to  a  ratification  by  the  corporation.  Considering  the  dilTerence  be- 
tween the  principle's  which  govern  the  liability  of  the  company  for 
the  tortious  acts  of  its  agents  committed  in  the  course  of  their 
authorized  employment,  and  its  liability  for  the  tortious  acts  of 
persons  employed  in  the  conduct  and  prosecution  of  a  business 
undertaken  on  behalf  of  the  corporation  by  its  agents,  Innond  the 
range  of  their  employment,  and  prohibited  by  the  laws  of  its  creation, 
the  previous  authority  or  subsequent  ratification,  in  order  to  bind 
the  corporation,  must  be  in  corporate  capacity. 

A  corporation  is  an  artificial  body,  a  distinct  person,  in  legal 
contemplation,  from  the  stockholders,  in  which  the  corporate 
property  is  vested.  Its  will  is  usually  or  ordinarily  expressed  at  a 
meeting  of  the  corporators.  Its  officers  are  its  agents,  and  not  the 
agents  of  the  stockholders.  In  this  sense,  previous  authority,  to 
bind  the  corporation  by  the  act  of  an  officer  or  agent  transcending 
its  powers  and  unconnected  with  its  authorized  business  and  pur- 
poses, must  be  the  result  of  corporate  action,  as  contradistinguished 
from  the  individual  action  of  the  stockholders  or  officers.   Subse- 


SECT.  11.]  CENTRAL   R.R.  CO.  V.  SMITH.  685 

quent  ratification  results,  when  a  knowledge  of  the  business  being 
thus  conducted,  and  of  the  reception  and  retention  of  its  fruits  and 
benefits,  is  brought  home  to  the  corporators,  at  a  time,  and  under 
circumstances  which  require  them  to  elect  to  repudiate  or  be  bound, 
and  they  fail  to  disavow  the  act ;  in  other  words,  any  facts,  which 
would  be  a  ratification  of  the  unauthorized  acts  of  an  agent  by  a 
principal  who  is  a  natural  person. 

]S[oTE.  —  The  Mou7it  Hermon  Boys'  School  was  an  educational 
corporation,  and  it  does  not  appear  that  there  were  any  stockholders. 
In  the  case  of  a  corporation  having  stockholders,  will  the  act  of  the 
directors  (or  other  similar  managing  officers)  in  engaging,  in  the 
name  of  the  corporation,  in  a  business,  lawful  in  itself  but  ultra  vires 
of  the  corporation,  be  given  corporate  significance,  without  more  ? 
This  is  not  as  yet  plain  under  the  authorities. 

In  most  of  the  cases  cited  in  the  note  to  Nims  v.  Mount  Hermon 
Boys'  School,  supra,  no  consideration  was  given  to  this  question. 
In  the  Bissell  case,  Selden,  J.,  said  (22  N.Y.  258,  306):  "There  is 
no  doubt  that  all  that  was  done  under  the  arrangement  between  the 
defendants,  unauthorized  and  contrary  to  law,  is  nevertheless  to  be 
treated  as  done  by  the  corporations  themselves.  The  business  was 
carried  on  under  the  direction  of  their  managing  officers,  with  their 
property  and  for  their  benefit,  and  they  cannot  now  be  heard  to  deny 
that  it  was  done  by  them."  It  is  to  be  noted,  however,  that  the  busi- 
ness there  in  question  had  been  carried  on  openly  in  the  name  of 
the  corporation  over  a  considerable  period  of  time. 


686  NATIONAL    BANK    V.  MATTHEWS.  [CHAP.   II. 

B.  Transfers  of  Property  Rights. 


NATIONAL  BANK  v.  MATTHEWS. 

98  U.S.  02 1.     1678. 

Error  to  the  Supreme  Court  of  the  State  of  Missouri. 

On  the  1st  of  March,  1871,  Ilugli  B.  Logan  and  EHzabcth  A. 
Matthews  executed  and  dehvcrcd  to  Steiling  Price  &  Co.  their 
joint  and  several  promissory'  note  for  the  sum  of  $15,000,  payable 
to  the  order  of  that  firm  two  years  from  date,  with  interest  at  the 
rate  of  ten  per  cent  per  annum.  The  payment  of  the  note  was 
secured  by  a  deed  of  trust,  executed  by  her,  of  certain  real  estate 
therein  described,  situate  in  the  State  of  Missouri. 

On  the  13th  of  the  same  month,  the  note  and  deed  of  trust  were 
assigned  to  the  I'nion  National  Bank  of  St.  Louis.  Price  &  Co. 
failed  to  pay  the  loan  at  maturity.  The  bank  directed  the  trustee 
named  in  the  deed  of  trust  to  sell.  Said  Elizabeth  thereupon  filed 
this  bill  in  the  proper  State  court  to  enjoin  the  sale.  The  bank  in  its 
answer  avers  that  it  "accepted  the  said  note  and  deed  of  trust  as 
security  for  the  sum  of  $15,000,  then  and  there  advanced  and  loaned 
to  said  Sterling  Price  &  Co.  ...  on  the  secuiity  of  said  note  and  deed 
of  trust."  A  perpetual  injunction  was  decreed,  upon  the  ground 
that  the  loan  by  the  bank  to  Price  &  Co.  was  made  upon  real- 
estate  security;  that  it  was  forbidtlen  by  law;  and  that  the  deed  of 
trust  was,  therefore,  void.  The  decree  was  made  upon  the  pleadings. 
No  testimony  was  introduced  upon  either  side.  The  bank  removed 
the  case  to  the  Supreme  Court  of  the  State,  where  the  decree  was 
affirmed.   The  bank  then  sued  out  this  writ  of  error. 

Mr.  Justice  Swayne,  after  stating  the  facts,  delivered  the  opinion 
of  the  court. 

This  case  involves  a  question  arising  under  the  national  banking 
law,  which  has  not  heretofore  been  passed  upon  by  this  court.  We 
have  considered  it  with  the  care  due  to  its  importance. 

Our  attention  has  been  called  to  but  a  single  point  which  requires 
consideration,  and  that  is,  whether  the  deed  of  trust  can  be  enforced 
for  the  benefit  of  the  bank. 

The  statutory  provisions  which  bear  upon  the  subject  are  as 
follows :  — 

"Sect.  5136."  Every  national  banking  association  is  authorized 
"to  exercise  by  its  board  of  directors  or  duly  authorized  officers  or 
agents,  subject  to  law,  all  such  incidental  powers  as  shall  be  neces- 
sary to  carry  on  the  business  of  banking  by  discounting  and  negoti- 
ating promissory  notes,  drafts,  bills  of  exchange,  and  other  evidences 


SECT,  il.]  NATIONAL    BANK    V.  MATTHEWS.  687 

of  debt;  by  receiving  deposits;  by  buying  and  selling  exchange,  coin, 
and  bullion;  by  loaning  money  on  personal  security;  and  by  obtain- 
ing, issuing,  and  circulating  notes  according  to  the  provisions  of 
this  title. 

"Sect.  5137.  A  national  banking  association  may  purchase, 
hold,  and  convey  real  estate  for  the  following  purposes,  and  for  no 
others:  First,  such  as  may  be  necessary  for  its  immediate  accom- 
modation in  the  transaction  of  its  business.  Second,  such  as  shall  be 
mortgaged  to  it  in  good  faith  by  way  of  security  for  debts  previ- 
ously contracted.  Third,  such  as  shall  be  conveyed  to  it  in  satisfac- 
tion of  debts  previously  contracted  in  the  course  of  its  dealings. 
Fourth,  such  as  it  shall  purchase  at  sales  under  judgments,  decrees, 
or  mortgages  held  by  the  association,  or  shall  purchase  to  secure 
debts  to  it.  But  no  such  association  shall  hold  the  possession  of 
any  real  estate  under  mortgage,  or  the  title  and  possession  of  any 
real  estate  purchased  to  secure  any  debts  due  to  it  for  a  longer  period 
than  five  years."  Rev.  Stat.  1999;  13  Stat.  99. 

Here  the  bank  never  had  any  title,  legal  or  equitable,  to  the  real 
estate  in  question.  It  may  acquire  a  title  by  purchasing  at  a  sale 
under  the  deed  of  trust;  but  that  has  not  yet  occurred,  and  never 
may. 

Section  5137  has,  therefore,  no  direct  application  to  the  case. 
It  is  only  material  as  throwing  light  upon  the  point  to  be  consid- 
ered in  the  preceding  section.  Except  for  that  purpose  it  may  be 
laid  out  of  view. 

Section  5136  does  not,  in  terms,  prohibit  a  loan  on  real  estate, 
but  the  implication  to  that  effect  is  clear.  What  is  so  implied  is  as 
effectual  as  if  it  were  expressed.  As  the  transaction  is  disclosed  in 
the  record,  the  loan  was  made  upon  the  note  as  well  as  the  deed  of 
trust.  No7i  constat,  that  the  maker  who  executed  the  deed  would  not 
have  been  deemed  abundantly  sufficient  without  the  further  secu- 
rity. The  deed,  as  a  mortgage  would  have  been,  was  an  incident  to 
the  note  and  a  right  to  the  benefit  of  the  deed,  whether  mentioned 
or  delivered  or  not,  when  the  note  was  assigned,  would  have  passed 
with  the  note  to  the  transferee  of  the  latter. 

The  object  of  the  restrictions  was  obviously  threefold.  It  was  to 
keep  the  capital  of  the  banks  flowing  in  the  daily  channels  of  com- 
merce; to  deter  them  from  embarking  in  hazardous  real-estate  specu- 
lations; and  to  prevent  the  accumulation  of  large  masses  of  such 
property  in  their  hands,  to  be  held,  as  it  were,  in  mortmain.  The 
intent,  not  the  letter,  of  the  statute  constitutes  the  law.  A  court  of 
equity  is  always  reluctant  in  the  last  degree  to  make  a  decree  which 
will  effect  a  forfeiture.  The  bank  parted  with  its  monej'-  in  good 
faith.  Its  garments  are  unspotted.  Under  these  circumstances,  the 
defence  of  ultra  vires,  if  it  can  be  made,  does  not  address  itself  favor- 
ably to  the  mind  of  the  Chancellor.  We  find  nothing  in  the  record 


688  NATIONAL    BANK    I'.  MATTHEWS.  [CIIAF.   11, 

touching  the  deed  of  trust  which,  in  our  judgment,  brings  it  within 
the  letter  or  the  meaning  of  the  prohibitions  rehed  ujxjn  by  the 
counsel  for  the  defendant  in  error. 

Where  a  corporation  is  incompetent  by  its  charter  to  take  a  title 
to  real  estate,  a  conveyance  to  it  is  not  void,  but  only  voidable,  and 
the  sovereign  alone  can  object.  It  is  valid  until  assailed  in  a  direct 
proceeding  instituted  for  that  purpo.se.  Leazure  v.  Hillegas,  7  »Serg.  & 
R.  (Pa.)  313;  Goundie  v.  Nurthamptan  Water  Co.,  7  Pa.  St.  233; 
Runyon  v.  Coster,  14  Pet.  122;  The  Banks  v.  Pmtiaux,  3  Rand. 
(Va.)  136;  Mclndoe  v.  The  City  of  St.  Louis,  10  Mo.  577.  See  also 
Gold  Mining  Company  v.  National  Bank,  96  U.S.  640. 

The  authority  first  citctl  is  elaborate  and  exhaustive  upon  the 
subject.  So  an  alien,  forbidden  by  the  local  law  to  acquire  real 
estate,  may  take  and  hold  title  until  office  found.  Fairfa.x's  Devisee  v. 
Hwder's  Lessee,  7  Cranch,  604. 

In  Silver  Lake  Bank  v.  North,  4  Johns.  (N.Y.)  Ch.  370,  the  l>ank 
was  a  Pennsylvania  corporation,  and  had  taken  a  mortgage  upon 
real  estate  in  New  York.  A  bill  of  foreclosure  was  filed  in  the  latter 
State.  The  answer  set  up  as  a  defence  "  that  by  the  act  of  incorpora- 
tion the  plaintilTs  were  not  authorized  to  take  a  mortgage  except  to 
secure  a  debt  previously  contracted  in  the  course  of  its  dealings;  and 
here  the  money  was  lent  after  the  bond  and  mortgage  were  exe- 
cuted." The  analogy  of  this  defence  to  the  one  we  are  considering 
is  too  obvious  to  need  remark.  Both  present  exactly  the  same 
question.  Chancellor  Kent  said:  "Perhaps  it  would  be  sufficient  for 
this  case  that  the  plaintiffs  are  a  duly  incorporated  body,  with 
authority  to  contract  and  take  mortgages  and  judgments;  and  if 
they  should  pass  the  exact  line  of  their  power,  it  would  rather  belong 
to  the  government  of  Penns^'lvania  to  exact  a  forfeiture  of  their 
charter,  than  for  this  court  in  this  collateral  way  to  decide  a  question 
of  misuser,  by  setting  aside  a  just  and  bona  fide  contract.  ...  If  the 
loan  and  mortgage  were  concurrent  acts,  and  intended  so  to  be,  it 
was  not  a  case  within  the  reason  and  spirit  of  the  restraining  clause 
of  the  statute,  which  only  meant  to  prohibit  the  banking  company 
from  vesting  their  capital  in  real  property,  and  engaging  in  land 
speculations.  A  mortgage  taken  to  secure  a  loan  advanced  bona  fide 
as  a  loan,  in  the  course  and  according  to  the  usage  of  banking  opera- 
tions, is  not  surely  within  the  prohibition." 

It  is  not  denied  that  the  loan  here  in  question  was  within  this 
categor^^  This  authority,  if  recognized  as  sound,  is  conclusive.  See 
also  Baird  v.  The  Bank  of  Washington,  11  Serg.  &  R.  (Pa.)  411. 

Sedgwick  (Stat,  and  Const.  Constr.  73)  says:  "Where  it  is  a  simple 
question  of  authority  to  contract,  arising  either  on  a  question  of  reg- 
ularity of  organization  or  of  power  conferred  by  the  charter,  a  party 
who  has  had  the  benefit  of  the  agreement  cannot  be  permitted  in  an 
action  founded  upon  it  to  question  its  validity.  It  would  be  in  the 


SECT.  II.]  KEEFOOT    V.  FARMERS'    BANK.  689 

highest  degree  inequitable  and  unjust  to  permit  a  defendant  to  re- 
pudiate a  contract,  the  benefit  of  which  he  retains." 

What  is  said  in  the  text  is  fully  sustained  by  the  authorities 
cited. 

We  cannot  believe  it  was  meant  that  stockholders,  and  perhaps 
depositors  and  other  creditors,  should  be  punished  and  the  b^rrower 
rewarded,  by  giving  success  to  this  defence  whenever  the  offensive 
fact  shall  occur.  The  impending  danger  of  a  judgment  of  ouster  and 
dissolution  was,  we  think,  the  check,  and  none  other  contemplated 
by  Congress. 

That  has  been  always  the  punishment  prescribed  for  the  wanton 
violation  of  a  charter,  and  it  may  be  made  to  follow  whenever  the 
proper  pubhc  authority  shall  see  fit  to  invoke  its  application.  A 
private  person  cannot,  directly  or  indirectly,  usurp  this  function  of 
the  government. 

The  decree  of  the  Supreme  Court  of  Missouri  will  be  reversed,  and 
the  cause  remanded  with  directions  to  dismiss  the  bill;  and  it  is 

So  ordered. 

Mr.  Justice  Miller  dissenting. 

I  am  of  opinion  that  the  National  Banking  Act  makes  void  every 
mortgage  or'other  conveyance  of  land  as  a  security  for  money  loaned 
by  the  bank  at  the  time  of  the  transaction  to  whomsoever  the  con- 
veyance may  be  made;  that  the  bank  is  forbidden  to  accept  such 
security,  and  it  is  void  in  its  hands. 

The  contract  to  pay  the  money,  and  the  collateral  conveyance  for 
security,  are  separable  contracts,  and  so  far  independent  that  one 
may  stand  and  the  other  fall. 

In  the  present  case,  the  money  was  loaned  on  the  faith  of  the  deed 
of  trust,  and  that  instrument  is  void  in  the  hands  of  the  bank,  but 
the  note,  as  evidence  of  the  loan  of  money,  is  valid  against  Mrs. 
Matthews  personally.  With  this  latter  contract  the  State  court  did 
not  interfere.  It  enjoined  proceedings  under  the  deed  of  trust  against 
the  land,  and  did  no  more. 

Its  judgment  in  that  matter  ought,  in  my  opinion,  to  be  affirmed. 


KERFOOT  V.  FARMERS'  BANK. 

218  U.S.  281.     1910. 

Mr.  Justice  Hughes  delivered  the  opinion  of  the  court. 

This  action  was  brought  in  1894,  in  the  Circuit  Court  of  Grundy 
County,  State  of  Missouri,  to  set  aside  a  deed  of  real  property  made 
by  James  H.  Kerfoot  to  the  First  National  Bank  of  Trenton,  Mis- 
souri, and  also  a  deed  by  which  that  bank  purported  to  convey  the 


090  KERFOOT   V.  FAlUIEas'    BAN'K.  [ciIAI'.  II. 

same  property  to  the  defendants  Hcrvey  Kerfoot,  Alwilda  Kcrfoot 
and  Lester  R.  Kerfoot,  and  for  the  recovery  of  possession.  Tiie 
plaintiffs  in  the  action,  which  was  brought  sliortly  after  the  death 
of  James  H.  Kerfoot,  were  Homer  Hall,  administrator  of  his  estate, 
and  Robert  Earl  Kerfoot,  his  infant  grandson,  who  claimed  to  be  liis 
only  heir  at  law  and  sued  by  Homer  Hall  as  next  friend.  The  peti- 
tion contained  two  counts,  one  in  equity,  the  other  in  ejectment. 
Upon  the  trial  the  Circuit  Court  found  the  issues  for  defendants  and 
the  judgment  in  their  favor  was  affirmed  by  the  Supreme  Court  of 
Missouri.  145  Missouri,  418.  On  his  coming  of  age  Robert  Earl 
Kerfoot  sued  out  this  writ  of  error. 

The  plaintiff  in  eiTor  challenges  tlie  conve\'ance  made  by  James  H. 
Kcrfoot  to  the  bank,  upon  the  ground  that  under  §  5137  of  the 
Revised  Statutes  of  the  United  States,  relating  to  national  banks, 
the  bank  was  without  power  to  take  property,  and  hence  that  no  title 
passed  by  the  deed,  but  that  it  remained  in  the  grantor  and  descended 
to  the  plaintiff  in  error  as  his  heir  at  law.  It  appears  that  the  deed, 
which  was  absolute  in  form,  with  warranty  and  expressing  a  sub- 
stantial consideration,  was  executed  in  pursuance  of  an  arrangement 
by  which  the  title  to  the  property  was  to  be  held  in  trust  to  be  con- 
veyed upon  the  direction  of  the  grantor;  and  the  Supreme  Court  of 
Missouri  decided  that  a  trust  was  in  fact  declared  by  the  grantor  in 
favor  of  Hervej^  Alwilda  and  Lester  R.  Kerfoot,  to  whom  ran  a 
quitclaim  deed,  which  he  prepared  and  forwarded  to  the  bank  to  be 
signed  and  acknowledged  by  it  and  then  returned  to  him. 

But  while  the  purpo.se  of  this  transaction  was  not  one  of  those 
described  in  the  statute  for  which  a  national  bank  may  purchase 
and  hold  real  estate,  it  does  not  follow  that  the  deed  was  a  nullity 
and  that  it  failecl  to  convey  title  to  the  property. 

In  the  absence  of  a  clear  expression  of  legislative  intention  to  the 
contrary,  a  conveyance  of  real  estate  to  a  corporation  for  a  purpose 
not  authorized  bj""  its  charter,  is  not  void,  but  voidable,  and  the 
sovereign  alone  can  object.  Neither  the  grantor  nor  his  heirs  nor 
third  persons  can  impugn  it  upon  the  ground  that  the  grantee  has 
exceeded  its  powers.  Stnith  v.  Sheeley,  12  Wall.  358;  National  Bank 
V.  Matthews,  98  U.S.  621;  National  Bank  v.  Whitneij,  103  U.S.  99; 
Reynolds  v.  Crawfordsville  Bank,  112  U.S.  405;  Fritts  v.  Palmer,  132 
U.S.  282;  Leazure  v.  Hillegas,  7  Scrg.  &  R.  (Pa.)  313.  Thus,  although 
the  statute  by  clear  implication  forbids  a  national  bank  from  making 
a  loan  upon  real  estate,  the  security  is  not  void  and  it  cannot  be  suc- 
cessfully assailed  by  the  debtor  or  by  subsequent  mortgagees  be- 
cause the  bank  was  without  authority  to  take  it ;  and  the  disregard 
of  the  provisions  of  the  act  of  Congress  upon  that  subject  only  lays 
the  bank  open  to  proceedings  by  the  Government  for  exercising 
powers  not  conferred  by  law.  National  Bank  v.  Matthews,  supra; 
National  Bank  v.  Whitney,  supra;  Swope  v.  Leffingwell,  105  U.S.  3. 


SECT.  II.]  KERFOOT  V.   FARMERS'  BANK.  691 

In  National  Bank  v.  Matthews,  supra,  viewing  that  case  in  this 
aspect,  the  court  said :  — 

"Where  a  corporation  is  incompetent  by  its  charter  to  take  a  title 
to  real  estate,  a  conveyance  to  it  is  not  void,  but  only  voidable,  and 
the  sovereign  alone  can  object.  It  is  valid  until  assailed  in  a  direct 
proceeding  instituted  for  that  purpose.  Leazure  v.  Hillegas,  7  Serg.  & 
R.  (Pa.)  313;  Goundie  v.  Northampton  Water  Co.,  7  Pa.  St.  233; 
Rumjon  v.  Coster,  14  Pet.  122;  The  Batiks  v.  Poitiaux,  3  Rand.  (Va.) 
136;  Mclndoe  v.  The  City  of  St.  Louis,  10  Missouri,  575,  577.  See 
also  Gold  Mining  Co.  v.  National  Bank,  96  U.S.  640." 

This  rule,  while  recognizing  the  authority  of  the  Government  to 
which  the  corporation  is  amenable,  has  the  salutary  effect  of  assuring 
the  security  of  titles  and  of  avoiding  the  injurious  consequences 
which  would  otherwise  result.  In  the  present  case  a  trust  was  de- 
clared and  this  trust  should  not  be  permitted  to  fail  and  the  property 
to  be  diverted  from  those  for  whom  it  was  intended,  by  treating  the 
conveyance  to  the  bank  as  a  nullity,  in  the  absence  of  a  clear  state- 
ment of  legislative  intent  that  it  should  be  so  regarded. 

The  cases  in  this  court,  which  are  relied  upon  by  the  plaintiff  in 
error,  are  not  applicable  to  the  facts  here  presented  and  are  in  no 
way  inconsistent  with  the  doctrine  to  which  we  have  referred. 
McCormick  v.  Market  Bank,  165  U.S.  538;  California  Bank  v.  Ken- 
nedy, 167  U.S.  362;  Concord  First  National  Bank  v.  Hawkins,  174 
U.S.  364. 

It  was  also  urged  by  the  plaintiff  in  error  that  the  deed  was  not 
accepted  by  the  bank,  and  was  inoperative  for  that  reason.  The 
Supreme  Court  of  Missouri  held  upon  the  evidence  that  it  was  ac- 
cepted, and  this  court,  on  a  question  of  that  character,  does  not  re- 
view the  findings  of  fact  which  have  been  made  in  the  state  court. 
Waters-Pierce  Oil  Co.  v.  State  of  Texas,  212  U.S.  86;  Egan  v.  Hart, 
165  U.S.  188;  Clipper  Mining  Co.  v.  Eli  Mining  &  Land  Co.,  194 
U.S.  220. 

Assuming  that  the  deed  was  accepted  by  the  bank,  it  was  effective 
to  pass  the  legal  title,  and  the  plaintiff  in  error  as  heir  at  law  of  the 
grantor  cannot  question  it. 

Judgment  affirmed. 

Note.  —  I.  No  collateral  attack  will  be  permitted  on  the  power  of 
a  corporation  to  be  a  conduit  of  title.  Morris  v.  Hall,  41  Ala.  510, 
537;  Sherwood  v.  Alvis,  83  Ala.  115  (A  mortgages  to  M,  B  purchases 
at  the  foreclosure  sale,  and  may  maintain  ejectment  against  A); 
J^igbee  Co.  v.  Moore,  121  Ala.  379  (M  subscribed  to  and  took  stock 
in  N,  and  transferred  to  A.  A  may  recover  dividends  from  N); 
Barnes  v.  Suddard,  117  111.  237;  Lathrop  v.  Commercial  Bank,  8  Dana 
(Ky.)  114;  Shewalter  v.  Pirner,  55  Mo.  218;  Ragan  v.  McElroy,  98 
Mo.  349;  Parish  v.  Wheeler,  22  N.Y.  494,  504;  Matter  of  Long  Acre 


G92  KERFOOT   V.  farmers'    BANK.  [CHAP.  II. 

Co.,  188  N.Y.  361,  369;  Mallett  v.  Simpson,  94  N.C.  37,  41 ;  Leazure 
V.  Hillegas,  7  S.  &  R.  (Pa.)  313;  Goundie  v.  Northampton  Water  Co., 
7  Pa.  St.  233;  Gilbert  v.  Hole,  2  S.Dak.  164;  National  Bank  v.  Stewart, 
107  U.S.  676;  Fritts  v.  Pa/mer,  132  U.S.  282;  Lantry  v.  ira//flCf,  182 
U.S.  536. 

The  grantee,  B,  from  M,  contracts  to  sell  to  C.  B  may  have  spe- 
cific performance.    Walsh  v.  Barton,  24  Ohio  St.  28. 

II.  The  grantor  to  a  corporation  of  property  which  it  was  ultra 
vires  for  the  corporation  to  receive  cannot  recover  the  property,  or 
have  his  conveyance  removed  as  a  cloud  on  title.  Monns  v.  Hall, 
41  Ala.  510,  537  (A  may  not  maintain  trover  against  M);  Long  v, 
Georgia  Ry.  Co.,  91  Ala.  519,  521;  Hough  v.  Cook  County  Land  Co., 
73  111.  23;  Hayden  v.  Hay  den,  241  III.  183;  Edwards  v.  Fairbanks,  27 
La.  Ann.  449  (judgment  creditors  of  A  seize  the  chattels,  and  M  is 
allowed  to  intervene  in  the  execution  proceedings  and  recover  the 
chattels);  Ragan  v.  McElroy,  98  Mo.  349;  Pittsburgh  Co.  v.  Altoona 
Co.,  196  Pa.  452.  See  also  Miner's  Ditch  Co.  v.  ZcUcrbach,  37  Cal. 
543,  606;  Barrow  v.  Nashinlle  Co.,  9  Humphrey  (Tenn.)  304. 

Similarly  as  to  any  privy  of  A.  Lathrop  v.  Commercial  Bank,  8 
Dana  114;  De  Witt  Co.  Bank  v.  Mickclberry,  244  111.  77  (creditor  of 
mortgagor  not  entitled  to  show  that  M  had  no  power  to  purchase 
the  land  at  foreclosure  sale) ;  Baker  v.  Northwestern  Co.,  36  Minn.  185; 
Christian  Union  v.  Yount,  101  U.S.  352,  361. 

Conversely,  the  corporation  cannot  sue  A  to  recover  back  the 
purchase  price.  Hagerstown  Mfg.  Co.  v.  Keedy,  91  Md.  430.  To 
the  same  effect  is  Baird  v.  Bank  of  Washington,  11  S.  &  R.  (Pa.) 
411,418. 

A  had  land  bounded  by  a  lake.  He  deeded  it  to  M,  whose  purchase 
was  ultra  vires.  A  has  not  thereafter  the  rights  of  a  riparian  proprietor 
against  third  parties.  Attorney-General  v.  Smith,  109  Wis.  532. 

III.  The  corporation  may  enforce  the  usual  incidents  of  owner- 
ship against  third  persons. 

M  may  enjoin  A,  or  a  privy  of  A,  from  interference  with  the  prop- 
erty. Alexander  v.  Tolleston  Club  of  Chicago,  110  111.  65;  Reynolds  v. 
Craufordsville  Bank,  112  U.S.  405,  413. 

M  may  cause  A  to  be  indicted  for  a  trespass  upon  Blackacre,  which 
trespass  is  criminal  because  the  ownership  is  in  M,  a  municipal  cor- 
poration. Commonwealth  v.  Wilder,  127  Mass.  1. 

A  sold  a  three-quarters  interest  in  Blackacre  to  B,  and  a  one- 
quarter  interest  to  M.  The  land  was  sold  to  satisfy  a  lien  in  favor  of 
A's  grantor.  The  whole  lien  was  satisfied  out  of  B's  share  of  the  pro- 
ceeds, on  principles  which  would  hold  if  IVI  acquired  title  to  the  one- 
quarter.  B  was  not  allowed  to  show  that  M's  taking  was  ultra  vires. 
Litchfield  v.  Preston,  98  Va.  530. 


SECT.  II.]  KERFOOT  V.   FARMERS'  BANK.  693 

A  conveyed  to  B,  the  conveyance  being  voidable  because  of  the 
fraud  of  B.  B  conveyed  to  M,  who  paid  value  and  had  no  notice  of 
the  fraud.  M  has  the  rights  of  a  bona  fide  purchaser  against  A. 
Schneider  v.  Sellers,  98  Tex.  380. 

M  may  maintain  ejectment  against  the  casual  possessor.  Natoma 
Co.  V.  Clarkin,  14  Cal.  544,  552;  Chicago  R.R.  Co.  v.  Keegan,  185  111. 
70.  Contra,  Catholic  Congregation  v.  Germain,  104  111.  440  (but  see 
Hamsher  v.  Hamsher,  132  111.  273,  286) ;  Trustees  v.  Dickenson,  1  Dev. 
L.  (N.C.)  189  (M  may  not  maintain  detinue  for  shares  against  a 
stranger.  Decided  in  1827). 

If  the  municipality  damages  Blackacre  by  changing  the  grade 
of  the  street,  M  may  recover  damages.  Louisville  Property  Co.  v. 
Nashville,  114  Tenn.  213  (foreign  corporation). 

M  may  lease  Blackacre  to  B,  and  maintain  an  action  for  the  rent 
against  the  lessee,  Rector  v.  Hartford  Deposit  Co.,  190  111.  380,  and 
the  surety  of  the  lessee,  Nantasket  Co.  v.  Shea,  182  Mass.  147.  It 
may  enforce  other  provisions  of  the  lease.  Springer  v.  Chicago  Trust 
Co.,  202  111.  17;  Cowell  v.  Springs  Co.,  100  U.S.  55,  60. 

M  may  maintain  a  petition  under  the  Burnt  Records  Act  to  con- 
firm its  title.   Cooney  v.  Booth  Packing  Co.,  169  111.  370. 

M  may  acquire,  by  accretion,  more  land  than  it  is  authorized  to 
hold  and  may  maintain  a  bill  to  quiet  its  title  to  such  land.  Chesa- 
peake Co.  V.  Walker,  100  Va.  69. 

M  conveys  or  sells  to  B,  and  may  recover  from  B  the  purchase 
price  according  to  the  contract.  Slater  Woollen  Co.  v.  Lamb,  143 
Mass.  420;  Holmes  &  Griggs  Co.  v.  Holmes  &  Wessell  Co.,  127  N.Y. 
252,  260;  Rutland  Co.  v.  Proctor,  29  Vt.  -93.  And  enforce  a  vendor's 
lien.   Fayette  Land  Co.  v.  Louisville  R.R.,  93  Va.  274. 

If  B  contracts  to  buy,  M  may  have  specific  performance.  Davis  v. 
Old  Colony  R.R. ,  131  Mass.  258,  273;  Lancaster  Y.Amsterdam  Improve- 
ment Co.,  140  N.Y.  576,  584;  Banks  v.  Poitiaux,  3  Rand.  (Va.)  136. 

A  municipality  could  compel  the  sale  to  it  of  the  property  of  a 
water  company  at  a  valuation,  and  sought  so  to  do.  It  was  obliged 
to  pay  for  all  the  property  held  by  the  company  for  the  purposes  of 
its  incorporation,  whether  that  was  in  excess  of  the  amount  author- 
ized or  not.   West  Springfield  v.  Aqueduct  Co.,  167  Mass.  128. 

If  M  makes  an  ultra  vires  purchase  of  a  negotiable  instrument,  it 
may  enforce  the  note  against  prior  parties.  Prescott  National  Bank  v. 
Butler,  157  Mass.  548  (and  prior  cases) ;  Merchants'  Bank  v.  Hanson, 
33  Minn.  40  (directly  overruling  Farmers'  Bank  v.  Baldwin,  23  Minn. 
198,  and  Bank  of  Rochester  v.  Pierson,  24  Minn.  140) ;  Hennessy  v. 
St.  Paul,  54  Minn.  219,  223;  Franklin  Institution  v.  Roscoe,  75  Mo. 
408. 

Contra,  Lazear  v.  National  Union  Bank,  52  Md.  78,  125  (but  see 
United  German  Bank  v.  Katz,  57  Md.  128,  141;  Black  v.  Bank  of 
Westminster,  96  Md.  399,  429). 


694  CALIFORNIA    NATIONAL    BANK    V.  KENNEDY.  [ciIAP.  II. 

If  M  makes  an  ultra  vires  purchase  of  a  non-negotiable  chose  in 
action,  it  may  enforce  it  in  the  same  manner  in  which  any  other 
assignee  could  have  enforced  it.  State  Ins.  Co.  v.  Farmers  Co.,  Go 
Neb.  34,  41;  Farwell  Co.  v.  Wolf,  96  Wis.  10. 


CALIFORNIA  NATIONAL  BANK  v.  KENNEDY. 

167  U.S.  362.     1897. 

This  action  was  commenced  in  the  Superior  Court  of  the  county 
of  San  Diego,  State  of  California,  against  the  California  Savings 
Bank,  and  other  defendants,  including  the  plaintiff  in  error.  In  each 
of  five  counts  of  an  amended  petition  a  separate  cause  of  action  was 
stated,  seeking  a  judgment  against  the  savings  bunk  for  the  amount 
of  a  particular  deposit  of  money  alleged  to  have  been  made  with  it 
on  a  .specified  date,  and  a  recovery  was  asked  against  the  other 
defendants  upon  the  ground  that  they  were  stockholders  in  the  sav- 
ings bank  on  the  dates  of  the  various  deposits,  and  in  consef|uence 
liable  under  the  laws  of  California  to  i)ay  the  debts  of  the  .'savings 
bank  in  proportion  to  the  amount  of  stock  held  and  owned  by  each 
stockholder.  A  demuiTer  to  the  amended  complaint  was  overruled, 
and  the  California  National  Bank  answered,  denying  that  it  was  ever 
the  owner  of  any  stock  in  the  .savings  bank,  and  alleging  that  if  any 
such  stock  was  ever  issued  to  it,  it  was  issued  without  due  authority 
from  the  bank  in  its  corporate  capacity  and  without  authority  of  law. 
The  answer  also  averred  that  the  bank  never  acquired  "in  the  usual 
course  of  business  or  now  has  as  owner  any  stock  of  the  said  (lef(>nd- 
ant,  the  California  Savings  Bank." 

No  issue  was  taken  upon  the  truth  of  the  averments  in  the  amended 
complaint  as  to  the  amount  and  date  of  the  respective  deposits  which 
plaintiff  alleged  he  had  m.ade  in  the  savings  bank. 

From  the  evidence  it  appeared  that  the  savings  bank  began  busi- 
ness in  January,  1890.  Its  stock  consisted  of  twenty-five  hundred 
shares,  and  was  originally  distributed  in  five  certificates,  each  for 
500  shares,  one  certificate  being  made  in  the  name  of  each  of  the 
following  persons:  J.  W.  Collins,  S.  G.  Havermale,  D.  D.  Dare, 
William  CoUier  and  H.  F.  Norcro.ss.  Norcross  had  no  official  con- 
nection with  the  national  bank,  but  Collier,  Dare  and  Collins  were, 
respectively,  president,  vice  president  and  cashier  of  the  national 
bank,  and  were  also,  with  Havermale,  directors  of  the  bank  during 
the  period  when  the  alleged  transfers  of  stock  were  made  to  the  bank. 

The  certificates  in  the  names  of  CoUier  and  Norcross  were  never 
delivered,  and  when  subsequently  cancelled  contained  no  indorse- 
ment. In  the  stead  of  those  certificates,  however,  on  September  10, 
1890,  three  certificates,  aggregating  990  shares,  were  issued  in  the 


SECT.  II.]         CALIFORNIA    NATIONAL    BANK    V.  KENNEDY.  695 

name  of  J.  W.  Collins,  cashier,  and  two  certificates,  each  for  five 
shares,  were  issued  to  Collier  and  Norcross,  respectively.  On  Jan- 
uary 2,  1891,  the  three  certificates  for  990  shares  in  the  name  of 
Collins,  cashier,  were  surrendered,  and  a  single  certificate  for  that 
number  of  shares  was  issued  in  the  name  of  the  California  National 
Bank. 

In  December,  1890,  and  January,  1891,  five  per  cent  dividends 
were  declared  and  paid  on  the  stock  of  the  savings  bank.  The 
amount  of  each  dividend  received  by  the  California  National  Bank 
was  $750.  No  direct  evidence  was  introduced  accounting  for  these 
payments  having  been  made  on  the  basis  of  an  ownership  of  1500 
shares,  when  the  bank  was  sought  to  be  held  liable  for  and  appeared 
to  be  the  holder  of  but  990  shares,  put  in  its  name  as  above  stated. 
Both  the  savings  bank  and  the  national  bank  became  insolvent;  the 
former  suspending  November  12,  1891,  while  the  receiver  of  the 
national  bank  quahfied  December  29,  1891. 

The  cause  was  tried  by  the  court  without  a  jury,  and  by  findings 
of  fact  and  conclusions  of  law  rested  thereon  the  court  sustained  the 
averments  of  the  complaint,  adjudged  the  national  bank  to  be  the 
holder  of  990  shares  of  the  stock  of  the  savings  bank,  and  responsible 
to  the  creditors  of  the  savings  bank  in  that  proportion.  Judgment 
was  entered  against  the  savings  bank  for  $47,497.75,  and  against  the 
national  bank  for  $18,507.52,  a  payment  to  the  savings  bank,  how- 
ever, to  be  a  satisfaction  of  the  judgment  against  the  national  bank. 
Both  at  the  hearing,  by  objection  to  the  introduction  in  evidence  of 
the  certificate  of  stock,  and  in  a  statement  filed  with  the  motion  for 
a  new  trial,  the  point  was  made  that  the  issue  of  the  stock  to  the 
bank  was  void  because  not  shown  to  have  been  acquired  pursuant 
to  authority  of  its  board  of  directors,  and  because  the  stock  was  not 
taken  in  the  ordinary  course  of  the  business  of  the  bank  as  security 
for  the  payment  of  a  debt  or  otherwise.  In  addition,  by  the  first, 
second  and  third  specifications  of  errors  of  law  occurring  at  the  trial 
it  was  specially  stated  that  error  had  been  committed  in  admitting 
the  certificate  in  evidence  and  holding  the  national  bank  liable  — 
substantially  the  same  language  being  employed  in  each  specifica- 
tion —  because  the  national  bank,  a  corporation  under  the  banking 
laws  of  the  United  States,  could  "not  in  law  become  a  stockholder 
or  incorporator  in  any  other  corporation."  The  motion  for  a  new 
trial  was  overruled,  and  an  appeal  was  taken  to  the  Supreme  Court 
of  the  State,  by  which  court  the  judgment  was  affirmed.  101  Cali- 
fornia, 495.  A  writ  of  error  was  allowed,  and  the  cause  has  been 
brought  here  for  review. 

Mr.  Justice  White.  [After  holding  that  a  national  bank  has  no 
power  to  purchase  or  subscribe  to  the  stock  of  another  corporation.^] 

The  transfer  of  the  stock  in  question  to  the  hank  being  unauthorized 

1  The  opinion  on  this  point  is  set  forth  at  p.  415,  supra. 


696  CAUFORNIA    NATIONAL    BANK    V.  KENNEDY.         (CHAP.  II. 

by  law,  does  the  fact  that,  under  some  circumstances,  the  hank  might 
have  legally  acquired  stock  in  the  corporalion  estop  the  bank  from  setting 
up  the  illegality  of  the  transaction  t 

Whatever  divergence  of  opinion  may  arise  on  this  question  from 
conflicting  juljuthfations  in  t>oine  of  the  state  courts,  in  this  court 
it  is  scttU'd  in  favor  of  the  ri^ht  of  the  cori><)ration  to  pU'Uil  its  want 
of  power,  that  is  to  say,  to  asst'rt  the  nuUity  of  an  act  which  is  an 
xdtra  vires  act.  Tlie  cases  of  Thomas  v.  Railroad  Company,  101  U.S. 
71 ;  Pennsylvania  Railroad  v.  »S7.  Louis,  Alton  d'C.  Railroad,  118  U.S. 
290;  Oregon  Railway  A  \avigation  Co.  v.  Oregonian  Railway  Co.,  130 
U.S.  1;  Ritlaburgh,  Cincinnati  etc.  Railway  v.  Keokuk  it'  Hamilton 
Bridge  Co.,  131  U.S.  371;  Central  Transp.  Co.  v.  Pullman's  Car  Co., 
139  U.S.  24;  St.  Louis  d'c.  Railroad  v.  Terrc  Haute  tt'  Indianapolis 
Railroad,  14.5  U.S.  393;  Union  Pacific  Railway  v.  Chicago  S:c.  Rail- 
way, 1()3  U.S.  .')t)4,  and  MciUmnick  v.  Market  \ai.  Hank,  UWi  U.S. 
538,  recognize  a.s  sound  doctrine  tiiat  the  lowers  of  cor|)orations  are 
such  only  as  are  conferre<l  U|K)n  them  by  statute,  and  that,  to  quote 
from  the  opinion  of  the  court  in  Central  Transp.  Co.  v.  Pullman's 
Palace  Car  Co.,  139  U.S.  24.  .')9  to  W): 

"A  contract  of  a  corporation,  which  is  tdtra  vires,  in  the  proper 
sense,  that  is  to  say,  outside  the  object  of  its  creation  as  defined  in 
the  law  of  its  organization,  and  therefore  l)eyond  the  powers  con- 
ferred upon  it  by  tiie  legislature,  is  not  voidable  only,  but  wholly 
void,  and  of  no  legal  eft'ect.  The  objection  to  the  contract  is,  not 
merely  that  the  corporation  ought  not  to  have  made  it,  but  that  it 
could  not  make  it.  The  contract  cannot  l)e  ratified  by  either  party, 
because  it  could  not  have  Ix'cn  authorized  by  either.  No  jxTformance 
on  either  side  can  give  the  unlawful  contract  any  validity,  or  Ix;  the 
foundation  of  any  right  of  action  upon  it." 

This  language  was  al.so  citetl  and  expressly  approved  in  Jackson- 
ville ii-c.  Railway  v.  Hooper,  100  U.S.  514,  .524,  ,5.30. 

As  .^aid  in  McConnick  v.  Market  Xational  Hank,  105  U.S.  5.38,  549: 

"The  doctrine  of  ultra  vires,  by  which  a  contract  made  by  a  cor- 
poration beyontl  the  scope  of  its  corporate  powers  is  unlawful  and 
void  and  will  not  support  an  action,  rests,  as  this  court  has  often 
recognized  and  affirmed,  upon  three  distinct  grounds:  The  obliga- 
tion of  any  one  contracting  with  a  corporation  to  take  notice  of  the 
legal  limits  of  its  powers;  the  interest  of  the  stockholders  not  to  be 
subject  to  risks  which  they  have  never  undertaken;  and.  al>ove  all, 
the  interest  of  the  public  that  the  corporation  shall  not  transcend 
the  powers  conferred  upon  it  by  law.  Pearce  v.  Madisoji  d'  Indian- 
apolis Railroad,  21  How.  441;  Pittsburgh,  Chicago  d'C.  Railway  v. 
Keokuk  &  Haiyiilton  Bridge  Co.,  131  U.S.  371,  384;  Central  Transp. 
Co.  v.  Pullman's  Palace  Car  Co.,  139  U.S.  24,  48." 

The  doctrine  thus  enunciated  is  likewise  that  which  obtains  in 
England. 


SECT.  II.]         CALIFORNIA    NATIONAL    BANK    V.  KENNEDY.  697 

The  circumstance  that  the  deahng  in  stocks  by  which,  if  at  all, 
the  stock  of  the  California  Savings  Bank  was  put  in  the  name  of  the 
California  National  Bank,  was  one  entirely  outside  of  the  powers 
conferred  upon  the  bank,  and  was  in  nowise  the  transaction  of  bank- 
ing business  or  incidental  to  the  exercise  of  the  powers  conferred 
upon  the  bank,  distinguishes  this  case  from  the  class  of  cases  relied 
upon  by  the  defendant  in  error.  National  Bank  v.  Whitney,  103  U.S. 
99;  National  Bank  v.  Matthews,  98  U.S.  621.  The  difference  between 
those  cases  and  one  like  this  was  referred  to  in  McCormick  v.  Market 
National  Bank  of  Chicago,  supra,  and  it  is,  therefore,  unnecessary  to 
particularly  review  them.  The  claim  that  the  bank  in  consequence 
of  the  receipt  by  it  of  dividends  on  the  stock  of  the  savings  bank  is 
estopped  from  questioning  its  ownership  and  consequent  liability, 
is  but  a  reiteration  of  the  contention  that  the  acquiring  of  stock  by 
the  bank  under  the  circumstances  disclosed  was  not  void  but  merely 
voidable.  It  would  be  a  contradiction  in  terms  to  assert  that  there 
was  a  total  want  of  power  by  any  act  to  assume  the  liability,  and 
yet  to  say  that  by  a  particular  act  the  liability  resulted.  The  trans- 
action being  absolutely  void,  could  not  be  confirmed  or  ratified. 
As  was  said  by  this  court  in  Union  Pacific  Railway  v.  Chicago  &c. 
Railway,  163  U.S.  564,  speaking  through  Mr.  Chief  Justice  Fuller 
(p.  581):  — 

"A  contract  made  by  a  corporation  beyond  the  scope  of  its  powers, 
express  or  implied,  on  a  proper  construction  of  its  charter,  cannot 
be  enforced,  or  rendered  enforceable  by  the  application  of  the  doc- 
trine of  estoppel." 

It  follows  from  the  foregoing  that  the  judgment  of  the  Supreme 
Court  of  California  against  the  bank  was  erroneous,  and  it  must, 
therefore,  be 

Reversed. 

Mr.  Justice  Harlan  dissented. 

Note.  —  The  principal  case  was  followed  in  Concord  First  National 
Bank  v.  Hawkins,  174  U.S.  364;  First  National  Bank  v.  Converse,  200 
U.S.  425;  Merchants'  Bank  v.  Wehrmann,  202  U.S.  295.  And  of 
course  is  binding  on  state  courts  in  case  of  a  national  bank.  Chemical 
Bank  v.  Havermale,  120  Cal.  601;  Leonhardt  v.  Small,  117  Tenn.  153. 

In  First  National  Bank  v.  Converse  (already  referred  to  at  p.  427, 
supra),  a  bank  loaned  money  to  a  corporation,  which  became  insol- 
vent. There  was  a  transfer  of  the  assets  of  this  corporation  to  a  new 
corporation,  by  way  of  reorganization,  and  the  bank,  with  other 
creditors,  took  preferred  stock  in  the  new  corporation  for  its  claim. 
About  17  years  later,  the  second  corporation  became  insolvent,  and 
a  receiver  sought  to  enforce  against  the  bank  the  hability  incident  to 
the  ownership  of  such  stock.  The  bank  successfully  defended  on  the 
ground  that  it  was  ultra  vires  for  it  to  receive  such  stock. 


098  CALIFOUNIA    NATIONAL    BANK    I'.   KENNEDY.         [»  HAP.  11. 

That  the  result  roached  in  the  princiiml  caHe  was  not  l>a«e<l  upon 
the  hick  of  authorization  l»y  the  (hri'etoi-s  is  inatle  phiin  hy  the  faetH 
aiul  decisions  in  Ctrruuid  I'lr.sl  \ittinnal  Hunk  v.  JJtiuhins  an<l  Fint 
Nutumnl  Bank  v.  Converse.  In  the  first  of  these  cawes  tlie  court  haid 
(174  r.S.  '.M,  309):  "Tlie  remaining  (|uestion  for  our  detenuination 
is  wliether  tlie  First  National  Bank  of  Concord,  having;,  as  a  matter 
of  fact,  l>ut  without  authority  of  law,  purcha.s4'<l  and  held  :is  an 
investment  shares  of  stock  in  tlie  h»dianai)olis  National  Hank,  can 
protect  itself  from  a  suit  by  the  receiver  of  the  latter  l)rt)unht  to 
enforce  the  stockholders'  liability,  by  alU'trinp  the  unlawfuhn-ss  of 
its  own  action."  And  that  the  authorization  by  the  entire  Uxly  of 
sto<klioldei-s  would  make  no  diffen^nce  is  phiin  from  the  reasoning 
of  the  court  in  Central  Trans])oriatuyn  Co.  v.  I'ulhnan's  Car  Co.,  I.'i9 
U.S.  24,  infra,  anil  the  eases  based  thereon.  "The  contract  cannot 
l)e  ratified  l)y  either  [uirty,  U^-ause  it  could  not  have  Uvn  auth.oriz<M| 
by  either.  No  jHTfonnance  on  either  si<le  can  pve  the  unhiwful 
contract  any  validity,  or  l)e  the  foundation  of  any  right  of  action 
upon  it."  And  that  the  siuue  rtsult  would  have  Uvn  reaclutl  even 
if  the  corj)oration  was  solvi-nt  is  plain  from  the  cases  just  citeil, — 
thai  is  to  s:»y,  the  court  is  not  pro<«"«'<linK  on  the  narrow  j;,ro»ind 
that  ultra  I'ires  creilitors  must  U*  dcfernnl  to  intra  rirea  creditors. 

Such  a  decision  is  a  logical  detiuction  from  the  reasoning  of 
Lord  Caiknm  in  Ashbury  Co.  v.  liichc,  ifujyra,  as  to  cf)rporate  legal 
capacity  and  was  to  l>e  exi)ecte<l  in  lingland.  Hut  in  the  I'niled 
States,  the  ciu^es  already  given,  or  note<l,  in  this  s<*ction  show  that  n 
cor|)oration  may  Ih^  lialile  for  an  ultra  rirci  act  (\ational  Hank  v. 
Cralmm,  l(K)  I'.S.  09<);  Salt  Lake  Citii  v.  Ilollister,  1 18  U.S.  250);  and 
that  a  transfer  to  it  of  projxTty,  ultra  vire.s  for  it  to  hold,  usually 
becom(>s  a  foundation  to  it  of  the  rights  commonly  incident  to  the 
ownership  of  such  property  {Xatianal  Bank  v.  Mallheus,  supra; 
Cowell  V.  Sjmngs  Co.,  100  U.S.  5o,  00;  Rnjnolds  v.  Craufordsville 
Bank,  112  U.S.  40;i.  413).  It  is  submitted  that  such  tran.'^fer  should 
also  usually  l)e  a  foundation  of  the  liabilities  commonly  incident  to 
the  ownership  of  such  pro|H'rty. 

See,  in  accord  with  the  principal  case.  Converse  v.  Emerson,  242  111. 
019. 

See,  contra.  Fidelity  Insurance  Co.  v.  German  Savings  Bank,  127 
Iowa.  591 ;  Hunt  v.  Hauler  Malting  Co.,  90  Minn.  282;  Scairily  Bank 
v.  St.  Croix  Co.,  117  Wis.  211,  218.  See  also  Turtclot  v.  Whithcd,  9 
N.D.  407,  470;  Wright  v.  Pipe  Line  Co.,  101  Pa.  204. 

A  religious  corporation  holding  property  ultra  rires  is  not  exempt 
from  taxation  on  such  property.  Evangelical  Society  v.  Boston,  204 
Mass.  28. 


SECT.  II.]  MATTER    OF    MCGRAW.  699 

Matter  of  McGRAW. 

Ill  N.Y.  66.     1888. 

Appeal  from  a  judgment  of  the  Supreme  Court,  which  reversed  a 
decree  made  by  the  Surrogate  of  Tompkins  County  on  the  settlement 
of  the  account  of  Douglass  Boardman,  executor  of  the  will  of  Mrs. 
Jennie  McGraw  Fiske.  The  will  of  Mrs.  Fiske  directed  that  her 
estate  "be  converted  into  money,  or  available  securities,  as  soon  as 
can  be  done,  having  in  view  its  best  interests  and  results."  After 
numerous  bequests  including  a  bequest  of  $250,000  to  Cornell  Uni- 
versity in  trust,  the  will  contains  the  following  residuary  clause:  "I 
give,  devise  and  bequeath  all  the  rest,  residue  and  remainder  of  my 
property  (if  any  there  shall  be)  to  Cornell  University,  aforesaid,  to 
be  added  to  the  'McGraw  Library  Fund'  aforesaid,  and  subject  to 
the  trusts,  purposes,  uses  and  conditions  hereinbefore  prescribed  for 
said  fund." 

The  Revised  Statutes  provide  that  a  devise  of  real  estate  may  be 
made  to  every  person  capable  by  law  of  holding  real  estate;  "but  no 
devise  to  a  corporation  shall  be  valid  unless  such  corporation  be  ex- 
pressly authorized  by  its  charter  or  by  statute  to  take  by  devise." 
(2  R.S.  57,  §§  1,  2,  3.)  The  Revised  Statutes  also  enact,  that  the 
trustees  of  every  college  chartered  by  the  State  shall  have  power  "to 
take  and  hold,  by  gift,  grant,  or  devise,  any  real  or  personal  property, 
the  yearly  income  or  revenue  of  which  shall  not  exceed  the  value 
of  twenty-five  thousand  dollars."  (1  R.S.  460,  §§  31-37.)  Cornell 
University  was  incorporated  by  chapter  585  of  the  Laws  of  1865. 
Section  5  of  the  charter  is  as  follows:  "Sec.  5.  The  corporation 
hereby  created  may  hold  real  and  personal  property  not  exceeding 
three  millions  of  dollars  in  the  aggregate." 

The  husband,  next  of  kin,  and  heirs  at  law,  of  Mrs.  Fiske,  con- 
tended that  Cornell  L^niversity,  at  the  date  of  Mrs.  Fiske's  death, 
already  owned  property  exceeding,  in  the  aggregate,  three  millions 
of  dollars. 

The  amount  of  Mrs.  Fiske's  estate  was  such  that,  after  deducting 
the  legacies  to  parties  other  than  Cornell  L^niversity,  there  was  a 
balance  of  more  than  one  milhon  which  would  go  to  the  University 
if  the  will  were  carried  out. 

Peckham,  J.  The  counsel  states  accurately  the  law  of  mortmain 
in  England  and  its  consequences  of  possible  forfeiture  of  the  estate 
granted,  and,  until  forfeiture,  the  vesting  of  the  title  in  the  corpora- 
tion indefeasible,  except  by  the  reentry  of  the  person  entitled  to  take 
it  by  reason  of  the  forfeiture.  But  the  circumstances  under  which 
lands  are  held  b}''  citizens  of  New  York,  where  their  tenure  is  so 
wholly  different  from  that  which  prevailed  in  England  when  the 
early  mortmain  acts  were  enacted,  render  any  argument  in  regard  to 


700  MATTER    OF    McGRAW.  [cilAP.   11. 

those  acts  and  their  effect  totally  inapplicable  to  the  case  of  a  cor- 
poration of  this  State.  Taking  the  law  as  it  exists  in  our  statutes, 
iiK  lu(iiri;f  the  special  provision  upon  the  subject  in  the  charter  of 
the  university,  it  seems  tome  that  the  provision  thrrcin,  limiting  the 
holding  of  property,  is,  as  I  have  said,  a  restriction  also  u{>on  the 
power  to  take  in  excess  of  the  specified  amount.  The  nature  of  the 
tenure  of  real  projxTty  at  the  time  of  the  pa.'vSiipo  of  the  early  mort- 
main acts  in  Knf^land  hears  no  re.s<>ml)lance  to  the  tenure  hy  which 
a  citizen  of  this  State  holds  lands.  Here  there  is  no  vassiil  and 
superior,  hut  the  title  is  aljsolute  in  the  owner,  and  subject  only  to 
the  liability  to  escheat.  (Const,  of  N.V.,  art.  1,  §  13.)  The  escheat 
takes  place  when  the  title  to  lands  fails  through  defect  of  heirs. 
(Const,  of  N.Y.,  art.  1.  §  11.) 

A  devise  to  a  corjHjration  which  is  forbidden  to  take  (or  forbi<lden 
to  hold,  if  the  word,  under  the  circumstances  of  the  case,  is  construed 
to  include  a  taking  also)  (1(k>s  not,  therefore,  give  a  title  subject  to 
the  right  of  some  suiMMMor  to  claim  a  forfeiture  of  the  land;  but  if  it 
be  in  violation  of  a  statute,  I  think  the  devise  is  void  and  the  land 
descends  to  the  heir  or  residuar>'  devisee.  .  . 

Whether  the  legislature,  when  using  language  providing  for  a  lim- 
itation upon  holding  proix-rty,  meant  to  ix-rmit  an  unlimited  taking, 
is  a  question  of  legislative  intent;  and  1  think  the  general  inference 
would  lx»,  in  the  absence  of  .some  plain  and  controlling  circumstance 
to  the  contrary,  that  the  legislative  IkxIv  meant  to  limit  a  taking  as 
well  as  a  holding  lu'vond  the  s[>ecified  amount.  .  .  . 

The  counsel  for  the  appellant  does  not  claim  that  this  property  was 
itself  forfeited  to  the  State,  if  the  State  should  ch(K)se  to  enforce  the 
forfeiture.  His  claim  is,  as  I  understand  it,  that  if  the  university  ex- 
ceedetl  its  limitation  by  holding  more  pro|K'rty  than  it  was  allowed 
by  law  to  hold,  a  cause  of  forfeiture  of  the  charter  was  therel)y  cre- 
ated, and  that  in  enforcing  such  forfeiture,  after  the  payment  of  the 
del)ts  of  the  corporation  the  rest  of  the  property  would  (as  he  insists) 
prol)ably  go  to  the  State  l)ecause  there  would  l)e  no  living  claimant 
to  it  who  would  have  any  right  to  ac(|uire  it.  A  ff)rfeiture  the  State 
may  claim  and  may  enforce  at  pleasure,  when  the  occasion  ari.ses, 
but  it  is  a  forfeiture  of  the  charter  and  not  a  forfeiture  of  the  projx'rty 
held  by  the  corporation.  It  is  further  claimed  that  this  distinction 
between  the  right  to  take  and  the  power  to  hold  property  is  one  which 
has  been  admitted  and  enforced  in  the  courts  of  England,  of  this 
State  and  of  the  other  States  of  the  Union  for  a  long  number  of  years; 
and  that  there  is  no  reason  why  effect  to  such  a  distinction  should 
not  be  given  in  this  case,  the  result  lx>ing,  as  is  stated,  that  the  cor- 
poration has  an  unlimited  right  to  take  property  and  also  an  un- 
hmited  right  to  hold  it  as  against  any  one  but  the  State  in  its  capac- 
ity of  sovereign.  There  is  undoubtedly  a  distinction  between  the 
right  to  take  and  the  power  to  hold  property  under  some  circum- 


SECT.  II.]  MATTER    OF    MCGRAW.  701 

stances,  the  only  question  being  whether  the  legislature  had  such 
distinction  in  mind  and  meant  to  provide  for  it  in  the  case  in  hand. 
It  is  said  that  an  alien  has  the  right  to  take  property  by  purchase, 
but  he  cannot  hold  it  as  against  the  State.  That  is  so.  He  takes, 
however,  a  defeasible  title,  good  as  to  all  but  the  sovereign  power, 
which  must  take  it  upon  office  found  or  by  escheat.  (Wright  v. 
Saddler,  20  N.Y.  320.) 

In  such  case  it  is  not  exactly  an  accurate  description  of  the  ahen's 
title  to  simply  say  that  he  can  take  but  cannot  hold.  That  is  a  con- 
tradiction in  terms.  If  he  take,  he  must  hold,  if  for  but  a  fractional 
part  of  a  second  of  time.  The  expression  is  but  a  short  one  for  the 
statement  that  he  cannot  hold,  as  against  the  claim  of  the  State, 
where  properly  made  and  enforced.  The  same  expression  is  used  in 
the  case  of  a  corporation  under  the  mortmain  laws,  that  it  can  take 
but  not  hold,  the  meaning  being  that  it  cannot  hold  as  against  the 
claim  for  forfeiture  when  made  by  the  next  superior  lord  of  the 
grantor  of  the  lands.  That  the  words  lose  all  their  meaning  when 
wrenched  from  the  circumstances  under  which  they  were  used,  and 
applied  to  corporations  existing  by  virtue  of  the  laws  of  this  State, 
seems  to  me  a  plain  proposition. 

But  it  is  said  that  where  property  is  given  to  a  corporation  which 
has  power  to  take  or  hold  under  some  circumstances,  the  title  vests  in 
the  corporation,  for  otherwise  the  State  would  never  obtain  the  right 
to  forfeit  even  the  charter  for  a  violation  thereof.  The  argument  is, 
the  corporation  would  answer  a  claim  to  forfeit  the  charter  by  the 
fact  that  the  charter  precluded  it  from  taking  such  property,  and, 
therefore,  as  it  could  not,  it  had  not  done  so.  I  do  not  see  the  force 
of  the  argument.  The  charter  may  preclude  the  rightful  taking  of 
the  property  by  the  corporation,  and  may  prevent  the  legal  title 
from  vesting  in  it,  but  that  has  nothing  to  do  with  the  fact  that, 
nevertheless,  the  corporation  has,  as  a  physical  act,  taken  the  prop- 
erty and  may  be  insisting  upon  its  right  to  keep  it  as  matter  of  law. 
In  such  case  can  there  be  any  doubt  that  the  corporation  has  taken 
and  is  holding  the  property  as  its  own  and  in  defiance  of  the  charter, 
and  that  it  may  be  punished  by  having  its  charter  forfeited,  although 
the  rightful  owner  of  the  property  may  thereafter  obtain  his  own? 
The  fact  that  he  does  obtain  it  is  no  answer  to  the  other  fact  that 
the  corporation  had  taken  it,  nor  is  it  any  legal  answer  to  the  claim 
of  forfeiture  of  the  charter,  on  the  part  of  the  State,  that  it  was  un- 
successful in  continuing  to  hold  the  property  against  the  charter 
provisions. 

Although  we  never  adopted  or  enacted  the  English  statutes  of 
mortmain,  yet  in  this,  as  in  other  States,  we  have  a  decided  mortmain 
policy.  It  is  found  in  our  statute  in  relation  to  wills,  prohibiting  a 
devise  to  a  corporation  unless  specially  permitted  by  its  charter  or 
by  some  statute  to  take  property  by  devise. 


702  MATTER    OF    MtGIUW.  (CHAP.  II. 

"It  is  a  statute  of  inortinain,  rcstinR  on  a  inortiimin  ikjUcv  aa 
distinctly  as  any  act  of  tlic  Hritish  parliament.  .  .  .  The  in'ccswity  i.s 
recojfnized  of  forhitldin^  the  accjuisition  hy  will,  unless  the  Icjjisla- 
ture,  in  granting  the  charter,  and  in  full  view  of  the  reasons  for  so 
tloinK,  think  proper  to  confer  the  power  in  express  terms.  .  .  .  Nor 
is  this  necessity  hy  any  means  a  fanciful  one.  It  is  eminently  praise- 
worthy to  ^ive  in  the  interest  of  charity  ami  religion.  But  in  the  last 
houi-s  of  life  exaggerated  impressions  of  charitaMe  or  religious  duty 
often  oljscure  the  judgment  of  men  and  subject  them  to  undue  influ- 
ence and  |XM-suasion.  Against  the.se  the  statute  is  intended  to  guard, 
lu'cause  it  is  in  Ix'half  of  ass^jciations  incorporat«*d  for  pious  ant! 
l)enev'olent  purposes  that  the  .s(«ntiments  of  men  in  such  situations 
arc  most  generally  apjx'aled  to.  The  enactment  is,  therefore,  prohib- 
ilonj  and  it  ought  to  be  expoutuled  and  applied  in  that  sense."  (Per 
Co.MsTOCK,  Ch.J.,  in  D(ncning  v.  Marshall,  23  N.V.  3G(),  387.) 

"Judges  have  given  the  widest  po.sMihle  scojx^  to  statutes  in 
restraint  of  the  disposiil  of  property  in  mortmain,  and  have  l)een 
astute  in  their  arguments  for  the  application  of  such  statutes  to 
ca.oies  as  they  arose.  (Per  (  Jibsqn.  Ch.J..  Ilillyard  v.  Miller,  10  Penn. 
32().)  The  courts  ought  not  to  impute  an  intent  to  the  legislature 
not  clearly  expressed,  in  direct  hostility  to  the  tra(Htions  and  {x^licy 
of  the  past.  .  .  .  Claiming  property  and  seeking  the  aid  of  the  courts 
to  reach  it,  the  corporation  can  rely  only  on  the  warrant  and  author- 
ity conferred  hy  law,  and  caimot  claim  in  transgression  or  excess  of 
that  authority.  .  .  .  Doubtless,  the  restriction  upon  corfwrations  is  a 
governmental  regulation,  and  one  of  policy,  and  to  Ix'  enforced  by 
the  government:  but  an  individual  whose  interests  will  Ix^  affected 
by  a  transgrc-^sion  of  the  rule,  may  a.ssert  and  insist  upon  the  limita- 
tion as  a  restriction  upon  the  power  of  the  corporation  to  take." 
(Per  Allen,  J.,  in  Chamberlain  v.  Chamberlain,  43  X.Y.  424-439.) 

Under  our  general  statutes  upon  the  subject  of  the  right  to  take  or 
hold  projx^rty  by  corporations,  and  reading  them  in  connection  with 
the  provisions  of  the  charter  of  the  university,  we  should  Ix^  astute 
in  our  arguments  against  the  application  of  the  mortmain  statutes 
instead  of  in  favor  of  them,  if  we  should  decide  that  the  language 
of  the  charter  did  not  apply  as  well  to  a  taking  as  of  a  holding  of 
property  l)eyond  the  expressed  limit. 

There  can  be  no  doubt  that  it  is  the  law,  in  this  State  at  least,  that 
if  there  Ix^  a  prohibition  against  the  taking  of  proix'rty  bc\'ond  a 
certain  amount  or  value,  a  devise  or  bequest  to  a  corporation  of 
property  which  will  exceed  the  amount  or  value  which  the  corpora- 
tion is  permitted  to  take,  will  be  void  for  the  excess.  This  is  expressly 
decided  in  the  Chamberlain  Case,  and  we  think  it  was  rightl}'  de- 
cided. Nor  is  there  any  doubt  that  in  such  a  ca.«?e  the  heirs  or  next 
of  kin  can  raise  the  question.  This  was  also  decided  in  the  same  case. 
(See,  also,  White  v.  Howard,  46  N.Y.  144.)    When  we  come  to  the 


SECT.  II. J  MATTER    OF   McGRAW.  703 

conclusion,  therefore,  that  this  university  is  by  law  precluded  (or 
was  precluded  at  the  time  of  the  death  of  Mrs.  Fiske)  from  taking 
more  than  the  amount  of  property  limited  in  its  charter,  we  bring 
the  case  precisely  within  the  rules  laid  down  in  the  cases  just  cited. 

The  counsel  claims,  however,  that  a  devise  to  a  corporation  vests 
the  title  in  it,  so  far  as  the  question  of  capacity  is  concerned,  when- 
ever it  would  in  the  case  of  a  sale  for  a  valuable  consideration.  Hence 
he  says  that  the  cases  of  sales  above  cited  are  decisive  of  this,  if  they 
be  admitted  as  well  decided.  In  the  case  of  an  executed  sale,  however, 
'  the  question  of  ultra  vires,  as  set  forth  in  the  modern  cases,  comes  in 
play,  and  the  question  of  a  want  of  title  in  the  corporation  in  such 
case  would  not  be  permitted  to  be  raised  by  the  grantor  or  his  heirs, 
because  it  would  be  against  justice  and  would  accomplish  a  legal 
wrong.    {Whitney  Arms  Co.  v.  Barlow,  63  N.Y.  62.) 

The  question  of  an  executed  gift  without  consideration  by  a  donor, 
by  an  absolute  delivery  to  a  corporation  without  power  to  take,  is 
also  instanced,  and  the  question  is  asked  whether  the  title  vests  in 
such  a  case  in  the  corporation  so  that  the  donor  or  his  heirs  could  not 
recover  it  back,  and  if  it  do,  the  counsel  asks  where  is  the  difference 
in  the  two  cases.  It  is  time  enough  to  decide  such  a  case  when  it 
arises.  But  it  seems  to  me  there  is  a  decided  difference.  In  the  one 
case  the  gift  is  made  inter  vivos  by  the  absolute  owner,  and  it  is  made 
effectual  as  to  him  by  a  delivery.  In  such  case  it  would  seem  that  he 
stands  in  no  position  to  ask  the  aid  of  the  court  to  get  him  out  of  a 
situation  into  which  he  voluntarily  entered  with  his  eyes  open,  and 
the  court  might  well  say  to  him  that  he  stood  in  no  position  to  attack 
the  right  of  his  donee  to  property  which  he  freely  and  absolutely 
gave  it.  As  to  his  heirs  it  could  be  said  that  their  ancestor  had  made 
a  disposition  of  property  which  was  absolutely  his  own  in  his  life- 
time, and  in  such  a  way  that  he  could  not  question  its  validity,  and 
that  as  he  could  not,  they  succeeding  only  to  his  rights,  were  alike 
disabled. 

In  the  case  of  a  devise,  however,  the  case  is  essentially  different. 
The  will  does  not  take  effect  until  the  testator's  death,  and  then,  if 
his  property  is  not  legally  devised  or  bequeathed,  no  title  vests  for  a 
single  moment  in  the  devisee  or  legatee,  but  it  vests  instantly  in  the 
heir  or  next  of  kin ;  and  the  corporation  claiming  under  the  will  asks 
the  aid  of  the  law  to  give  the  property  to  it,  and  in  so  doing  it  must 
show  the  authority  it  has  to  take.  .  .  . 

[After  referring  to  the  fact  that  the  legislature,  subsequently  to 
the  death  of  Mrs.  Fiske,  passed  an  act  which  took  away  any  limita- 
tion on  the  power  of  the  university  to  hold  property.] 

However  perfect  may  be  the  waiver  in  the  act  alluded  to,  of  the 
right  of  the  State  to  forfeit  the  charter  of  this  university  on  account  of 
any  alleged  violation  thereof,  such  act  can,  of  course,  have  no  possi- 
ble effect  upon  rights  of  property  which  vested  at  the  death  of  Mrs. 


704  HUBBARD    t'.   WORCEMTER    ART    IIUHKI'M.  [cilAP.  II. 

Fiske  antl  U'fore  tlie  jMussam'  of  tlie  act  in  queistion.   {White  v.  //oir- 
ard,  4t>  N.Y.  144.)  .  .  . 

Tfiis  will  (i('vist«  no  real  ewtate  to  Cornell  University.  .  .  .  (The 
will)  <lircrts  that  the  estate  of  the  t4-»tatrix  xhall  U-  eonvert«'tl  into 
nioiuy  or  available  siruritie?:  hy  her  executor  us  jsotm  a.s  it  can  Ijc 
done,  liavinn  in  view  the  lx?«t  interesta  of  the  estate.  This  (iire<'tion 
to  convert  ofK-rated  jus  an  e<|uital»le  converxi<»n  of  the  estate  of  the 
testatrix  into  money  or  available  securities,  an«l  hence  no  real  estate 
in  other  states  luus  Ixi-n  devised  by  her  to  the  university.  .  .  . 

I'fKjn  a  review  of  the  whole  (juj-stion  as  to  the  profK'r  construction 
of  the  icf^islation,  general  and  si)ociaI,  afTectinn  this  university,  I  am 
of  the  opinion  that  it  had  im)  |M)w«'r  to  take  or  hold  any  more  real  and 
personal  proiKTty  than  $;i,U(J<),()0(),  in  the  a|ycrej;ate. 

Scamd.  Coming  to  the  conclusion  I  have,  on  the  first  branch  of 
the  ca.se,  it  lH'conH>s  nec(»ssar>'  to  examine  the  second  an<l  otdy  re- 
maiiiinp;  (juestion,  viz.:  Dim-s  this  projXTty,  if  taken  and  held  by  the 
university,  exceed  the  amount  which  by  law  it  can  hold? 

(The  court  hdd,  that  the  proj^-rty  of  the  university,  at  the  time  of 
the  decease  of  Mrs.  Fiske,  amounted  to  more  than  "its  permitted 
anKrepite";  and  that,  under  such  <'ircumstances,  the  university  could 
not  take  the  various  legacies  l»<*<|ueatlH'<l  to  it  by  her  will.) 

Jwltjmcnt  of  (leneral  Term  affirmed. 

All  concur,  except  Finch,  J.,  taking  n«)  part. 

Not?:.  —  Collateral  attack  uj)on  the  power  of  the  corporation  to 
receive  property  devised  or  IxMjueathed  to  it  wius  also  jHTmitted  in 
Cromie  v.  Louisville  Orphans'  Home,  '.i  Bush  (Ky.)  305,  38.3;  Davidson 
College  v.  Chambers,  3  Jones  Eq.  (N.C.)  253;  W<hhI  v.  Hammond,  IG 
K.I.  98,  115;  House  of  Mercy  v.  Davidson,  90  Tex.  o2U. 


IUHBARn   i:   \VOIlCr:STER  ART   MlSKl'M. 

10  J  Mom.  2K0.     1907. 

The  Worcester  Art  Museum  was  the  residuary  legatee  in  the  will 
of  Stephen  Salisbur>'.  If  the  intention  of  the  testator  were  carried 
out,  tiie  Museum  would  receive,  und(T  the  will,  real  and  [wrsonal 
estate  amounting  in  value  to  Ijctween  §2,000.000  and  §^3,500,000. 
By  the  R.L.  c.  125,  §  8,  such  a  corporation  as  the  Museum  was 
authorized  to  "hold  real  and  personal  estate  to  an  amount  not  ex- 
ceeding !?1.51X).(XM)."  By  the  St.  1006,  c.  312,  enacted  after  the  pro- 
bate of  the  will,  the  right  of  the  Museum  to  hold  real  and  jx^rsonal 
estate  was  enlarged  to  an  amount  not  exceeding  $5,(XX),(XX).  The 
petitioners,  the  heirs  of  Stephen  Salisbury',  contend  that,  by  reason 
of  the  limitation  in  the  statute,  the  gift  was  void;  that,  as  heirs  at 


SECT.  11.1  HUBBAKD   V.  WORCESTER    ART    MUSEUM.  705 

1  „f  tliP  tpstator  their  rights  in  this  part  of  his  estate  became 
velted  on  tl  :  prlVe  oTLlill;  that  the  St.  1906  is  P-Pect>™  m 
Hs  oneiation,  and  does  not  affect  the  right  ot  the  respondent  to  hold 
n^per  y  Ider  tlris  will,  and  that,  it  it  were  construed  as  applying 
to  proX  devised  by  this  will,  it  wonld  be  unconsftutional  and 

™KNOWLTON,  C.J.  ...  We  come  directly  to  the  effect  of  the  resid- 

"'?L:'Xkuponts  validity  may  be  considered  from  two  points 
of  vMsT  in  reference  to  the  rights  of  testators,  as  agamst  their 
toto  dispose  of  their  property  for  charitable  or  other  purposes 
secondly  in  reference  to  the  provisions  of  the  law  givmg  this  kind  of 
corpoSions  a  right  to  hold  property  to  an  amount  not  exceeding  a 


'"From "the  first  point  of  view  this  gift  is  perfect  and  complete. 

Excer"  P™'-«°"  °f.  *-tatutory  ^f^l'^^^^^Z 
wife  the  power  ot  a  testator  in  this  Commonwealth  to  dispose  oi  nis 
Tstaie  by  a  w  11  is  unlimited.  There  is  nothing  in  our  law  to  restram 
one  from  giving  tree  course  to  his  charitable  mclmations  up  to  the 
Ct  momeTt  of  his  possession  ot  a  sound,  disposmg  mmd    Making 
nW  tabk  rif?s  in  this  Commonwealth  is  not  against  public  pohcy 
and  we  have  no  legislation,  such  as  has  long  existed  in  England  and 
LnIw  York  and  some  of  Ihe  other  American  States,  putting  obsta- 
cle" way  ot  such  testamentary  acts.  The  only  ground  of  obec 
cies  >»"'«"■'       ,  ,       m  i       t  fron,  the  point  of  view  ot  the  tes- 
tator or  o"  hi   he  sbulon  account  of  the  provision  ot  the  statute 
u  a  ing  tt  right;  of  corporations  as  to  the  '-Mmg  <^  prof«rt>. 
We  must;  therefore,  determine  the  meanmg  and  effect  of  this  statute 

"'^TtfcSlhaUufby  implication  an  absolute  prohibition 
aiintt  the  holding,  at  any  time,  in  any  form,  for  any  purpose,  of  a 
g  eX  !mount  of'propert^  than  that  stated,  and  "Y — 
of  a  corporation  to  hold  more,  or  of  any  person  to  put  more  into  tne 
ownersMp  of  a  corporation,  is  illegal  and  absolutely  void    The  re- 
sponcen  contends  "hat  this  implied  limitation  of  the  ngh  to  hold  is 
made  on  grounds  ot  public  policy;  that  it  is  a  provision  only  in  favor 
Sthe  State,  which  the  State  may  enforce  or  not  as  it  chooses  that 
grants  or  devises  in  excess  ot  the  amounts  stated  are  not  void  but 
fnly  voTdable;  that  third  persons  cannot  question  the  jahdity  of 
such  grants  or  devises,  but  that  they  are  legal  so  long  as  the  State 
eats  them  undisturbed,  and  that  the  State  may  -t  »(  t'"-' ^^^^^ 
legislative  act  or  in  some  other  proper  way,  completely  waive  its 

^'^l"  «rgte  act  the  history  of  earlier  kindred  prov^ions 
mav  be  helpful.  At  common  law,  corporations  were  authorized  to 
"cquire  and  hold  both  real  and  personal  property  without  hmit. 


706  HUBBARD    V.  WORCESTER    ART    MUSEUM.  [cHAP.  II, 

In  re  McGraiv^s  Estate,  111  N.Y.  GO,  84.  "The  creation  of  a  ecjrfjora- 
tion,  gives  to  it,  amongst  other  powers,  as  incident  to  its  existence 
and  without  any  express  grant  of  such  powers,  that  of  buying  and 
sclHng."  Bank  v.  Poitiaux,  3  lland.  130.  "A  corporation  hiis,  from 
its  nature,  a  right  to  purchase  hinds,  though  the  cliarter  contains  no 
license  to  that  purpose."  Leaziire  v.  Ilillegas,  7  S.  &  U.  313.  Sec  also 
Page  v.  Ilcincbcrg,  40  Vt.  81;  Mallctl  v.  Simpsmi,  94  N.C.  37,  41. 

Under  the  feudal  system,  when  land  was  given  to  a  corporation, 
the  chief  lords  of  whom  the  land  was  held,  and  tiie  king  as  ultimate 
chief  lortl,  lost  their  chancvs  of  escheat,  and  various  other  rights  and 
incidents  of  militar>'  tenure.  During  the  middle  ages,  the  accumula- 
tion of  land  in  the  ecclesiastical  corporations  was  so  great  as  to  Ix; 
thought  a  national  grievance.  Hence  the  lOnglish  mortmain  acts, 
which  go  hack  for  their  origin  to  Magna  Charta.  St.  9  lien.  Ill,  c.  30, 
and  wiiich  have  continued  with  various  modifications  to  this  day. 
See  7  Edw.  I,  c.  2;  15  Rich.  II,  c.  5;  Shelford  on  Mortmain,  2,  0,  8, 
10,  25,  34,  39,  809,  812;  Tysst^n  on  C'haritahle  Bequests,  2,  383. 
Under  these  acts  the  alienations  were  not  voitl,  .so  as  to  let  in  the 
grantors  and  their  heirs;  but  they  merely  operated  as  a  forfeiture 
which  gave  a  right  to  the  mesne  lord  and  the  king  to  enter  after  due 
inquest.  This  right  to  enter  was  often  waived  by  a  licen.sc  in  mort- 
main. See  citations  above,  and  Tys.^en  on  Charitable  Becjuests,  383; 
St.  7  &  8  Will.  Ill,  c.  37.  In  form  the.se  licen.ses  commonly  author- 
ized a  holding  of  property  "not  exceeding"  a  certain  value.  In  later 
j'ears  this  authority  sometimes  has  Ix'en  in.serted  in  the  charter,  and 
this  limited  power  of  purchase  has,  it  is  .'^aid,  Ikh'U  exceeded  by  almost 
all  corporations.  Shelford  on  Mortmain,  55.  See  al.so  pages  10,  44, 
49,  50,  891;  Tyssen  on  Charitable  Bequests,  393,  394,  390. 

Another  act,  St.  9  Geo.  II,  c.  30,  which  is  usually  called  "The 
Mortmain  Act"  but  is  called  by  Tyssen  the  "Georgian  Mortmain 
Act,"  is  of  a  very  different  nature.  One  of  its  purpo.ses,  as  declared 
in  the  preamble,  is  to  avoid  "improvident  alienations  or  dispositions 
made  by  languishing  or  dying  [X'rsons,  or  by  other  persons,  to  uses 
called  charitable  uses,  to  take  place  after  their  deaths,  to  the  dis- 
herison of  their  lawful  heirs."  Considered  in  reference  to  its  purposes, 
it  is  not  properly  called  a  mortmain  act.  It  applies  only  to  gifts  for 
charitable  uses;  and  under  it  all  such  gifts,  unless  made  as  the 
statute  allows,  are  absolutely  void. 

We  never  have  had  any  real  mortmain  acts  in  Massachusetts. 
The  nearest  approach  to  one  was  the  Prov.  St.  1754-55,  c.  12; 
3  Prov.  Laws  (State  ed.)  778.  This  made  deacons  a  corporation  to 
take  gifts  for  charitable  purposes,  Umited  the  grants  to  such  as  would 
produce  an  income  not  exceeding  three  hundred  pounds  a  year,  and 
pro\dded  that  they  should  be  made  by  deed,  three  months  before 
death,  and  that  all  bequests,  devises  or  later  grants  should  be  void. 
This  statute  related  only  to  gifts  to  deacons,  and  was  repealed  by 


SECT.  II.]  HUBBARD    V.  WORCESTER    ART    MUSEUM.  707 

St.  1785,  c.  51  (February  20,  1786),  which  re-enacted  a  part  of  the 
law,  but  omitted  the  provision  that  gifts  not  authorized  by  the  act 
should  be  void.  Bartlet  v.  Ki7ig,  12  Mass.  537, 545.  See  R.L.  c.  -87,  §  1. 

The  significance  of  this  reference  to  English  law  and  to  our  leg- 
islation is,  first,  that,  except  for  this  short  period,  we  have  never 
had  in  Massachusetts  any  legislation  prohibiting  charitable  gifts  to 
trustees  or  corporations,  or  providing  that  any  kind  of  conveyances, 
devises  or  bequests  to  corporations  shall  be  void.  On  the  other  hand, 
the  policy  of  the  Commonwealth,  as  expressed  both  by  legislation 
and  the  decisions  of  its  courts,  has  been  exceedingly  liberal  to  testa- 
tors and  public  charities.  Sanderson  v.  White,  18  Pick.  328,  333,  334; 
American  Academy  v.  Harvard  College,  12  Gray,  582,  595,  596; 
Saltonstall  v.  Sanders,  11  Allen,  446;  Jackson  v.  Phillips,  14  Allen, 
539,  550.  Secondly,  the  implied  limitations  upon  the  power  of  cor- 
porations to  hold  property,  which  appear  in  numerous  enactments, 
have  been  made,  not  in  the  interest  of  grantors  or  devisors  or  their 
heirs,  but  in  the  interest  of  the  State,  on  considerations  of  public 
pohcy.  The  general  form  of  these  limitations,  which  appears  in  the 
statute  before  us,  and  with  slight  variations  in  special  charters  (a 
list  of  which,  two  hundred  and  seventy-four  in  number,  granted  in 
this  State  before  1850,  has  been  furnished  us  through  the  industry 
of  counsel),  corresponds  with  the  form  of  licenses  granted  by  the 
Crown  in  England  under  the  old  mortmain  acts,  and  sometimes 
embodied  in  charters  granted  by  Parhament.  Under  these  English 
acts,  grants  or  devises  to  a  corporation  to  hold  property  without  a 
license,  or  in  excess  of  the  amount  hcensed,  were  not  void,  but  only 
voidable  by  the  mesne  lord  or  the  king,  upon  entry,  after  inquest 
according  to  law.  In  view  of  the  close  relations  between  Massachu- 
setts and  the  mother  country  in  early  times,  this  justifies  an  argu- 
ment, of  considerable  strength,  that  the  implied  limitations  in  our 
statutes  were  intended  to  have  no  greater  force  than  the  old  mort- 
main acts  of  England,  as  distinguished  from  the  Georgian  mortmain 
act. 

We  start  with  the  inherent  right,  already  referred  to,  of  every 
corporation  to  take  and  hold  property  at  common  law,  by  virtue  of 
the  act  of  its  creation.  This  right  is  recognized  in  our  statutes  by 
implication,  without  express  mention.  R.L.  c.  109,  §§  4-6.  What 
force  is  to  be  given  to  the  words,  "may  hold  real  and  personal  estate 
to  an  amount  not  exceeding  one  million  five  hundred  thousand  dol- 
lars"? The  respondent  contends  that  their  meaning  is  as  if  words 
were  added  as  follows:  "and  beyond  that  amount  it  shall  have  no 
right  as  against  the  Commonwealth;  and  the  Commonwealth  may 
take  proper  measures,  through  action  of  the  Attorney  General  or 
otherwise,  to  prevent  or  terminate  such  larger  holding."  According 
to  the  argument,  a  taking  and  holding  by  a  corporation,  above  the 
prescribed  amount,  is  under  its  inherent  right.   As  between  it  and 


708  HUBBARD    V.  WORCESTER    ART    MUSEUM.  [CHAP.  II. 

the  State  as  the  guardian  of  the  public  interest,  a  provision  as  to 
amount  is  made,  wliich  tloes  not  affect  its  riglit  as  to  third  persons. 
As  to  the  general  legahty  of  the  holding,  except  when  the  State 
chooses  to  enforce  the  law  for  its  own  benefit,  the  condition  is  similar 
to  that  resulting  from  a  statutory  provision  which  is  merely  directory. 
It  is  not  very  unlike  the  old  law  as  to  conveyances  to  aliens.  Such 
conveyances,  whether  by  grant  or  devise,  were  good  against  every 
one  but  the  State,  and  could  Ijc  set  aside  onl}'  after  office  found. 
Fox  V.  Sauthack,  12  Mass.  143;  Waugh  v.  lilley,  8  Met.  290;  Judd  v. 
Laurence,  1  Cush.  531;  Kcrshaiv  v.  Kclsey,  100  Mass.  501. 

That  this  is  the  effect  of  such  hmitations  in  statutes  of  this  kind 
where  the  title  of  the  corporation  is  under  a  giant,  as  distinguished 
from  a  devise,  seems  to  Ix?  the  universal  rule. 

But  if  the  statute  were  a  prohibition  that  renders  the  holding 
utterly  void,  and  the  taking  also  void,  as  is  argued  in  the  opinion 
in  In  re  McGraw^s  Estate,  111  N.Y.  66,  anylxnly  interested  could 
take  advantage  of  the  violation  of  law,  unless  he  was  precluded  by 
estoppel.  Most  of  the  cases  which  we  have  cited  do  not  put  their 
decision  on  the  ground  of  estoppel.  Often  the  question  might  arise 
when  there  w'as  no  estoppel.  The  ground  on  which  most  of  the  cases 
go  is  that  the  implication  is  not  an  absolute  prohibition,  liut  only  a 
condition  affecting  the  rights  of  the  corporation  as  between  it  and 
the  State.  If  the  holding  were  an  illegalit}'  which  was  utterly  void, 
the  condition  would  be  the  same  whether  the  taking  was  by  grant  or 
devi.se,  and  a  variety  of  unfortunate  con.sequences  might  follow.  The 
property  might  greatly  increase  in  value  after  its  acciuisition,  as  was 
the  case  in  Evangelical  Baptist  Society  v.  Boston,  192  Mass.  412.  In 
that  case,  although  the  property  of  the  corporation  largely  exceeded 
in  value  the  amount  authorized  by  the  statute,  there  was  no  intima- 
tion that  the  holding  was  illegal,  so  long  as  the  State  did  not  inter- 
fere. See  also  Humbert  v.  Trinity  Church,  24  Wend.  587,  005.  As  to 
all  interests  of  private  persons,  in  the  absence  of  interference  by 
the  State,  the  cases  generally  treat  titles  to  property  held  by  corpo- 
rations in  excess  of  the  specially  authorized  amounts  as  good.  They 
allow  the  corporations  to  give  good  titles  to  purchasers  of  such 
property. 

Some  judges,  in  holding  that  such  titles  cannot  be  taken  under 
wills,  endeavor  to  found  a  distinction  upon  the  executed  character 
of  a  title  by  grant,  and  suggest  that  a  devise  or  bequest  is  executory. 
It  seems  to  us  that  there  is  no  good  rea.son  for  the  distinction,  ^^'hen 
a  will  is  proved  and  allowed,  it  takes  effect  immediately  to  pass  all 
property  affected  by  it.  The  provision  in  the  law  against  large 
holdings  by  corporations  has  no  relation  to  the  probate  of  the  will. 
The  act  of  the  testator  in  executing  the  will  is  confirmed  and  given 
effect  as  a  complete  and  executed  disposition  of  the  property,  by 
the  allowance  of  the  will.   In  this  respect  a  recorded  will  does  not 


SECT.  II.]  HUBBARD    V.  WORCESTER    ART    MUSEUM.  709 

materially  differ  from  a  delivered  deed.  The  heirs  at  law  are  bound 
by  one  as  well  as  by  the  other. 

The  decisions  upon  the  precise  point  at  issue  are  conflicting.  In 
Jones  V.  Habersham,  107  U.S.  174,  a  case  similar  to  that  now  before 
us,  it  was  held  by  the  court,  in  an  opinion  by  Mr.  Justice  Gray,  that, 
"restrictions  imposed  by  the  charter  of  a  corporation  upon  the 
amount  of  property  that  it  may  hold  cannot  be  taken  advantage  of 
collaterally  by  private  persons."  In  the  same  case  in  the  Circuit 
Court  the  question  had  been  considered  previously,  and  the  same 
result  was  reached,  in  an  opinion  by  Mr.  Justice  Bradley  of  the 
Supreme  Court  of  the  United  States,  which  is  found  in  3  Woods, 
443,  475.  The  same  rule  is  established  in  Maryland.  Hanson  v. 
Little  Sisters  of  the  Poor,  79  Md.  434;  In  re  Stickneifs  will,  85  Md.  79, 
104.  DeCamp  v.  Dobbins,  2  Stew.  (N.J.)  36,  40,  was  decided  by  the 
Chancellor  on  this  ground.  The  decree  was  affirmed  on  another 
ground  in  the  Court  of  Errors  and  Appeals,  4  Stew.  (N.J.)  671,  690, 
in  an  opinion  by  Beasley,  C.J.,  which  contains  a  dictum  disap- 
proving of  the  view  of  the  Chancellor.  In  Farrington  v.  Putnam,  90 
Maine,  405,  the  court,  in  a  very  elaborate  opinion,  in  a  case  identical 
in  its  leading  features  with  that  now  before  us,  held  that  the  gift 
was  good.  The  same  doctrine  is  stated  in  Brigharyi  v.  Peter  Bent 
Brigham  Hospital,  126  Fed.  Rep.  796,  801 ;  s.c.  134  Fed.  Rep.  513, 
527.  It  is  also  stated  in  textbooks.  Beach,  Corp.  (Purdy's  ed.)  §  825; 
Thompson,  Corp.  §§  5795,  5797. 

The  leading  case  which  presents  the  opposite  view  is  In  re 
McGraw^s  Estate,  111  N.Y.  66.  Although  the  decision  necessarily 
puts  a  construction  upon  a  statute  of  that  State,  this  construction 
seems  to  be  materially  affected  by  the  policy  of  New  York  in  refer- 
ence to  charities.  Said  Judge  Peckham,  who  delivered  the  opinion, 
"We  have  a  decided  mortmain  policy.  It  is  found  in  our  statute  in 
relation  to  wills,  prohibiting  a  devise  to  a  corporation  unless  specially 
permitted  by  its  charter  or  by  some  statute  to  take  property  by 
devise."  In  Charnberlain  v.  Chamberlain,  43  N.Y.  424,  the  court 
refers  to  the  prohibition  of  devises,  and  to  the  N.Y.  St.  1860,  c.  360, 
still  in  force,  which  makes  void  all  bequests  or  devises  to  charity  in 
excess  of  one-half  the  testator's  property,  where  he  leaves  relatives. 
Other  statutes  have  been  passed,  limiting  the  amount  that  can  be 
devised  to  certain  corporations  by  one  testator,  forbidding  a  de\ase 
or  bequest  to  charities,  by  a  person  leaving  relatives,  of  more  than 
one  fourth  of  his  estate,  and  making  void  such  gifts  where  the  will 
was  executed  within  two  months  before  the  death  of  the  testator. 
Gen.  Laws  of  N.Y.  1901  (Heyd.  ed.)  4885,  4891,  4892.  The  pohcy 
of  that  State  in  regard  to  charities  has  been  very  unfavorable.  See 
Allen  V.  Stevens,  161  N.Y.  122,  139,  140;  People  v.  Powers,  147  N.Y. 
104;  Fosdick  v.  Hempstead,  125  N.Y.  581. 

In  the  construction  of  our  statute,  when  the  question  arises 


710  HUDnAUI)    V.  WORCESTER    ART    MUSEUM.  (cHAP.   II. 

whether  a  difTercnt  rule  shall  Ix*  eMtahiished  in  regard  to  the  taking 
and  holding  l\v  a  t'or[)orati<)n  under  a  will  from  that  which  ifs  univer- 
sally laid  down  in  ivfiard  to  a  hokling  undi-r  a  dotil,  we  are  inuih 
influenced  by  the  policy  of  our  law  as  to  tievises  and  Ix'fjuej'ts  for 
charitable  purposes.  VVe  are  of  opinion  that,  under  the  11. L.  c.  12'), 
§  8,  a  gift  to  a  corporation  under  a  will,  to  an  amount  in  excess  of  the 
sum  specially  authorized,  should  Ix-  held  no  les8  valid  than  a  similar 
accjuisition  of  title  under  a  deed.  It  is  ^(mmI  iia  against  every  one  l)Ut 
the  Commonwealth.  It  follows  that  the  St.  1966,  e.  312,  o|x>rate<i  as  a 
waiver  of  the  Commonwealth's  right  to  terminate  the  holding,  and  a 
legislative  declaration  of  the  entire  valiility  of  the  provision  in  the  will. 
If  we  are  wrong  in  this  conclusion,  the  p<'tition  must  Ik'  (lisnjis.»<e(l 
on  an  independent  ground.  The  gift  was  to  a  public  charity.  The 
purposes  of  the  Worcester  Art  Museum,  as  set  forth  in  the  agree- 
ment for  its  organization  from  which  we  have  (luoteil,  show  the 
charitable  uses  to  which  all  projierty  helil  by  it  must  Ik'  put.  It  is  all 
held  "solely  in  trust,  for  the  l)enefit  of  all  the  p<'ople  of  the  city  of 
Worcester."  We  have  no  doubt  that  the  property  wius  given  under 
the  testator's  will  with  a  general  charitable  intent,  with  which  the 
Worcester  Art  Museum,  as  a  corporation,  had  no  other  connection 
than  as  an  instrument  to  carr>'  out  the  general  purjxise  of  the  tes- 
tator. In  other  words,  the  gift  was  not  to  the  Worcester  Art  Mu.seum 
as  a  corporation,  apart  from  the  charitable  work  in  which  it  was 
engaged,  nor  on  account  of  anything  es.sential  or  jx'culiar  in  its  per- 
formance of  the  charitable  work  described  in  its  instrument  of  organi- 
zation. The  general  charitable  purpose  was  predominant  in  the  mintl 
of  the  testator,  and  not  a  desire  to  give  to  a  particular  corporation. 
The  charitable  purpose  may  l^e  implied  in  the  name  or  object  of 
the  devisee.  }\'inslow  v.  Cummings,  8  Cush.  358;  lili.ss  v.  Atnencan 
Bible  Society,  2  Allen.  334 ;  Incorporated  Society  v.  Richards,  1  Dr.  & 
War.  258,  331.  The  object  of  the  devisee,  as  a  legally  established 
public  charity,  was  well  known  to  the  testator.  To  state  the  .'^amc 
proposition  in  other  language,  an  implication  to  create  a  public 
charity  may  arise  "from  the  character  of  the  Ixxiy  to  which  the 
gift  is  made,  or  from  publicly  avowed  purposes  of  its  organiza- 
tion and  action."  Old  Siruth  Society  v.  Crocker,  119  Mass.  1,  24; 
Stratton  v.  Phyt^io-Medicnl  College,  149  Mass.  505,  508.  In  such  a 
case,  if  for  any  reason  the  <lonee  named  is  incapable  of  executing  the 
trust,  the  court  will  not  allow  the  gift  to  fail  for  want  of  a  donee. 
Fellmvs  v.  Miner,  119  Mass.  541 ;  Codman  v.  Brigham,  187  Mass.  309; 
Osgood  V.  Rogers,  186  Mass.  238;  Bliss  v.  American  Bible  Society, 
2  Allen,  334;  Sherman  v.  Congregational  Home  Missionary  Society, 
17G  Mass.  349;  Wijislow  v.  Cummings,  3  Cush.  358;  Attorney  General 
V.  Stephens,  3  Myl.  &  K.  347;  Hayter  v.  Trego,  5  Russ.  113;  Loscombe 
V.  Wi7iti-ingham,  13  Beav.  87;  Swase^j  v.  American  Bible  Society,  57 
Maine,  523;  Almy  v.  Jones,  17  R.I.  265. 


SECT.  II.]  HUBBARD    V.  WORCESTER   ART   MUSEUM.  711 

If  the  corporation,  at  the  time  of  the  probate  of  the  will,  was  in- 
capable of  taldng  the  property  and  carrying  out  the  general  chari- 
table intent  of  the  testator,  the  court,  applying  the  doctrine  of  cy  pres, 
would  appoint  a  trustee  to  act  in  its  place.  Inasmuch  as  the  Legisla- 
ture, by  the  St.  1906,  c.  312,  has  removed  the  only  ground  of  its 
disability,  a  direction  to  turn  over  the  property  to  the  corporation 
would  accomplish  perfectly  the  purpose  of  the  testator.  Baker  v. 
Clarke  Institution  for  Deaf  Mutes,  110  Mass.  88. 

Note.  —  Collateral  attack  upon  the  power  of  the  corporation  to 
receive  property  devised  or  bequeathed  to  it  was  also  denied  in 
Jones  V.  Habersham,  107  U.S.  174;  Brigham  v.  Brigham  Hospital,  134 
Fed.  513,  527;  White  v.  Howard,  38  Conn.  342;  Eliot's  Appeal,  74 
Conn.  586;  Hamsher  v.  Hamsher,  132  111.  273;  Haijward  v.  Davidson, 
41  Ind.  212;  Farrington  v.  Putnam,  90  Me.  405;  Hanson  v.  Little 
Sisters  of  the  Poor,  79  Md.  434;  In  re  Stickney's  Will,  85  Md.  79; 
Chambers  v.  St.  Louis,  29  Mo.  543. 

Cf.  Chase  v.  Dickey,  212  Mass.  555.  Mary  Baker  G.  Eddy  conveyed 
certain  real  estate,  the  net  annual  value  of  which  was  largely  in 
excess  of  $2,000,  to  Dickey,  and  others,  in  trust,  among  other  things, 
to  dispose  of  the  same  in  accordance  with  her  will.  By  her  will  she 
gave  her  residuary  estate  to  the  First  Church  of  Christ,  Scientist, 
in  Boston  in  trust,  primarily,  to  be  used  for  the  purpose  of  promoting 
and  extending  the  religion  of  Christian  Science  as  taught  by  her.  The 
plaintiffs,  in  behalf  of  the  First  Church,  sought  to  compel  a  convey- 
ance of  such  real  estate  by  the  said  trustees.  The  Attorney  General 
became  a  party,  and,  in  his  answer,  set  up  R.L.  c.  37,  §  9,  which 
provides  that  "the  income  of  the  gifts,  grants,  bequests  and  devises 
made  to  or  for  the  use  of  any  one  church  shall  not  exceed  two 
thousand  dollars  a  year,"  etc.  Therefore,  the  State  having  challenged 
the  gift,  the  principal  case  became  inapplicable.  But  the  court  held 
that,  if  the  trust  were  for  a  charitable  purpose,  the  trust  would  not 
be  allowed  to  fail,  even  if  the  named  trustee  was  not  permitted 
to  receive  the  trust  property. 


712  MONUMENT   NATIONAL    B.\NK    V.  GLOBE    WOIULS.       [cUAP.  II. 


C.    Contracts. 


MONUMENT  NATIONAL  BANK  v.  GLOBE  WORKS. 

lUl  Mum.  57.     1869. 

Hoar,  J.  The  single  question  presented  for  our  deci.sion  in  this 
cause,  all  others  which  arise  upon  the  ro|X)rt  having  Ixi'U  waived,  is, 
whether  the  note  of  a  inanufac-turing  t-orporation,  in  the  hands  of 
a  holder  in  good  faith  for  value,  who  took  it  l)efore  maturity,  and 
without  any  knowleilge  that  the  makers  had  not  received  the  full 
consideration,  cannot  Ijc  enforcetl  against  them,  because  it  was  in 
fart  made  as  an  ac-eommo<lation  note. 

The  argument  for  the  dc  h  iidants  takes  the  ground  that  to  issue 
an  accommodation  note  is  not  within  the  powers  conferreil  uiK)n  the 
corporation;  and  that,  as  any  persons  taking  it  had  notice  that  it 
was  the  note  of  the  corporation,  they  had  notice  that  it  was  of  no 
validity  unless  issue<l  for  a  puriM)se  within  the  seoix*  of  the  corporate 
powers,  and  were  therefore  hound  to  luscertain  not  only  that  it  was 
executed  by  the  officer  of  the  corporation  who  had  the  general 
authority  to  sign  the  notes  whieh  they  might  lawfully  make,  but  that 
the  purpose  for  whieh  it  wius  issued  was  such  as  the  charter  authorized 
them  to  entertain  and  execute. 

The  court  are  all  of  opinion  that  this  position  is  not  tenaljle,  and 
that  the  defence  cannot  lx>  maintained. 

It  has  long  l)een  settled  in  this  Commonwealth  that  a  manufac- 
turing corporation  has  the  power  to  make  a  negotiable  promissory 
note.  Narragansetl  Bank  v.  Atlantic  Silk  Co.,  3  Met.  282.  And  it 
was  held  in  Bird  v.  Daggett,  97  Mass.  494,  as  a  just  corollarj'  to  that 
proposition,  that  such  a  note  in  the  hands  of  a  holder  in  good  faith 
for  value  is  bintling  upon  the  maker,  although  made  as  an  accom- 
modation note.  The  question  was  not  discussed,  nor  the  reasons  for 
the  decision  fully  stated,  in  Bird  v.  Daggett;  but  it  was  assumed  that 
the  doctrine  announced  was  clear  and  undoubted  law. 

The  doctrine  of  idtra  vires  has  Ix^en  carried  nuich  farther  in  Eng- 
land than  the  courts  in  this  country  have  been  disposetl  to  extend  it; 
but,  with  just  limitations,  the  principle  cannot  \)C  questioned,  that 
the  limitations  to  the  authority,  powers  and  liability  of  a  corporation 
are  to  be  found  in  the  act  creating  it:  And  it  no  doubt  follows,  as 
claimed  by  the  learned  counsel  for  the  defendants,  that  when  powers 
are  conferred  and  defined  by  statute,  every  one  dealing  with  the 
corporation  is  presumed  to  know  the  extent  of  those  powers. 

But  when  the  transaction  is  not  the  exercise  of  a  power  not  con- 
ferred on  a  corporation,  but  the  abuse  of  a  general  power  in  a  par- 


SECT.  II.]       MONUMENT    NATIONAL    BANK    V.  GLOBE    WORKS.  713 

ticular  instance,  the  abuse  not  being  known  to  the  other  contracting 
party,  the  doctrine  of  ultra  vires  does  not  apply.  As  was  said  by 
Selden,  J.,  in  Bissell  v.  Michigan  Southern  &  Northern  Indiana 
Railroad  Co.,  22  N.Y.  289,  290:  "There  are  no  doubt  cases  in  which 
a  corporation  would  be  estopped  from  setting  up  this  defence, 
although  its  contract  might  have  been  really  unauthorized.  It  would 
not  be  available  in  a  suit  brought  by  a  bond  fide  indorsee  of  a  negoti- 
able promissory  note,  provided  the  corporation  was  authorized  to 
give  notes  for  any  purpose;  and  the  reason  is,  that  the  corporation, 
by  giving  the  note,  has  virtually  represented  that  it  was  given  for 
some  legitimate  purpose,  and  the  indorsee  could  not  be  presumed  to 
know  the  contraiy.  The  note,  however,  if  given  by  a  corporation 
absolutely  prohibited  by  its  charter  from  giving  notes  at  all,  would 
be  voidable  not  only  in  the  hands  of  the  original  payee,  but  in  those 
of  any  subsequent  holder;  because  all  persons  dealing  with  a  cor- 
poration are  bound  to  take  notice  of  the  extent  of  its  chartered  pow- 
ers. The  same  principle  is  applicable  to  contracts  not  negotiable. 
When  the  want  of  power  is  apparent  upon  comparing  the  act  done 
with  the  terms  of  the  charter,  the  party  dealing  with  the  corporation 
is  presumed  to  have  knowledge  of  the  defect,  and  the  defence  of 
ultra  vires  is  available  against  him.  But  such  a  defence  would  not 
be  permitted  to  prevail  against  a  party  who  cannot  be  presumed  to 
have  had  any  knowledge  of  the  want  of  authority  to  make  the  con- 
tract. Hence,  if  the  question  of  power  depends  not  merely  upon  the 
law  under  which  the  corporation  acts,  but  upon  the  existence  of 
certain  extrinsic  facts,  resting  peculiarly  within  the  knowledge  of 
the  corporate  officers,  then  the  corporation  would  be  estopped  from 
denying  that  which,  by  assuming  to  make  the  contract,  it  had 
virtually  affirmed." 

This  doctrine  seems  to  us  sound  and  reasonable;  and  in  conformity 
with  it,  it  was  held  in  Farmers'  &  Mechanics'  Bank  v.  Empire  Stone 
Dressing  Co.,  5  Bosw.  275,  that  aii  accommodation  acceptance  by  an 
officer  of  a  manufacturing  corporation,  on  behalf  of  the  company, 
was  not  binding,  unless  the  consideration  had  been  advanced  upon 
the  faith  of  the  acceptance;  but  that  if  the  consideration  was  paid  in 
good  faith  after  the  acceptance,  and  upon  the  credit  of  it,  it  could 
be  enforced. 

So  it  was  said  by  Lord  St.  Leonards  that  he  felt  a  disposition  "to 
restrain  the  doctrine  of  ultra  vires  to  clear  cases  of  excess  of  power, 
with  the  knowledge  of  the  other  party,  express  or  implied  from  the 
nature  of  the  corporation,  and  of  the  contract  entered  into."  Eastern 
Counties  Railway  Co.  v.  Hawkes,  5  H.L.  Cas.  331,  373. 

The  cases  on  which  the  defendants  rely  are  cases  against  municipal 
corporations,  in  respect  to  which  the  rule  is  much  more  rigid,  or  for 
the  most  part  those  in  which  the  other  contracting  party  had  notice 
upon  the  face  of  the  transaction  of  the  want  of  corporate  power. 


714      NAT.  HOME  BUILDING  ASs'n  V.  HOME  SAVINGS  BANK.    (cilAP.  II. 

There  can  Ije  no  doubt  that  it  is  very  often  true  that  a  corporation 

may  be  re.spon.sible  for  the  uiuuitliorized,  and  even  for  the  unlawful 
acts  of  its  agents,  ai){)areutly  clollied  with  its  authority.  No  corpora- 
tion is  empowered  by  its  ciiartcr  to  commit  an  assauU  and  batterj'; 
yet  it  1ms  frecpiently  lx?en  held  accountable,  in  this  Commonwealth, 
for  one  committed  by  its  servants.  Bills  of  a  bank  issued  without 
consitlerution,  and  even  stolen,  are  gooti  in  the  hands  of  an  inno- 
cent hoUler  for  value.  Many  other  illustrations  might  In-  given,  but 
enough  has  been  said  to  show  the  principle  on  which  our  decision 
rests. 

Judgment  for  the  ylaintiffs. 

Note.  —  The  cases,  accord,  arc  numerous.  See  Slouffer  v.  Smith- 
DaL'is  Co.,  154  Ala.  301 ;  Miners'  Ditch  Co.  v.  Zellerbach,  37  Cal.  543; 
Credit  Co.  v.  Howe  Machine  Co.,  54  Conn.  357;  Jacobs  Co.  v.  Soidhcrn 
Co.,  97  Cia.  573;  Lucas  v.  White  Line  Transfer  Co.,  70  la.  541,  540; 
National  Bank  v.  Young,  41  N.J.  Va\.  531. 


NATIONAL  HOiME  BUILDING  ASS'N  v.  HOME  SAVINGS 

BANK. 

181  111.  35.     1899. 

Mr.  Chief  Justice  C.Vrtwhicht  delivered  the  opinion  of  the  court. 

In  November,  1893,  Flora  D.  Bishopp  matle  a  trade  of  lots  in  the 
city  of  Chicago  with  the  National  Home  Building  and  Loan  Associa- 
tion, appellant,  in  pursuance  of  which  appellant  conveyed  to  her  lot 
10  in  Lee  Bros.'  addition  to  Lnglewood,  lots  15  and  10  in  block  00  in 
Chicago  University  subdivision,  and  lot  30  in  block  2  in  Herring's 
subdivision.  In  exchange  for  these  lots  said  Flora  D.  Bishopp  and 
Jonathan  D.  Bishopp,  her  husband,  conveyed  to  the  building  and 
loan  association  lots  5  and  0  in  block  2  in  Johnson  &  Clement's  sul> 
division,  and  in  the  deed  of  the  same  it  was  agreed  that  the  building 
and  loan  association  should  assume  and  pay  an  encumbrance  on 
said  lot  5  in  the  form  of  a  trust  deed  executed  by  said  Flora  D. 
Bishopp  and  husband  to  Charles  T.  Page,  trustee,  to  secure  a  note 
for  .S30(X)  and  interest.  The  trade  was  negotiated  andTarricd  out  on 
the  part  of  the  association  through  J.  O.  Duncan,  agent,  who  was 
employed  by  the  association  to  negotiate  loans  and  examine  abstracts 
for  it  in  Chicago,  and  he  acted  under  the  direction  of  the  secretary 
of  the  association.  After  the  exchange  the  association  paid  a  mort- 
gage of  SGOO  on  said  lot  5  and  the  delinquent  interest  on  the  mortgage 
assumed  in  the  conveyance.  On  May  14,  1895,  the  board  of  direc- 
tors passed  a  resolution  that  the  assumption  clause  in  the  deed  was 
made  without  authority  of  the  association,  and  directed  the  execu- 


SECT.  II.]     NAT.  HOME  BUILDING  ASs'n  V.  HOME  SAVINGS  BANK.     715 

tion  and  tender  of  a  quitclaim  deed  of  the  lot  to  Flora  D.  Bishopp. 
The  deed  was  made  and  tendered  unconditionally,  and  the  associa- 
tion thereby  offered  the  lot  to  her  without  a  return  of  the  considera- 
tion or  any  other  condition.  The  note  for  $3000,  secured  by  the  trust 
deed,  was  transferred  to  the  Home  Savings  Bank,  one  of  the  appellees, 
and  it  filed  its  bill  in  the  superior  court  of  Cook  county  to  foreclose 
the  same,  asking  for  a  decree  against  Flora  D.  Bishopp,  a  sale  of 
the  mortgaged  premises,  and  a  decree  against  the  building  and  loan 
association  for  such  deficiency  as  might  exist.  The  building  and 
loan  association  answered  that  the  trade  was  consummated  by  di- 
rection of  its  president  and  secretary,  but  the  clause  assuming  the 
mortgage  was  inserted  without  their  knowledge  or  authority  and 
without  the  knowledge  and  authority  of  its  board  of  directors,  that 
such  an  agreement  was  ultra  vires  the  corporation,  and  that  it  had 
tendered  a  quitclaim  deed  of  the  lot  to  the  said  Flora  D.  Bishopp. 
The  bill  was  answered  by  Flora  D,  Bishopp  and  her  husband,  who 
admitted  its  material  allegations  and  filed  their  cross-bill,  alleging 
the  agreement  for  an  exchange  of  the  properties  and  the  conveyances 
and  asking  for  a  deficiency  decree  against  the  association.  The 
building  and  loan  association  answered  the  cross-bill,  setting  up  the 
same  defense  as  before,  and  the  cause  was  referred  to  a  master,  who 
reported  in  favor  of  a  foreclosure  and  sale  and  a  decree  against  the 
building  and  loan  association  for  any  deficiency  in  the  payment  of 
the  debt,  interest,  fees  and  costs.  Exceptions  to  the  report  were 
overruled  and  a  decree  was  entered  in  accordance  with  it,  which  has 
been  affirmed  by  the  Appellate  Court. 

No  objection  is  made  to  the  foreclosure  of  the  trust  deed  or  the 
sale  of  the  premises,  and  the  only  question  involved  in  this  appeal 
is  whether  the  contract  inserted  in  the  deed,  by  which  the  defendant, 
the  National  Home  Building  and  Loan  Association,  agreed  to  assume 
and  pay  the  debt,  is  binding  upon  it.  This  defendant,  which  denied 
the  binding  force  of  the  agreement,  is  a  corporation  organized  under 
the  provisions  of  an  act  entitled  "An  act  to  enable  associations  of 
persons  to  become  a  body  corporate  to  raise  funds  to  be  loaned  only 
among  the  members  of  such  association,"  in  force  July  1,  1879. 
(Laws  of  1879,  p.  83.)  As  a  corporation  it  is  a  creature  of  the  law, 
having  no  powers  but  those  which  the  law  has  conferred  upon  it. 
A  corporation  has  no  natural  rights  or  capacities,  such  as  an  indi- 
vidual or  an  ordinary  partnership,  and  if  a  power  is  claimed  for  it, 
the  words  giving  the  power  or  from  which  it  is  necessarily  implied 
must  be  found  in  the  charter  or  it  does  not  exist.  The  law  on  this 
subject  is  stated  by  the  Supreme  Court  of  the  United  States  in 
Central  Transportation  Co.  v.  Pullman  Palace  Car  Co.,  139  U.S.  24, 
as  follows:  "The  charter  of  a  corporation,  read  in  the  light  of  any 
general  laws  which  are  applicable,  is  the  measure  of  its  powers,  and 
the  enumeration  of  those  powers  implies  the  exclusion  of  all  others 


71G     NAT.  HOME  BUILDING  ASs'n  V.  HOlfB  SAVINGA  BANK.     (CHAP.  II. 

not  fairly  incidental."  The  purp<iHe  of  thi«  coriioration  in  the  miiiind; 
of  fuiuis  to  Ix?  loaned  to  it.s  luenilxTs  iifxin  the  .i|c 

and  unencuinlx'red  real  estate.    Manifestly  the  ...  ..ii({ 

in  real  estate  or  ac(iuirir)K  the  same,  except  as  incidental  to  their 
legitimate  husine.ss,  is  wholly  foreij^n  to  the  pur|xwc  for  wliieh  the 
State  has  created  such  corfMJrations  and  conferred  U|M)n  them  cor- 
I)orate  powers.  They  have  no  iK)Wir  to  take  and  hold  real  estate, 
and  contracts  made  for  the  purcluiiH?  of  it  are  not  enforceahlc. 
(I^ndlich  on  Building  A.ssooiations,  §§  30r>-308.)  But  for  the  purpose 
of  colifctinn  debts  it  is  ess<Mitial  that  they  should  have  somr  |M)wer 
with  respect  to  the  real  estate  mortnage<l  to  them,  and  f<»r  that  pur- 
pose §  I'.i  of  the  act  for  their  incorfxiration  provides  as  follows:  "Any 
loan  or  huililinR  assoeiation  incor|K)rat(Hl  hy  or  under  this  act  is 
herehy  authorizi-d  and  em{Kiwer(*<l  to  purchase  at  any  sherifT's  or 
other  judicial  .sale,  or  at  any  other  sale,  public  or  private,  any  real 
estate  u|K)n  which  such  association  nuiy  have  or  hold  any  mortgage, 
lien  or  other  encumbrance,  or  in  which  said  association  may  have  an 
interest,  and  the  real  estate  so  purchas<'d,  to  .S4'll.  convey.  lejiM»  or 
morfj^age  at  plejusure  to  any  fx^rsori  or  fH'rsons  whats<M«ver."  Such 
corporations  are  not  authorize<l,  either  by  their  charters  or  as  an 
incielent  to  their  existence,  to  acquire  or  hold  any  real  estate,  except 
such  as  hjus  lieen  mortgage<l  to  them  or  which  they  may  have  an 
interest  in.  Not  only  is  this  the  ruN*  to  Ik^  derived  from  the  act  of  the 
legislature  authorizing  their  incorporation,  und»'r  the  general  princi- 
ples of  law,  but  it  is,  and  always  has  Ixvn.  against  the  policy  of  the 
State  to  permit  corporations  to  accumulate  landed  estates,  or  to 
own  real  estate  l)eyond  what  is  necessar\'  for  their  corporate  business 
or  such  as  is  accpiired  in  the  collection  of  debts.  Carroll  v.  City  of 
East  St.  Liniis,  <)7  111.  oOS;  i' nitid  States  TruM  Co.  v.  Lee,  73  id.  142; 
People  V.  Pullman  Palace  Car  Co.  175  id.  125;  First  M.E.  Church  of 
Chicago  v.  Dixon,  178  id.  200.  It  is  also  a  settled  principle  of  Anieri- 
can  jurisprudence.  5  Thompson's  Law  of  Corporations,  §  5772.  If  a 
building  and  loan  a.s.s<HMation  were  permitted  to  invest  its  money  in 
the  purchase  of  real  estate  or  to  traffic  or  trade  in  such  projx^rty 
instead  of  keeping  within  the  ix)wers  conferred  upon  it  by  loaning 
such  money  and  collecting  it,  it  would  not  only  W  exercising  powers 
not  granted,  but  it  would  Ix*  carrying  on  a  business  inconsistent  with 
the  purpo.se  of  its  creation  and  against  the  fixed  and  uniform  policy 
of  the  State.  In  People  ex  rel.  v.  Chicago  Gas  Tru.<^t  Co.,  IM)  111.  2G8, 
it  was  said  (p.  292):  "The  word  'unlawful,'  as  applied  to  corpora- 
tions, is  not  u.sed  exclusively  in  the  sen.se  of  malum  in  se  or  malum 
prohibitum.  It  is  also  used  to  designate  powers  which  corporations 
are  not  authorized  to  exercise,  or  contracts  which  they  are  not  author- 
ized to  make,  or  acts  which  they  are  not  authorized  to  do,  —  or,  in 
other  words,  such  acts,  powers  and  contracts  as  are  ultra  inres."  In 
Central  Transportation  Co.  v.  Pullman  Palace  Car  Co.,  supra,  the 


SECT.  II.]     NAT.  HOME  BUILDING  ASs'n  V.  HOME  SAVINGS  BANK.     717 

result  of  the  decisions  as  to  the  exercise  of  powers  not  granted  is 
summed  up,  as  follows:  "All  contracts  made  by  a  corporation 
beyond  the  scope  of  those  powers  are  unlawful  and  void,  and  no 
action  can  be  maintained  upon  them  in  the  courts,  —  and  this  upon 
three  distinct  grounds :  the  obhgation  of  every  one  contracting  with 
a  corporation  to  take  notice  of  the  legal  limits  of  its  powers;  the 
interest  of  the  stockholders  not  to  be  subjected  to  risks  which  they 
have  never  undertaken;  and  above  all,  the  interest  of  the  public 
that  the  corporation  shall  not  transcend  the  powers  conferred  upon 
it  by  law." 

It  is  also  argued  that  the  building  and  loan  association  is  estopped 
to  raise  the  question  whether  the  contract  was  ultra  vires  because  it 
has  received  the  benefit  of  the  contract  by  the  conveyance  of  property 
to  it.  That  depends,  as  we  think,  upon  the  sense  in  which  the  term 
ultra  vires  is  used.  It  has  been  applied  indiscriminately  to  different 
states  of  fact  in  such  a  way  as  to  cause  considerable  confusion. 
When  used  as  applicable  to  some  conditions,  it  has  been  frequently 
said  that  a  corporation  is  estopped  to  make  such  a  defense  where  it 
has  received  the  benefit  of  the  contract.  For  example,  the  term  has 
been  applied  to  acts  of  directors  or  officers  which  are  outside  and 
beyond  the  scope  of  their  authority,  and  therefore  are  invasions  of 
the  rights  of  stockholders,  but  which  are  within  the  powers  of  the 
corporation.  In  such  a  case  the  act  may  become  binding  by  ratifica- 
tion, consent  and  acquiescence,  or  by  the  corporation  receiving  the 
benefit  of  the  contract.  Again,  it  has  been  applied  to  cases  where  an 
act  was  within  the  authority  of  the  corporation  for  some  purposes 
or  under  some  circumstances,  and  where  one  dealing  in  good  faith 
with  the  corporation  had  a  right  to  assume  the  existence  of  the 
conditions  which  would  authorize  the  act.  Where  an  act  is  not  ultra 
vires  for  want  of  power  in  the  corporation  but  for  want  of  power  in 
the  agent  or  officer,  or  because  of  the  disregard  of  formalities  which 
the  law  requires  to  be  observed,  or  is  an  improper  use  of  one  of  the 
enumerated  powers,  it  may  be  valid  as  to  third  persons.  In  the  more 
proper  and  legitimate  use  of  the  term  it  applies  only  to  acts  which 
are  beyond  the  purpose  of  the  corporation,  which  could  not  be  sanc- 
tioned by  the  stockholders.  There  would,  of  course,  be  no  power  to 
confirm  or  ratify  a  contract  of  that  kind,  because  the  power  to  enter 
into  it  is  absolutely  wanting.  If  there  is  no  power  to  make  the  con- 
tract there  can  be  no  power  to  ratify  it,  and  it  would  seem  clear  that 
the  opposite  party  could  not  take  away  the  incapacity  and  give  the 
contract  vitality  by  doing  something  under  it.  It  would  be  contra- 
dictory to  say  that  a  contract  is  void  for  an  absolute  want  of  power 
to  make  it  and  yet  it  may  become  legal  and  vahd  as  a  contract,  by 
way  of  estoppel,  through  some  other  act  of  the  party  under  such 
incapacity,  or  some  act  of  the  other  party  chargeable  by  law  with 
notice  of  the  want  of  power. 


718    NAT.  HOME  BUILDING  ARs'n  V.  HOME  SAVINGS  BANK.     [oiAP.  11. 

The  powers  delo^jited  by  the  State  to  the  cori)oration  are  matters 
of  puhlie  law,  of  wliich  no  one  can  ph-ad  ignorance.  A  party  (l<'aHn(; 
with  a  corporation  liavin^  hniited  and  delegated  |)owerH  conferred  by 
law  is  char^ealjle  with  notice  of  them  and  tlieir  limitutioiLS,  and  can 
not  plead  ignorance  in  avoidance  of  the  defcium. 

In  Durkee  v.  People,  155  111.  354,  the  same  rules  were  laid  down, 
and  it  wjus  i)ointed  out  that  the  ca.ses  where  a  corporation  is  e.stop|)od 
from  asserting  that  a  contract  is  ultra  vires  when  it  has  receivi<l  a 
benefit  under  the  contract  is  where  the  makinn  of  the  contract  is 
within  the  scope  of  the  franchise,  and  the  contract  is  sought  to  be 
avoided  lx,*causc  there  was  a  failure  to  comply  with  some  regulation 
or  the  power  was  improi)erly  exercised.  The  following  wjus  then 
quoted  from  the  o[)inion  in  Dans  v.  Old  Colony  Railroad  Co.,  131 
Ma.ss.  258:  "Tiiere  is  a  clear  distinction,  as  was  pointed  out  by  Mr. 
Justice  ('A.MPDELL  in  Zabriskie  v.  Cleveland,  Columbus  and  Cincinnati 
Railroad  Co.,  by  Mr.  Justice  Hoau  in  Monument  Hank  v.  (/li>l>e  Works, 
and  by  Lord  Chancellor  Caiu.ns  and  Lord  IIatiikim.ky  in  Ashhury 
Railway  Carriage  and  Iron  Co.  v.  Riche,  K)etween  the  exercise  by  a 
corporation  of  a  power  not  conferred  upon  it,  varying  from  the 
objects  of  its  creation  as  declared  in  the  law  of  its  or^anization,  of 
which  all  jXTsons  dealing  with  it  are  l)Ound  to  take  notice,  and  the 
abuse  of  a  general  power  or  the  failure  to  comply  with  prescril)ed 
formalities  or  regulations  in  a  peculiar  instance,  when  such  abuse 
or  failure  is  not  known  to  the  other  contracting  parties." 

In  this  ca.'^e  the  transaction  was  U-yond  the  corjiorate  powers  and 
ullramres'm  the  strict  and  legitimate  s<'nse,  and  against  public  policy. 
It  could  not  l)C  ratified  or  become  valid  by  acquiescence,  since  there 
was  no  power  to  make  it.  Flora  D.  Bishopp,  who  dealt  with  the 
corporation,  was  chargeable  with  notice  of  its  powers  and  their 
limitations^nd  its  inability  to  enter  into  the  contract.  She  could 
not  make  the  void  contract  valid  by  acting  under  it.  No  action  can 
be  maintained  upon  the  unlawful  contract,  and  in  such  cases,  if  the 
courts  can  afford  any  remedy,  it  cannot  Ix?  done  by  affirming  or 
enforcing  the  contract,  but  in  some  other  manner. 

The  decree  of  the  superior  court  against  the  National  Home 
Building  and  Loan  Association  for  any  deficiency  that  may  e.xist, 
and  for  execution  to  collect  the  same,  and  the  judgment  of  the 
Appellate  Court  affirming  said  decree  in  that  respect,  are  each 
reversed. 

Judgment  reversed. 

Mr.  Justice  C.ajiter,  dissenting: 

I  do  not  agree  to  the  doctrine  announced  in  the  decision  of  this 
case,  that  a  corporation  may  not  be  estopped  from  pleading  its  own 
lack  of  corporate  power.  As  I  understand  the  decisions,  it  has  long 
been  the  settled  doctrine  of  this  court  that  where  the  contract  has 


SECT.  II.]      NAT.  HOJIE  BUILDING  ASS'n  V.  HOME  SAVINGS  BANK.     719 

been  wholly  executed  and  the  corporation  has  received  the  benefit 
of  it,  it  will  be  estopped  from  setting  up  in  defense  of  payment  its 
own  lack  of  power,  under  its  charter,  to  enter  into  the  contract, 
where  the  contract  is  not  one  either  malum  in  se  or  malum  prohibitum. 
I  do  not  understand  that  the  application  of  the  doctrine  of  estoppel 
is  confined  to  those  cases  where  the  contract  is  within  the  powers  of 
the  corporation,  but  only  beyond  the  mere  authority  of  its  officers  or 
agents.  The  doctrine  of  estoppel  does  not  rest  upon  the  principle  of 
agency  that  there  may  be  a  ratification  of  the  unauthorized  acts  of 
agents.  It  has  been  held,  not  only  by  this  court  but  by  many  others, 
that  in  many  cases  the  question  of  ultra  vires  can  only  be  raised  in  a 
direct  proceeding  by  the  State  to  oust  the  corporation  of  its  assumed 
and  usurped  powers.  Bradley  v.  Ballard,  55  111.  413 ;  Kadish  v.  Garden 
City  Building  Ass., 151  id.  531;  McNulta  v.  Corn  Belt  Bank,  164  id. 
427;  Eckman  v.  Chicago,  Burlington  and  Quincy  Railroad  Co.,  169 
id.  312;  Darst  v.  Gale,  83  id.  136. 

Note.  —  When  a  corporation,  sued  upon  a  contract  made  in  its 
name,  seeks  to  defend  on  the  ground  that  the  contract  was  ultra  vires, 
three  questions  arise :  — 

(1)  Did  the  corporation  have  legal  capacity  to  make  the  contract? 
If  not,  that  is  an  end  of  the  matter.  There  is  no  possibility  of  such  a 
corporate  act. 

(2)  If  the  corporation  has  such  legal  capacity,  that  means  that 
there  are  human  beings  to  whose  acts  in  making  such  contract  cor- 
porate significance  will  be  given.  Who  are  those  human  beings,  — 
the  directors  alone,  or  the  directors,  plus  the  stockholders?  And  is  it 
a  fact  that  the  contract  was  made  by  their  authority?  If  not,  that  is 
an  end  of  the  matter.  There  has  not  in  fact  been  such  a  corporate  act. 

(3)  If  there  was  such  a  corporate  act,  is  the  plaintiff  barred  from 
relief  because  affected  with  notice,  actual  or  constructive,  that  this 
was  an  improper  corporate  act? 

If  the  corporation  is  held  not  to  have  legal  capacity  to  make  such  a 
contract,  it  is  submitted  that  it  is  needless,  and  makes  only  for  con- 
fusion of  thought,  to  speak  of  the  plaintiff  as  having  had  constructive 
notice  of  the  powers  of  the  corporation.  There  is  not  a  word  about 
such  notice  in  Lord  Cairns'  opinion  in  Ashhury  Co.  v.  Riche,  supra. 

Whether  every  person  who  deals  with  corporate  officers  is  charged 
with  constructive  notice  of  the  powers  of  the  corporation  is  a  question 
that  has  not  received  careful  consideration  by  the  courts.  The  doc- 
trine seems  to  have  arisen  with  respect  to  railroad  companies,  formed 
by  special  act.  See  East  Anglian  Ry.  Co.  v.  Eastern  Counties  Co., 
11  C.B.  775  (the  act  of  incorporation  "is  a  public  act,  accessible  to 
all,  and  supposed  to  be  known  to  all").  It  has  been  frequently  laid 
down  by  courts  in  this  country,  without  discussion.  But  there  has 
been  some  dissent  from  making  any  such  sweeping  doctrine.   Thus 


720  DENVER    FIRE    INSURANCE    CO.  V.  MCCLELLAND.       [CHAP.  II. 

in  the  Bissell  case,  Comstock,  J.,  said  (22  N.Y.  258,  281) :  "A  travel- 
ler from  New  York  to  the  Mississippi  can  hardly  be  required  to  fur- 
nish himself  with  the  charters  of  all  the  railroads  on  his  route,  or  to 
study  a  treatise  on  the  law  of  corporations." 

There  is  a  square  conflict  of  authority  as  to  whether  a  corporation 
is  ever  liable  upon  an  ultra  vires  contract.  Some  of  the  cases  holding 
the  corporation  not  liable  are  given  in  the  next  paragraph.  The 
reasoning  in  these  cases  often  confuses,  it  is  submitted,  the  three 
questions  stated  at  the  opening  of  this  note. 

See  Chewacla  Lime  Works  v.  Dismukes,  87  Ala.  344;  Byrne  v. 
Schuyler  Co.,  65  Conn.  336;  Franklin  Co.  v.  Lewiston  Bank,  68  Me. 
43;  Western  Marijland  R.R.  Co.  v.  Blue  Ridge  Co.,  102  Md.  307  (cf. 
General  Home  v.  Hammerhacker,  64  Md.  595,  606;  United  German 
Bank  v.  Katz,  57  Md.  128);  Dam  v.  Old  Colony  R.R.  Co.,  131  Mass. 
258;  Dresser  v.  Traders'  Bank,  165  Mass.  120;  Hotchkin  v.  Third 
Bank,  219  Mass.  234;  Ulman  v.  Golden  Cross,  220  Mass.  422  (cf.  Ches- 
ter Glass  Co.  V.  Dewey,  16  Mass.  94,  102;  Slater  Woollen  Co.  v.  Lamb, 
143  Mass.  420;  N.Y.  Bank  Note  Co.  v.  Kidder  Press  Mfg.  Co.,  192 
Mass.  391,  404);  Greenville  Compress  v.  Planters'  Press,  70  Miss.  669, 
676  (cf.  Prairie  Lodge  v.  Smith,  58  Miss.  301);  Downing  v.  Mount 
Washington  Road  Co.,  40  N.H.  230;  Simpson  v.  Building  Assn., 
38  Ohio  St.  349;  Metropolitan  Stock  Exchange  v.  National  Bank,  76 
Vt.  303. 


DENVER  FIRE  INSURANCE  CO.  v.  McCLELLAND. 

9  Colo.  11.     1885. 

Action  by  McClelland  (plaintiff  below)  against  Insurance  Com- 
pany. 

Plaintiff's  complaint  alleges  that,  on  June  12, 1882,  defendant  com- 
pany issued  a  policy  insuring  plaintiff's  growing  crops  against  loss  or 
damage  by  hail;  that  this  policy  was  issued  in  consideration  of  $3.00 
cash  paid  by  plaintiff,  and  also  of  a  note  for  $58.03  executed  and 
delivered  by  plaintiff  to  defendant;  and  that  on  June  19,  1882, 
plaintiff's  crops  were  damaged  by  hail. 

Defendants'  answer  set  up,  as  second  defense,  that  the  defendant 
company's  articles  of  incorporation  were  duly  recorded  in  two  public 
offices  long  before  the  issuing  of  said  policy;  and  that  "neither  the 
said  The  Denver  Fire  Insurance  Company,  its  directors,  stockholders 
or  officers,  had  or  have  any  right,  power  or  authority"  to  enter  into 
such  a  contract,  and  that  all  such  acts  as  were  alleged  in  the  com- 
plaint respecting  such  contract  were  "absolutely  null  and  void,  each 
and  every  act  being  beyond  the  scope  and  power  vested  by  the  said 
articles  of  incorporation  in  defendant,  the  directors,  stockholders, 
and  officers." 


SECT.  II.]       DENVER    FIRE    INSURANCE    CO.  V.  MCCLELLAND.  721 

The  objects  of  the  company,  as  defined  in  its  articles  were  to 
insure  buildings  of  all  kinds  erected  or  in  process  of  erection,  goods, 
wares  and  merchandise,  machinery,  mills,  factories,  smelters,  foun- 
dries, machine  shops,  breweries  and  personal  property  of  every 
description,  whether  in  store,  transit  or  use,  from  loss  or  damage  by 
fire,  and  generally  to  do  and  transact  all  business  necessary  to  effec- 
tually secure  indemnity  from  loss  or  casualty  by  fire  or  lightning,  and 
all  other  Ijusincss  transacted  by  fire  insurance  companies. 

The  plaintiff  demurred  to  the  second  defense.  The  demurrer  was 
sustained.  The  jury  assessed  the  damages  at  $1,265.50. 

Stone,  J.  In  the  case  before  us  the  contract,  as  made  by  the  par- 
ties, appears  to  have  been  fully  executed  on  the  part  of  the  appellee, 
so  far  as  his  right  of  action  when  brought  was  affected  by  it.  He  had 
paid  a  small  portion  of  money  on  the  amount  of  the  premium  agreed 
to  be  paid  and  had  given  a  promissory  note  for  the  balance.  This 
was  all  he  had  agreed  to  do;  all  that  had  been  exacted  of  him  by  the 
insurance  company,  and  this  he  had  performed.  It  matters  not  that 
the  note  had  not  been  paid,  for  it  was  not  due  when  his  right  of  action 
accrued  and  when  he  brought  his  suit. 

It  is  not  contended  that  the  payment  of  the  note  was  a  condition 
precedent  to  his  right  of  action  against  the  company,  since,  at  the 
time  of  bringing  the  action,  the  note  lacked  two  months  of  maturity, 
and  there  was  nothing  to  be  done  or  performed  by  him  under  the 
contract.  The  performance  already  made  by  the  appellee  had  been 
accepted  by  the  appellant  company,  and,  so  far  as  it  was  concerned, 
the  execution  of  the  note  was  the  same  as  a  cash  payment  in  full  of 
the  amount;  the  company  had  the  benefit  thereof.  It  is  argued  on 
behalf  of  the  appellant  that  the  courts  ought  in  all  such  cases  to  sus- 
tain the  defense  of  ultra  vires,  here  interposed,  on  the  ground  of 
public  policy;  that  the  public  which  confers  the  corporate  powers 
upon  such  companies  has  an  interest  in  the  protection  of  innocent 
stockholders  and  creditors  of  such  companies  by  confining  the  exer- 
cise of  corporate  powers  strictly  within  their  authorized  limits,  and 
this  is  given  in  the  books  as  the  chief  reason  for  the  rule  of  decision 
in  the  cases  which  sustain  the  defense  of  ultra  vires. 

That  the  public  has  such  an  interest  is  quite  true,  but  whether  to 
afford  such  protection  the  defense  of  ultra  vires  is  always  necessary 
in  such  cases  is  another  thing.  Stockholders  are  but  one  portion  of 
the  public;  another  portion,  with  equal  rights  of  protection,  is  that 
with  whom  these  multiform  corporations  deal  in  the  daily  exercise 
of  their  assumed  powers.  And  it  seems  illogical  to  assume  that  the 
interests  of  the  public  would  be  best  subserved  by  a  public  policy 
which  will  allow  a  corporation,  any  more  than  an  individual,  to  vio- 
late the  principles  of  common  honesty  and  claim  exemption  from  the 
obligation  of  its  contracts  by  pleading  its  own  wrong-doing.  Such 
policy  would  rather  seem  to  offer  a  premium  for  dishonest  dealing. 


722  DENVER    FIRE    INSURANCE    CO.  V.  MCCLELLAND.       (ciIAP.  11. 

Besides,  both  the  state  which  ^rant.s  these  coriwrute  powers,  and 
the  stockholders  for  whose  beiietit  such  powers  ur«*  exercis<^'d,  have 
their  reiiie(hes,  the  former  by  interfering  to  revoke  the  charter,  and 
the  hitter  by  an  action  to  restrain  the  unauthorized  undertakings. 
While  courts  are  inclined  to  maintain  with  vigor  the  limitations  of 
corporate  actions,  whenever  it  is  a  question  of  restraining  the  cor- 
poration in  advance  from  passing  beyond  the  lK)undaries  of  their 
charters,  they  are  equally  indiiu'd,  on  the  other  hand,  to  enforce 
against  them  contracts,  though  ultra  vires,  of  which  they  have  re- 
ceived the  Ijenetit.  If  the  other  party  proceeds  to  tlie  pi'rformance 
of  the  contract,  expending  his  money  and  hilx)r  in  the  proiluction 
of  values,  which  the  coriM)ration  appropriates,  such  cf)rporation  will 
not  Ik>  excused  on  the  plea  that  the  contract  was  Ix'vond  its  powers, 
Bradley  v.  Ballard,  55  111.  413. 

Corporations  have  the  capacity  to  do  wrong,  and  may  overstep 
the  limits  placed  by  the  law  to  their  [)owers,  aiul  when  they  violate 
their  charters  in  this  res[x>ct  their  acts  are  illegal,  but  not  necessarily 
void,  Bisscll  V.  Mich,  etc.,  U.U.  Co.,  22  N.Y.  258, 

The  plea  of  ultra  vires  is  not  to  \yc  understootl  as  an  absolute  and 
peremptory  tlefense  in  all  cas<'s  of  excess  of  power  without  regard  to 
other  circumstances  and  considirations.  The  plea  is  not  to  Ik*  en- 
tertainetl  where  its  allowance  will  do  great  wrong  to  innocent  third 
persons,  Bisscll  v,  Mich.,  etc.,  li.li.  Co.,  22  N.Y.  258.  Where  a 
certain  act  is  prohibited  by  statute,  its  performance  is  to  l)e  held 
void  l)ecause  such  is  the  legislative  will.  So  where  the  consideration 
of  a  contract  is  by  law  illegal,  as  whi-re  the  cau.se  of  action  arises 
ex  turpe.  But  where  the  act  is  not  wrong  per  se,  where  the  contract 
is  for  a  lawful  purpose  in  itself,  has  been  entered  into  with  good 
faith,  and  fairly  executed  l)y  the  party  who  seeks  to  enforce  it,  we 
must  assent  to  the  doctrine  of  those  authorities  which  hold  that  the 
excess  of  the  corporate  powers  of  the  contracting  party  which  has 
received  the  benefit  of  the  contract  is  an  unconscionable  defense, 
which  may  not  l)e  set  up  to  exempt  from  liability  the  party  so  plead- 
ing it.   And  such,  we  think,  is  the  case  before  us. 

The  answer  of  the  insurance  company  does  not  deny  the  averment 
in  the  complaint  that  the  company  "was  doing  business  in  Larimer 
county,  in  the  state  of  Color.ldo,  as  a  general  fire  and  hail  insurance 
company."  It  does  not  deny  that  it  entered  into  the  contract  of 
insurance  with  the  appellee  in  manner  and  form  as  alleged  in  said 
complaint,  nor  that  the  contract  was  executed  as  averred.  The  sole 
defense  upon  which  the  appellant  company  relies  here  is  its  want  of 
authority  to  insure  against  hail.  By  offering  to  insure  the  property 
of  appellee  against  damage  by  hail,  and  by  entering  into  the  contract 
of  insurance  therefor,  it  claimed  to  possess  the  power  so  to  do.  It 
took  the  appellee's  money  and  assumed  the  risk  and  obligation  of 
paying  the  damage,  much  or  little,  that  might  occur,  or  of  having 


SECT.  II.]       DENVER    FIRE    INSURANCE    CO.  V.  MCCLELLAND.  723 

nothing  at  all  to  pay,  if  the  contingency  of  damage  should  not  happen 
within  the  time  covered  by  the  policy. 

A  loss  having  occurred,  the  company  seeks  exemption  from  the 
obligation  it  entered  into  by  denying  that  it  had  any  authority  to  do 
what  it  asserted  the  right  to  do  when  it  voluntarily  assumed  the 
undertaking. 

We  are  aware  that  the  courts  have  been  very  slow  to  concede  that 
a  defendant  setting  up  as  a  defense  the  ultra  vires  of  a  contract,  where 
said  contract  was  clearly  not  authorized,  should  be  held  liable  on  the 
contract,  since  this  would  appear  to  sustain  the  enforcement  of  an 
unauthorized  contract,  and  therefore  the  cases  show  that  whenever 
the  courts  could  avoid  this  seeming  inconsistency  by  resting  the 
recovery  upon  some  other  ground  they  have  done  so.  This  has  often 
led  to  equal  inconsistency  in  other  directions.  The  true  ground  would 
seem  to  be  that  of  equitable  estoppel,  whereby  the  defendant  is 
not  permitted  to  rely  upon  or  show  the  invalidity  of  the  contract. 
In  such  case,  the  contract  is  assumed  by  the  court  to  be  valid,  the 
party  seeking  to  avoid  it  not  being  permitted  to  attack  its  character 
in  this  respect. 

The  point  was  strongly  insisted  upon  by  counsel  for  appellant  in 
argument,  that  one  dealing  with  a  corporation  is  bound  to  know  the 
extent  of  its  powers  to  contract,  that  the  corporate  name  itself  indi- 
cates the  scope  of  its  business,  and  the  record  of  its  charter  or  articles 
of  incorporation  furnishes  notice  of  the  extent  and  limitation  of  its 
corporate  powers  and  authority  to  contract. 

While  as  a  general  proposition  this  is  true,  yet  it  must  be  conceded 
that  this  constructive  notice  is  of  a  very  vague  and  shadowy  char- 
acter. Every  one  may  have  access  to  the  statutes  of  the  states 
affecting  companies  incorporated  thereunder,  and  to  their  articles 
of  incorporation,  but  to  impute  a  knowledge  of  the  probable  con- 
struction the  courts  would  put  upon  these  statutes  and  articles  of 
incorporation  to  determine  questions  raised  upon  a  given  contract 
proposed,  is  carrying  the  doctrine  of  notice  to  an  extent  which  can 
only  be  denominated  preposterous.  It  was  in  answer  to  the  same 
point  that  Chief  Justice  Comstock  observed,  in  his  opinion  in  a 
leading  case  upon  this  question,  that  ''a  traveler  from  New  York  to 
Mississippi  can  hardly  be  required  to  furnish  himself  with  the  char- 
ters of  all  the  railroads  on  his  route,  or  to  study  a  treatise  on  the  law 
of  corporations."  Bissell  v.  M.S.  &  N.J.  R.R.  Co.,  22  N.Y.  258.  It 
was  urged  in  argument  on  behalf  of  appellant  that  the  state,  which 
created  these  corporations  for  public  good,  has  such  an  interest  in 
their  existence  and  perpetuity  that  public  policy  should  be  inter- 
posed to  keep  them  within  the  legitimate  exercise  of  their  powers. 
This  may  be  true  to  a  certain  extent,  and  the  state  may  interpose  to 
revoke  their  charters  for  an  abuse  thereof;  but  we  take  it  that  it  is 
no  more  the  public  policy  of  the  state  to  protect  the  business  of 


724  den\t:r  fire  insurance  co.  v.  mcclelland.     [chap.  ii. 

private  corporations  than  that  of  its  individual  citizens;  and  to 
invoke  puljhe  pcjhcy  in  a  ease  hke  the  one  at  l)ar,  in  order  to  prevent 
a  corporation  from  doing  wrong,  by  punisliing  the  otiier  party, 
would  differ  little  from  asking  a  court,  on  the  ground  of  public  policy, 
to  prevent  the  obtaining  money  or  goods  through  false  jiretenses  by 
holding  that  the  party  defrauded  should  be  punished  l)y  the  loss  of 
his  money  or  go<jds. 

While  such  wrong  may  be  prevented  by  interference  on  the  part 
of  the  state,  or  stockholders  of  the  company,  it  cannot  well  be  said 
that  to  cure  the  evil  it  is  necessary  in  every  case  to  exempt  the  com- 
pany from  the  liability  of  its  unauthorized  engagements. 

We  do  not  say  that  the  directors  or  acting  officers  of  such  company 
may  act  in  excess  of  their  legitimate  powers  against  the  interests  and 
contrary  to  the  will  of  the  stockholders  of  such  company,  but  while 
admitting  th(>  excess  of  proper  authority,  we  think,  on  jirinciple  and 
tiie  weight  of  modern  decisions,  that  if  the  stockholders,  whose  busi- 
ness it  is  to  see  that  their  own  managing  officers  act  within  the  proper 
scope  of  their  powers,  either  expressly,  or  by  silence  impliedly,  assent 
to  acts  done  on  their  behalf  in  excess  of  authority,  they  should  be 
held  estopped  to  deny  that  such  acts  were  authorized. 

The  appellant  company  here  offered  to  pay  back  the  nioney  and 
return  or  cancel  the  note  given  for  the  policy,  and  counsel  urgently 
contended  that  this  is  all  that  legally  can  or  rightfully  ought  to  be 
exacted.  This  would  not  place  the  appellee  in  statu  quo.  Every 
insurance  company  would  be  ready  and  willing  to  do  that  much 
after  the  loss  had  occurred,  on  condition  of  exemption  from  pajTiient 
of  the  loss.  The, damage  to  appellee  is  the  loss  of  his  crops  against 
which  the  appellant  untlertook  to  secure  him.  After  the  loss  it  was 
too  late  for  appellee  to  insure  in  another  company  having  unques- 
tioned authority  to  insure  against  such  loss. 

Wc  therefore  conclude  that  since  the  contract  of  insurance, 
though  it  may  have  been  beyond  the  scope  of  the  proper  object  and 
purposes  of  the  comjiany  as  expressed  and  conferred  by  their  articles 
of  incorporation,  was  neither  by  statute  nor  by  their  charter  expressly 
forbidden,  nor  in  its  nature  illegal  or  improper,  antl  since  the  conduct 
of  the  company  in  soliciting  the  insurance  and  entering  into  the  con- 
tract therefor  under  the  circumstances  disclosed  by  this  case  was 
such  that  to  exempt  it  from  its  engagements  thereunder  would  result 
in  injuring  and  defrauding  the  appellee,  who  in  good  faith  dealt 
with  the  company  under  the  belief  of  its  rightful  authority  in  the 
premises,  the  defense  of  the  appellant  company  interposed  against 
its  liability  on  the  contract  is  inequitable,  unconscionable,  and 
should  not  be  allowed. 

Beck,  C.J.,  and  Helm,  J.,  concurring.  Private  corporations  are 
creatures  of  statute,  and  derive  their  powers  solely  therefrom.  Upon 
weighty  considerations  of  public  policy,  and  of  private  equity  as  well, 


SECT.  II.]       DENVER    FIRE    INSURANCE    CO.  V.  MCCLELLAND.  725 

the  principle  has  been  universally  recognized  that  the  charters  or 
general  laws  through  which  these  corporations  derive  their  existence 
absolutely  control  their  action;  that  a  contract  made  or  an  act  done 
by  them  which  is  not  in  any  manner  authorized  by  some  express 
provision  of  the  charter  or  law  of  incorporation,  or  which  may  not 
be  clearly  implied  therefrom,  is  ultra  vires;  and  that  such  usurpation 
of  power  may  be  relied  upon  as  a  complete  defense  to  a  suit  growing 
out  of  the  unauthorized  act  or  contract. 

But,  for  the  purpose  of  avoiding  the  infliction  of  manifest  injustice 
in  given  cases,  many  courts  of  the  highest  respectability  have  seen 
fit  to  recognize  an  exception  to  the  foregoing  doctrine.  Tliis  excep- 
tion, when  admitted,  is  always  based  upon  principles  largely  analo- 
gous to  those  supporting  equitable  estoppels.  The  decisions  recog- 
nizing it  hold  that  where  a  corporation  receives  and  retains  the  full 
benefit  of  a  contract,  and  a  failure  to  perform  on  its  side  would  result 
in  palpable  injustice  to  the  other  contracting  party,  it  is  estopped 
from  escaping  liability  thereunder  through  a  plea  of  ultra  vires. 

We  are  inclined  to  the  opinion  that  cases  sometimes  arise  wherein 
this  exception,  properly  understood  and  limited,  should  be  held 
applicable.  If  a  private  corporation  has  accepted  and  retained  the 
full  benefits  of  a  contract  which  it  had  no  power  to  make,  the  same 
having  been  performed  by  the  other  party  thereto;  and  if  the  trans- 
action is  of  such  a  nature  that  the  party  thus  performing  will  suffer 
manifest  injustice  and  hardship  unless  permitted  to  maintain  his 
action  directly  upon  the  contract,  no  other  adequate  relief  being  at 
his  command,  we  think  the  defense  of  ultra  vires  may  be  disallowed. 
This,  however,  does  not  do  away  with  the  objectionable  character 
of  the  unauthorized  contract.  It  admits  the  legal  wrong  committed 
by  the  usurpation  of  power,  but  denies  the  equitable  right  of  the 
corporation  to  profit  through  such  wrong  at  the  expense  of  parties 
contracting  with  it;  the  corporation,  having  received  and  retained 
the  benefit  of  the  contract,  is  denied  the  privilege  of  invoking  the 
illegality  of  its  act,  and  thus  avoiding  consequences  naturally  flowing 
therefrom. 

The  circumstances  attending  and  surrounding  the  transaction 
now  before  us,  in  our  judgment,  render  this  an  appropriate  case  for 
the  apphcation  of  the  foregoing  equitable  doctrine.  For  this  reason 
we  concur  in  the  conclusion  arrived  at  by  Mr.  Justice  Stone,  who 
writes  the  principal  opinion. 

Affirmed. 

Note.  —  See,  accord,  Western  Development  Co.  v.  Caplinger,  86 
Ark.  287;  Baij  Citij  Ass'n  v.  Broad,  136  Cal.  525;  Muncie  Gas  Co.  v. 
Muncie,  160  Ind.  97,  104;  In  re  Mutual  Ins.  Co.,  107  la.  143;  Electric 
Co.  V.  Blue  Rapids  Township,  11  Kan.  580;  Canal  Co.  v.  St.  Charles 
Co.,  44  La.  Ann.  1069,  1075;  Geraghty  v.  Washtenaw  Co.,  145  Mich. 


726  STATE    V.  BANK    OF    HEMINGFORD.  [CHAP.  II. 

C35;  Bell  v.  Mendenhall,  78  Minn.  57;  Whitehead  v.  American  Lamp 
Co.,  70  N.J.  Eq.  581;  Parish  v.  Wheeler,  22  N.Y.  494;  Trustees  v. 
Realtij  Co.,  134  N.C.  41,  49;  Clarke  v.  Olson,  9  N.D.  304;  /%ri  v. 
Ainerican  Carbon  Block  Co.,  182  Pa.  20();  /^o/jrf  v.  Terrell  Co.,  82  Tex. 
309;  Bear  River  Co.  v.  Hanley,  15  Utah,  500;  Farwell  Co.  v.  iro//,  09 
Wis.  10.  For  further  authorities  see  24  H.L.R.  544. 


STATE  V.  BANK  OF  HEMINGFORD. 

58  Neb.  818.     1899. 

Harrison,  C.J.  The  Bank  of  Hcmingford,  a  corporation  formed 
under  the  laws  of  this  State,  and  located  and  in  business  at  Heining- 
ford,  purchased  a  store  building  and  lots  upon  which  it  stood,  also 
the  stock  of  niorchtuKHse  contained  in  the  store,  of  ail  of  which 
the  bank  afterward  made  a  conditional  sale  to  Mary  E.  Jones.  The 
vendee  defaulted  in  fulfillment  of  the  conditions  of  the  sale,  and  the 
bank  took  possession  of  the  property  on  or  about  March  7,  1893, 
from  which  time  until  OctoIxT  2,  1S05,  when  the  bank  was  do.sed 
and  taken  in  charge  by  the  state  banking  board,  the  bank  had  con- 
ducted the  mercantile  business.  In  the  due  course  of  proceedings  to 
"\vind  up"  the  affairs  of  the  bank  a  receiver  was  appointed,  who 
took  possession  of  the  assets  of  the  bank,  inclusive  of  the  store 
building,  the  real  property  upon  which  it  was  situated,  also  the  stock 
of  merchandise.  The  apix'llant  had  sold  merchandi.se  to  the  bank 
during  the  time  the  latter  was  running  the  store,  and  which  had  been 
placed  therein  as  a  part  of  the  stock  for  sale,  and  sold  in  the  course 
of  the  retail  trade;  and  for  the  unpaid  portions  of  the  l)ill  or  accounts 
due  and  unpaid  claims  were  duly  presented  to  the  receiver,  each  of 
which  was  returned  indorsed:  "Not  filed,  for  the  reason  it  is  not  a 
legal  claim  against  the  Bank  of  Hemingford.  Dated  December  20, 
1805.  Ira  E.  Tash,  Receiver  Bank  of  Hemingford."  The  appellants, 
bj'  petition  of  intervention  in  the  proceeding  in  district  court  wherein 
the  receiver  had  been  appointed,  set  up  and  asserted  their  respective 
claims,  and  after  trial  a  decree  was  rendered  by  which  certain  claims 
for  parties  of  amounts  collected  by  the  bank  on  accounts  against  a 
part}^  who  had  owned  and  conducted  the  store  (it  was  the  conditional 
vendee  of  the  bank  and  the  debt  contracted  by  her)  were  preferred, 
the  depositors  of  the  bank  ordered  paid  in  full,  and  if  any  assets 
remained  they  were  to  be  applied  in  pajTnent  of  the  claims  of  appel- 
lants and  others  who  had  similar  claims  and  who  had  also  asserted 
them  in  the  same  manner  as  appellants  had  their  claims.  Appellants 
claim  that  they  should  have  been  accorded  preferred  claims  against 
any  amount  in  the  hands  of  the  receiver  derived  or  realized  from  the 
sale  of  the  store  property,  inclusive  of  the  merchandise,  or  at  least 


SECT.  II.]  STATE    V.  BANK   OF   HEMINGFOKD.  727 

should  not  have  been  postponed  in  favor  of  the  other  creditors  of  the 
bank.  It  is  conceded  by  all  parties,  and  is  true,  that  the  bank  was 
not  authorized  to  engage  permanently  or  as  a  venture  in  the  business 
of  selling  merchandise  at  retail,  or  to  use  the  common  general  expres- 
sion, "in  keeping  a  store,"  and  in  so  doing  it  proceeded  without  war- 
rant in  its  articles  of  incorporation  and  hence  without  legal  right. 
It  has  been  decided  that  if  a  bank  not  authorized  by  its  articles  of 
incorporation  engages  in  a  business  other  than  banking,  an  account 
for  articles  furnished  it  in  and  about  the  conduct  of  such  business 
may  be  collected  from  it,  and  that  it  had  no  power  to  make  the  con- 
tract out  of  which  the  debt  arises  is  of  no  avail  to  it  as  a  defense  in 
an  action  against  it  to  recover  the  amount  of  the  account.  American 
Nat.  Bank  v.  National  Wall  Payer  Co.,  77  Fed.  Rep.  85.  But  a  re- 
ceiver appointed,  as  in  this  case,  under  the  provisions  of  our  banking 
act  will  answer  in  such  matters  as  herein  in  controversy,  not  alone 
for  the  bank  or  as  representing  or  ''  standing  in  the  shoes  of  the  bank," 
but  wiirguard,  protect,  and  preserve  the  rights  and  interests  of  cred- 
itors, and  look  to  and  secure  their  proper  adjustment  relatively  to 
all  claims  and  each  to  the  other.  Barrington  v.  Connor,  51  Neb.  214. 

In  the  absence  of  evidence  to  the  contrary,  and  there  is  none,  it 
will  be  presumed  that  the  depositors  dealt  with  the  bank  as  a  bank 
and  not  as  a  store-keeper,  and  beheved  it  to  be  and  trusted  it  as 
engaged  in  legitimate  banking  and  not  in  ventures  or  transactions 
not  contemplated  in  the  articles  of  its  incorporation,  and  in  which 
its  capital  and  funds,  or  a  portion  thereof,  must  be  used,  and  they 
are  entitled  to  demand  of  right  that  the  funds  diverted  and  employed 
for  purposes  other  than  the  banking  business,  if  such  funds  have 
been  returned  to  or  are  in  the  possession  of  the  bank,  or,  in  the  event 
of  its  insolvency,  have  been  taken  by  its  duly  appointed  receiver, 
together  with  any  funds  or  property  which  in  the  course  of  the  out- 
side dealing  have  been  mingled  with  what  were  originally  put  to  the 
unauthorized  use  by  the  bank,  be  appropriated  to  the  pajmient  of 
their  just  claims  against  the  bank  to  the  exclusion  of  parties  who  have 
accounts  against  the  bank  which  originated  exclusively  in  the  un- 
authorized business.  The  parties  who  trusted  the  bank  as  a  store- 
keeper knew  that  it  w^as  an  incorporated  bank,  and  must  have  known, 
or  will  be  charged  with  the  knowledge,  that  it  was  not  properly  in 
the  retail  mercantile  business. 

It  is  urged  with  considerable  stress  that  quite  a  large  percentage 
of  the  goods,  the  accounts  or  bills  for  which  were  presented  to  the 
receiver  as  claims  by  the  appellants,  was  in  the  stock  in  the  store  at 
the  time  it  passed  into  the  possession  of  the  receiver  of  the  bank; 
also,  that  there  was  an  account  in  the  books  of  the  bank  in  which 
the  store  figured  as  a  party  and  by  or  from  which  it  was  possible  to 
ascertain  what  money  had  come  to  the  bank  from  the  store  business 
as  a  source,  and  in  this  connection  that  the  creditors  of  the  bank,  as  a 


728  CENTRAL   TRANS.  CO.  V.  PULLMAN's    CAR    CO.       [CHAP.   II. 

store-keeper,  ought  to  be  preferred  as  tp  funds  or  property  whicli 
came  from  the  store  to  the  hank  or  its  receiver,  or  at  least  to  share 
equally  in  them  with  the  other  creditors  of  the  hank.  There  was 
evidence  to  the  effect  that  "  ninety  per  cent"  of  one  hill  of  ^oods.  the 
account  for  which  wjus  the  basis  of  tlic  claim  of  one  of  the  appellants, 
remained  unsold  and  in  the  stock  in  the  store  when  the  receiver  took 
possession,  and  relative  to  .some  others  of  the  claims  of  appellants 
similar  conditions  prevailed,  except  the  per  cents  of  goods  named 
were  smaller;  but  here  it  must  be  said  that  this  is  not  an  action  to 
recover  the  specific  articles  or  goods  or  their  proceeds,  but  is  in  the 
nature  of  an  action  to  recover  on  an  account  against  the  bank,  and 
the  evidence  to  which  attention  has  l)een  directed  can  have  but  little, 
if  any,  weight,  except  as  it  might  avail  to  awaken  anil  move  the 
equitable  feelings  and  powers  of  the  court;  but  the  appellants  are 
in  no  position  to  invoke  the  equity  powers  of  the  courts  as  against 
the  rights  of  the  depositors  and  general  creditors  of  the  bank. 
There  was  also  testimony  to  the  effect  that  in  the  books  of  tlie  bank 
an  account  had  been  kept  with  the  store,  and  the  record  states  that 
some  pages  of  the  books  of  the  bank  were  introduced  in  evidence  to 
show  portions  at  least  of  the  account  with  the  store,  but  these  are 
not  in  the  record  presented  here,  and  from  all  that  is  before  us  on  the 
subject  it  cannot  be  said  that  there  is  evidence  which  in  any  degree 
tends  to  show  that  funds  taken  from  the  bank  to  the  store  business 
had  been  fully  repaid  and  that  there  were  funds  or  profits  from  the 
store  business  to  which  the  appellants  might  possibly,  equitably, 
be  said  to  have  any  right  to  demand  they  be  paid  on  their  claims 
as  distinctively  and  specifically,  to  coin  an  expression,  store  funds. 
The  decree  of  the  district  court  was  right  and  must  be 

Note.  —  See  also  Vari  Brocklin  v.  Queen  City  Printing  Co.,  19 
Wash.  552,  cited  in  the  note  on  p.  449,  supra. 


CENTRAL  TRANSPORTATION  CO.  v.  PULLMAN'S  CAR  CO. 

139  U.S.  24.     1890. 

A  CORPORATION,  formed  by  articles  of  association,  called  a  certifi- 
cate or  charter,  under  the  general  laws  of  Pennsylvania  concerning 
manufacturing  companies,  with  a  certain  capital  stock,  for  twenty 
years,  for  "the  transportation  of  passengers  in  railroad  cars  con- 
structed and  owned  by  the  said  company"  under  certain  patents, 
carried  on  the  business  of  manufacturing  sleeping  cars  under  its 
patents,  and  of  hiring  or  letting  the  cars  to  railroad  companies  by 
written  contracts,  receiving  a  revenue  from  the  sale  of  berths  and 


SECT.  II.]        CENTRAL   TRANS.  CO.  V.  PULLMAN's    CAR    CO.  729 

accommodations  to  passengers.  Seven  years  afterwards,  by  a  special 
act  of  the  legislature  of  Pennsylvania,  the  charter  was  extended  for 
ninety-nine  years,  and  the  corporation  was  empowered  to  double  its 
capital  stock,  and  "to  enter  into  contracts  with  corporations  of  this 
or  any  other  State  for  the  leasing  or  hiring  and  transfer  to  them,  or 
any  of  them,  of  its  railway  cars  and  other  personal  property."  The 
corporation  forthwith  entered  into  an  indenture  with  a  corporation 
of  another  State  engaged  in  a  similar  business,  by  which  it  leased 
and  transferred  to  that  corporation  all  its  cars,  railroad  contracts, 
patent  rights  and  other  personal  property,  moneys,  credits  and 
rights  of  action,  for  the  term  of  ninety-nine  years,  except  so  far  as 
the  contracts  and  patents  should  expire  sooner;  and  covenanted  not 
to  "engage  in  the  business  of  manufacturing,  using,  or  hu'ing  sleeping 
cars"  while  the  indenture  should  remain  in  force;  and  the  lessee  cov- 
enanted to  pay  all  existing  debts  of  the  lessor,  and  to  pay  to  the  lessor 
annually  the  sum  of  $264,000,  during  the  entire  term  of  ninety-nine 
years,  unless  the  indenture  should  be  sooner  terminated  as  therein 
provided.  The  question  was  whether  an  action  could  be  maintained 
by  the  lessor  upon  this  contract  to  recover  the  sums  thereby  pay- 
able for  a  period  during  which  the  lessee  had  enjoyed  the  benefits 
of  the  contract. 

Mr.  Justice  Gray.  .  .  .  The  clear  result  of  these  decisions  may  be 
summed  up  thus:  The  charter  of  a  corporation,  read  in  the  light  of 
any  general  laws  which  are  applicable,  is  the  measure  of  its  powers, 
and  the  enumeration  of  those  powers  implies  the  exclusion  of  all 
others  not  fairly  incidental.  All  contracts  made  by  a  corporation 
beyond  the  scope  of  those  powers  are  unlawful  and  void,  and  no 
action  can  be  maintained  upon  them  in  the  courts,  and  this  upon 
three  distinct  grounds :  the  obligation  of  every  one  contracting  with  a 
corporation,  to  take  notice  of  the  legal  limits  of  its  powers;  the  inter- 
est of  the  stockholders,  not  to  be  subjected  to  risks  which  they  have 
never  undertaken;  and,  above  all,  the  interest  of  the  public,  that  the 
corporation  shall  not  transcend  the  powers  conferred  upon  it  by  law. 
A  corporation  cannot,  without  the  assent  of  the  legislature,  transfer 
its  franchise  to  another  corporation,  and  abnegate  the  performance 
of  the  duties  to  the  public,  imposed  upon  it  by  its  charter  as  the 
consideration  for  the  grant  of  its  franchise.  Neither  the  grant  of  a 
franchise  to  transport  passengers,  nor  a  general  authority  to  sell  and 
dispose  of  property,  empowers  the  grantee,  while  it  continues  to  exist 
as  a  corporation,  to  sell  or  to  lease  its  entire  property  and  franchise 
to  another  corporation.  These  principles  apply  equally  to  companies 
incorporated  by  special  charter  from  the  legislature,  and  to  those 
formed  by  articles  of  association  under  general  laws. 

The  view  which  this  court  has  taken  of  the  question  presented  by 
this  branch  of  the  case,  and  the  only  view  which  appears  to  us  con- 
sistent with  legal  principles,  is  as  follows :  — 


730  CENTRAL  TRANS.  CO.  V.  PULLMAN's    CAR    CO.       [CHAP.  II. 

A  contract  of  a  corporation,  which  is  ultra  vires,  in  the  proper  sense, 
that  is  to  say,  outside  the  object  of  its  creation  as  defined  in  the  law 
of  its  organization,  and  therefore  beyond  the  powers  conferred  upon 
it  by  the  legishiture,  is  not  voidal)le  only,  but  wholly  void,  and  of  no 
legal  effect.  The  objection  to  the  contract  is,  not  merely  tluit  the  cor- 
poration ought  not  to  have  made  it,  but  that  it  could  not  make  it. 
The  contract  cannot  be  ratified  by  either  party,  because  it  could  not 
have  been  authorized  by  either.  No  performance  on  either  side  can 
give  the  unlawful  contract  any  validity,  or  be  the  foundation  of  any 
right  of  action  upon  it. 

Wlien  a  corporation  is  acting  within  the  general  scope  of  the  powers 
conferred  upon  it  by  the  legislature,  the  corporation,  as  well  as  per- 
sons contracting  with  it,  may  be  estopped  to  deny  that  it  has  com- 
plied with  the  legal  formaUties  which  are  prerequisites  to  its  existence 
or  to  its  action,  because  such  requisites  might  in  fact  have  been  com- 
plied with.  But  when  the  contract  is  beyond  the  powers  conferred 
upon  it  l)y  existing  laws,  neither  the  corporation,  nor  the  other  jxirty 
to  the  contract,  can  be  estopped,  by  asvsenting  to  it,  or  by  acting 
upon  it,  to  show  that  it  was  prohibited  by  those  laws. 

The  doctrine  of  the  common  law,  by  which  a  tenant  of  real  estate 
is  estopped  to  deny  his  landlord's  title,  has  never  been  considered  by 
this  court  as  applicable  to  leases  by  railroad  corporations  of  their 
roads  and  franchises.  It  certainly  has  no  bearing  upon  the  question 
whether  this  defendant  may  set  up  that  the  lease  sued  on,  which  is 
not  of  real  estate,  but  of  personal  property,  and  which  includes,  as 
inseparable  from  the  other  property  transferred,  the  inalienable 
franchise  of  the  plaintiff,  is  unlawful  and  void,  for  want  of  legal 
capacity  in  the  plaintiff  to  make  it. 

A  contract  ultra  vires  being  unlawful  and  void,  not  because  it  is  in 
itself  immoral,  but  because  the  corporation,  by  the  law  of  its  creation, 
is  incapable  of  making  it,  the  courts,  while  refusing  to  maintain  any 
action  upon  the  unlawful  contract,  have  always  striven  to  do  justice 
between  the  parties,  so  far  as  could  be  done  consistently  with  adher- 
ence to  law,  by  permitting  property  or  money,  parted  with  on  the 
faith  of  the  unlawful  contract,  to  be  recovered  back,  or  compensation 
to  be  made  for  it. 

In  such  case,  however,  the  action  is  not  maintained  upon  the  un- 
lawful contract,  nor  according  to  its  terms;  but  on  an  implied  con- 
tract of  the  defendant  to  return,  or,  failing  to  do  that,  to  make  com- 
pensation for,  property  or  money  which  it  has  no  right  to  retain.  To 
maintain  such  an  action  is  not  to  afl&rm,  but  to  disafiirm,  the  unlaw- 
ful contract. 

The  ground  and  the  limits  of  the  rule  concerning  the  remedy,  in 
the  case  of  a  contract  ultra  vires,  which  has  been  partly  performed, 
and  under  which  property  has  passed,  can  hardly  be  summed  up 
better  than  they  were  by  Mr.  Justice  Miller  in  a  passage  already 


SECT.  II.]  BATH    GAS    LIGHT    CO.  V.  CLAFFY.  731 

quoted,  where  he  said  that  the  rule  "stands  upon  the  broad  ground 
that  the  contract  itself  is  void,  and  that  nothing  which  has  been  done 
under  it,  nor  the  action  of  the  court,  can  infuse  any  vitality  into  it"; 
and  that  "where  the  parties  have  so  far  acted  under  such  a  contract 
that  they  cannot  be  restored  to  their  original  condition,  the  court 
inquires  if  relief  can  be  given  independently  of  the  contract,  or 
whether  it  will  refuse  to  interfere  as  the  matter  stands."  Pennsyl- 
vania Railroad  v.  St.  Louis,  &c.,  Railroad,  118  U.S.  317. 

Whether  this  plaintiff  could  maintain  any  action  against  this 
defendant,  in  the  nature  of  a  quantum  meruit,  or  otherwise,  inde- 
pendently of  the  contract,  need  not  be  considered,  because  it  is  not 
presented  by  this  record,  and  has  not  been  argued.  This  action, 
according  to  the  declaration  and  the  evidence,  was  brought  and 
prosecuted  for  the  single  purpose  of  recovering  sums  which  the 
defendant  had  agreed  to  pay  by  the 'unlawful  contract,  and  which, 
for  the  reasons  and  upon  the  authorities  above  stated,  the  defendant 
is  not  liable  for. 

Judgment  affirmed. 

Note.  —  See,  accord,  Bank  of  ChiUicothe  v.  Swayne,  8  Ohio,  257; 
Marble  Co.  v.  Harvey,  92  Tenn.  116. 


BATH   GAS   LIGHT   CO.   v.   CLAFFY. 

151  N.Y.  24.    1896. 

The  plaintiff  is  a  Maine  corporation,  created  under  a  special  law  of 
that  State,  passed  in  1853,  for  the  purpose  of  supplying  gas  for  the 
lighting  of  the  streets  and  buildings  in  the  city  of  Bath.  The  United 
Gas,  Fuel  and  Light  Company  is  a  Maine  corporation,  organized  in 
1888,  under  a  general  law  of  that  State. 

On  November  10,  1888,  the  plaintiff  company  executed  to  the 
United,  etc..  Company  a  lease  of  its  property  and  franchises  for  the 
term  of  twenty-five  years  from  November  1,  1888,  at  an  annual  rent 
of  S2500,  which  the  lessee  covenanted  to  pay  in  semi-annual  pay- 
ments on  the  first  day  of  May  and  the  first  day  of  November  in  each 
year,  and  also  the  taxes  assessed  during  the  term.  Provision  was 
made  for  the  payment  by  the  lessor  to  the  lessee,  at  the  expiration  of 
the  term,  of  the  value  of  any  improvements  or  extensions  made  by  the 
lessee,  and  it  was  also  provided  that  the  lessee  should  give  to  the 
lessor  a  satisfactory  bond  for  the  faithful  performance  by  the  lessee 
of  its  covenants  in  the  lease.  In  pursuance  of  the  provision  last  men- 
tioned, the  United  Gas,  Fuel  and  Light  Company,  on  the  same  day, 
executed  a  bond  with  the  defendants  John  Claffy  and  John  T.  Row- 
land as  sureties,  conditioned  for  the  faithful  performance  by  the 


732  BATH  GAS  LIGHT  CO.  V.   CLAFFY.        [CHAP.  II. 

company  of  the  covenants  in  its  behalf  contained  in  the  lease,  which 
bond  was  delivered  to  and  accepted  by  the  plaintiff.  The  sureties 
were  interested  in  the  United  Clas,  Fuel  and  Li^ht  Company  as 
stockholders,  and  Claffy  (the  appellant)  was  also  a  director.  The 
lessee  immediately,  upon  the  execution  of  the  lease,  entered  into 
possession  of  the  demised  property  and  paid  the  rent  up  to  the  1st 
day  of  Noveml)er,  1889,  but  defaulted  in  the  semi-annual  payment 
due  May  1st,  181)0,  and  on  the  2d  day  of  August,  181)0  (the  rent  re- 
maininjj;  unpaid),  the  plaintiff  reentered  and  took  pos.'jession  of  the 
demised  property  under  a  provision  of  the  lease  which  authorized 
the  lessor  to  enter  and  expel  the  les.see  on  failing  to  pay  rent.  The 
entry  also  was,  as  may  l)e  inferred,  with  the  consent  and,  indeed,  at 
the  suggestion  of  the  officers  of  the  lessee.  This  action  was  i)rought 
on  the  bond  against  the  lessee  antl  the  sureties  to  recover  as  damages 
the  rent  which  fell  due  May  1, 1890,  and  the  proportionate  rent  from 
that  date  up  to  August  2,  1890,  and  taxes  which  had  been  assessed 
against  the  property  during  its  occupation  by  the  lessee,  which  it 
had  failetl  to  pay. 

The  defendant  Claffy  alone  appeared  and  defended  the  action. 

The  court  below  gave  judgment  in  favor  of  the  i)laintiff.  Claffy 
appealed. 

Andrews,  Ch.J.  The  defendant  Claffy  alone  appeared  and  de- 
fended the  action.  His  sole  defense  to  the  general  claim  is  that  the 
lease  was  ultra  vires,  illegal  and  void,  because  (as  is  conceded)  it  was 
made  without  legislative  sanction.  If  the  court  is  compelled  to 
accede  to  this  contention  by  force  of  controlling  authority,  or  from 
considerations  of  public  policy  which  overbear  in  the  particular  case 
the  rules  of  ordinary  justice,  it  will  be  our  dutj^  so  to  declare  and  to 
say  that,  although  the  United  Gas,  Fuel  and  LighfCompany  re- 
ceived and  enjoyed  the  undisturbed  posse.'^sion  of  the  demised  prop- 
erty under  the  lease  until  the  reentry,  and  accepted  and  appropriated 
the  benefit  of  the  contract,  nevertheless,  when  called  upon  to  pay  the 
rent  which  accrued  during  its  occupation,  it  may  defend  itself  on  the 
ground  that  the  plaintiff,  in  making  the  leasee,  exceeded  its  power  and 
escaped  the  performance  of  its  obligation,  and,  further,  that  the  de- 
fendant Claffy  may,  for  a  like  reason,  avoid  his  guaranty. 

The  modern  doctrine,  as  gtated  by  Chancellor  Kent,  is  to  con- 
sider corporations  as  having  such  powers  as  are  specifically  granted 
by  the  act  of  incorporation,  or  as  are  necessary  for  the  purpose  of 
carrying  into  effect  the  powers  expressly  granted,  and  as  not  having 
any  others.  2  Kent  Comm.  299.  This  doctrine  is  embodied  in  the 
Re\ised  Statutes  of  New  York,  and  the  section  relating  to  the  sub- 
ject is  regarded  as  simply  declaratory  of  the  antecedent  law.  1  Rev. 
St.  600,  §  3.  It  has  been  frequently  stated  that  the  validity  of  con- 
tracts of  corporations  is  to  be  determined  by  comparing  the  contract 
made  with  the  charter,  and  if  upon  such  comparison  it  appears  that 


SECT.  II.]  BATH    GAS   LIGHT   CO.  V.  CLAFFY.  733 

the  contract  was  neither  expressly  authorized,  nor  a  necessary  or 
reasonable  incident  to  the  exercise  of  the  powers  specifically  granted, 
the  contract  is  ultra  vires.  It  seems  that  by  the  ancient  common  law 
a  corporation  could  bind  itself  by  a  contract  under  its  corporate  seal, 
although  the  contract  was  not  within  the  powers  specified  in  the 
charter,  and  even  although  it  contained  negative  words.  This  was 
in  substance  stated  by  Blackburn,  J.,  in  the  case  of  Riche  v.  Ash- 
bury  Railway  Carriage  Co.,  L.R.  (9  Exch.)  262,  citing  as  authority 
Sutton's  Hospital  Case,  10  Co.  1.  He  said:  "If  there  are  conditions 
contained  in  the  charter  that  the  corporation  shall  not  do  particular 
things,  and  those  things  are  nevertheless  done,  it  gives  ground  for  a 
proceeding  by  sci.  fa.  in  the  name  of  the  crown  to  repeal  the  letters 
patent  creating  the  corporation.  But  if  the  crown  take  no  such  steps 
it  does  not,  as  I  conceive,  lie  in  the  mouth  either  of  the  corporation 
or  of  the  person  who  has  contracted  with  it  to  say  that  the  contract 
into  which  they  have  entered  was  void  as  beyond  the  capacity  of  the 
corporation."  The  case  came  before  the  House  of  Lords  on  appeal 
from  the  decision  of  the  Exchequer  Chamber  in  favor  of  the  plaintiff, 
and  its  judgment  is  reported  in  L.R.  (7  Eng.  &  Ir.  App.)  653.  The 
action  was  to  enforce  a  contract  entered  into  by  the  defendant,  a 
corporation  incorporated  under  the  Companies  Act  of  1862.  The 
judgment  of  the  Exchequer  Chamber  was  reversed  on  the  ground 
that  the  contract  sued  upon  was  expressly  prohibited  by  the  act 
under  which  the  defendant  was  incorporated,  and  was,  therefore, 
void.  The  House  of  Lords  applied  the  general  doctrine  that  an  act 
done  in  contravention  of  an  express  statute  is  utterly  void. 

The  modern  and  reasonable  doctrine  that  contracts  into  which 
corporations  may  lawfully  enter  are  such  only  as  are  expressly  or 
impliedly  authorized  by  their  charters,  is  nevertheless  frequently 
disregarded  in  practice,  and  when  this  is  done  and  a  corporation 
enters  into  a  contract  beyond  its  chartered  powers,  the  question  arises 
which  has  been  the  subject  of  debate  and  of  much  difference  of 
opinion,  how  shall  such  a  contract  be  treated  by  the  courts,  and 
whether  the  contract  can  create  any  rights  as  between  the  parties 
which  the  courts  will  enforce.  There  are  some  propositions  pertaining 
to  the  general  subject  which  are  beyond  dispute.  One  is,  that  a  con- 
tract by  a  corporation  to  do  an  immoral  thing,  or  for  any  immoral 
purpose,  or,  to  use  a  convenient  expression,  a  contract  malum  in  se, 
is  void  and  gives  no  right  of  action.  The  doctrine,  however,  is  not 
peculiar  to  contracts  of  corporations.  It  has  its  root  in  the  universal 
principle  that  persons  shall  not  stipulate  for  iniquity.  Another  prin- 
ciple of  general  recognition  is  that  a  corporation  cannot  enter  into  or 
bind  itself  by  a  contract  which  is  expressly  prohibited  by  its  charter 
or  by  statute,  and  in  the  application  of  this  principle  it  is  immaterial 
that  the  contract,  except  for  the  prohibition,  would  be  lawful.  No 
one  is  permitted  to  justify  an  act  which  the  legislature  within  its 


734  BATH  GAS  LIGHT  CO.  V.   CLAFFY.        [CHAP.  H. 

constitutional  power  has  declared  shall  not  be  performed.  The  series 
of  cases  in  this  state,  known  as  the  Utica  insurance  cases,  alTord  an 
apt  illustration.  It  was  held  that  the  restraining  acts  which  prohib- 
ited the  exercise  of  banking  powers,  including  the  discount  of  paper, 
by  other  than  banking  corporations,  rendered  void  securities  tiiken 
on  such  discount  by  corporations  not  pos.sessing  banking  powers,  and 
this,  although  the  object  of  the  restraining  laws  seems  to  have  been 
the  protection  of  the  chartered  banks  in  the  monopoly  of  banking. 

But  in  not  infrequent  instances  corporatif)ns  enter  into  unau- 
thorized contracts,  which  are  neither  niola  in  sc  nor  mala  yraJdhUa, 
or  when  the  only  prohibition  or  restriction  is  implied  from  the  grant 
of  specified  powers.  It  is  this  class  of  cases  which  open  the  field  of 
controversy.  Is  such  a  contract  peiformed  by  one  party,  l)ut  not 
performed  by  the  other,  voitl  as  between  them  to  all  intents  and 
purposes,  so  that  no  recovery  can  be  had  under  it  against  the  party 
who  has  received  the  consideration  for  his  promise,  but  neglects  or 
refuses  to  perform  it,  or  is  it  so  tainted  with  illegality  that  the  courts 
must  refu.se  to  recognize  it  under  any  circumstances  or  enforce  its 
obligation,  whether  as  to  past  or  future  transactions?  There  are  cer- 
tain English  cases  which  are  relied  upon  by  those  who  maintain  the 
strict  view  that  contracts  of  corporations  ultra  inres  are  under  no 
circumstances  enforceable  in  the  courts.  The  principal  of  these  cases 
are  The  East  Anglian  liaihcoTjs  Co.  v.  The  Eastern  C(nintics  Raihvay 
Co.,  11  C.B.  775;  Maegregor  v.  The  Dover  &  Deal  Railway  Co.,  18  Ad. 
&  El.  618,  and  The  Ashbury  Railway  Carriage  Co.,  Limited,  v.  Riche, 
L.R.  7  Eng.  &  Ir.  App.  653.  The  East  Anglian  case  seems  to  have 
been  the  first  one  in  England  which  sustained  a  defense  of  ultra  vires 
interposed  l)y  a  corporation  as  a  defense  to  an  action  at  law  on  a 
contract  made  in  the  name  of  the  corporation.  See  opinion  of  Erle, 
J.,  Mayor  of  Norwich  v.  Norfolk  Railway  Co.,  4  El.  &  Bl.  397.  The 
defendant  in  that  case,  a  railway  corporation  owning  and  operating 
a  railway,  entered  into  a  contract  with  another  railway  company,  by 
which  it  agreed  to  pay  the  parliamentar>'  expenses  which  might  be 
incurred  by  the  latter  companj'  in  the  effort  to  obtain  authority  to 
extend  its  lines,  whether  the  grant  .should  be  obtained  or  not,  the  in- 
tention being  to  turn  over  the  concessions  if  obtained,  together  with 
the  original  line,  to  the  defendant  under  a  lease,  for  which  a  par- 
liamentary'' sanction  was  to  be  applied  for.  The  concessions  were  only 
in  part  obtained,  and  no  authority  to  make  the  proposed  lease  was 
given,  and  the  project  was  finally  abandoned.  The  action  was 
brought  on  the  contract  to  recover  the  expenses  incurred  by  the 
plaintiff,  amounting  to  more  than  twenty  thousand  pounds.  It  was 
held  that  the  plaintiff  was  not  entitled  to  recover,  on  the  ground  that 
the  statute  under  which  the  defendant  was  incorporated  prescribed 
that  the  funds  of  the  defendant  should  be  applied  to  the  purposes  for 
which  it  was  incorporated,  and  that  it  could  not  legally  enter  into  a 


SECT,  II.]  BATH    GAS    LIGHT    CO.  V.  CLAFFY.  735 

contract  involving  the  application  of  any  portion  of  its  funds  to  other 
purposes.  The  opinion  relies  upon  cases  in  equity  brought  by  share- 
holders to  restrain  the  misapplication  of  corporate  funds.  The  case  of 
Macgregor  v.  The  Dover  &  Deal  Railway,  and  the  case  of  The  Ashbury 
Railway  Carriage  Company,  though  differing  in  detail,  were  decided 
upon  the  same  principle,  but  in  the  latter  case  there  was  an  express 
statutory  prohibition  which  was  regarded  as  prohibiting  the  contract 
there  in  question.  It  is  important  to  observe  that  in  each  of  these 
cases  the  action  was  brought  against  the  offending  corporation,  or 
those  in  privity  with  it,  to  enforce  the  unauthorized  contract  while 
it  was  still  executory  on  the  part  of  the  corporation,  and  that  the 
effect  of  a  recovery  would  have  been  to  divert  and  appropriate  the 
funds  of  the  corporation  by  the  action  of  the  courts,  to  unauthorized 
objects,  to  the  prejudice  of  the  legal  rights  of  stockholders  and  credi- 
tors. Without  questioning  these  cases,  it  is  quite  apparent  that  they 
stand  in  justice  upon  a  very  different  basis  from  the  action  in  this 
case,  which  is  brought  by  the  corporation  to  enforce  a  contract,  the 
enforcement  of  which  will  indemnify  the  plaintiff  and  its  stock- 
holders for  the  deprivation  of  the  use  of  the  property  of  the  cor- 
poration,  during  its  possession  by  the  defendants,  under  the  unau- 
thorized lease.  The  Supreme  Court  of  the  United  States  seems  to  be 
committed  to  a  construction  of  the  doctrine  of  ultra  vires  which 
would  sustain  the  defense  in  the  case  now  before  us.  Several  cases 
have  arisen  in  that  court  upon  leases  of  railroads  made  without  leg- 
islative sanction,  in  which  it  has  been  held  that  such  leases  are  void 
as  between  the  parties,  and  that  no  action  can  be  maintained  thereon 
to  recover  the  rent  reserved,  even  during  the  occupation  by  the  lessee 
under  the  lease.  In  Thomas  v.  Railroad  Company,  101  U.S.  71,  the 
defendant  had  leased  to  the  plaintiffs  a  railroad  for  a  term  of  years, 
reserving  an  option  to  terminate  the  lease  at  any  time  during  the 
term,  and  the  defendant,  in  case  such  option  should  be  exercised, 
covenanted  to  submit  to  arbitration  the  ascertainment  of  the  loss 
and  damage  to  the  plaintiffs  by  reason  of  such  termination  of  the 
lease,  and  to  abide  by  the  award.  The  defendant  exercised  the  option 
and  terminated  the  lease  and  resumed  possession  of  the  road,  and  an 
action  was  brought  for  a  breach  of  the  contract  in  respect  to  arbitra- 
tion. The  trial  court  determined  the  case  against  the  plaintiffs  on 
the  ground  that  the  contract  sued  upon  was  in  substance  a  lease  of 
the  property  and  franchises  of  the  defendant,  which  having  been 
executed  without  legislative  authority  was  illegal  and  void,  and  the 
Supreme  Court  affirmed  the  judgment.  The  action,  it  will  be  ob- 
served, was  in  substance  an  action  to  recover  the  value  of  the  un- 
expired term  of  which  the  plaintiffs  had  been  deprived  by  the  action 
of  the  defendant,  and  the  covenant  sued  upon  was  wholly  executory. 
But,  in  the  subsequent  cases  of  Pa.  Railroad  Co.  et  al.  v.  St.  Louis, 
A.  &  T.H.  R.R.  Co.,  118  U.S.  290;  Oregon  Railway  &  Nav.  Co.  v. 


736  BATH  GAS  LIGHT  CO.  V.   CLAFFY.        [CHAP.  II. 

Oregonian  Railway  Co.,  130  U.S.  1,  and  Si.  Louis,  V.  &  T.H.  Railroad 
Co.  V.  Terre  Haute  &  Indiana  poll  a  Railroad  Co.,  145  U.S.  '.VXl,  which 
were  actions  by  lessor  against  lessee  to  recover  rent  accrued  under 
leases  of  railroads  during  the  occupation  by  the  lessees,  it  was 
broadly  hekl  that  as  the  leases  were  made  without  legislative  sanction 
they  were  void,  and  that  no  action  could  be  maintained  thereon  to 
recover  the  past  due  rent,  although  the  le.s.sces  were  and  still  re- 
mained in  undisturbed  possession  of  the  demised  property.  Mr. 
Justice  Miller,  in  the  case  in  118  U.S.,  expressed  a  doubt  whether 
there  could  be  a  recovery  on  a  quantum  yncruit.  We  concur  with  the 
opinion  expres.sed  by  two  of  the  learned  justices  of  the  court,  who 
dissented  from  the  judgment  in  the  case  last  cited,  that  the  decision 
carried  the  doctrine  of  idlra  vires  to  an  unjust  extent,  and  the  rank 
injustice  which,  as  it  seems  to  us,  these  cases  sanction,  justifies  the 
observation  of  Lord  St.  Leonards  in  the  case  of  The  Eastcrti  Coun- 
ties Railway  Co.  v.  Hawkes,  5  ILL.  C'as.  347,  370,  that  "the  safety 
of  men  in  their  daily  contracts  retjuires  that  the  doctrine  of  ultra 
vires  should  \)c  confined  within  narrow  limits." 

We  concede  that  a  railroad  or  other  corporation  invested  with 
powers  in  the  exercise  of  which  the  pul)lic  have  an  interest,  and  em- 
powered by  rea.son  of  its  qua.n  pul)lic  character  to  do  acts  and  exer- 
cise privileges  peculiar  and  exceptional  to  enable  it  to  discharge  its 
public  duties,  cannot,  as  against  the  public,  abdicate  its  functions 
or  absolve  itself  from  the  performance  of  such  duties  through  an  un- 
authorized transfer  of  its  property  and  franchises  to  another  body 
or  corporation.  We  have  so  held  in  the  case  of  Abbott  v.  The  Johns- 
town, etc..  Railroad  Co.,  80  N.Y.  27,  where  it  was  decided  that  a  rail- 
road corporation  which,  without  legal  sanction,  had  leased  its  road, 
was  not  thereby  exempted  from  liai)ility  as  carrier  to  a  pas.'^enger 
injured  by  negligence  during  the  operation  of  the  road  under  the 
lease. 

There  are  obvious  reasons  of  propriety  and  public  policy,  the  pre- 
vention of  monopolies,  among  others,  aside  from  the  mere  question 
of  capacity  under  their  charters,  which  enforce  the  now  well-settled 
doctrine,  that  leases  by  such  qtiasi  public  corporations,  to  be  valid 
and  effectual,  must  be  authorized  by  statute.  But  where,  as  in  the 
present  case,  such  an  unauthorized  lease  has  been  made,  and  the 
lessee  has  received  and  enjoyed  the  possession  of  the  property  under 
the  lease,  is  there  any  public  policy  which  requires  that  the  lessee 
should  be  permitted  to  escape  the  obligation  imposed  by  the  eon- 
tract  to  pay  the  rent  reserved  during  the  enjo\Tnent  of  the  property? 
It  is  doubtless  true,  as  has  been  suggested,  that  the  corporation  in 
such  cases  cannot,  without  the  consent  of  the  State,  change  its  ol> 
ligations  to  the  State  or  the  public,  and  discharge  itself  from  its  pub- 
lic duties.  But  the  law  affords  ample  remedy  for  the  usurpation  by 
corporations  of  unauthorized  powers,  through  proceedings  by  in- 


SECT.   II.]  BATH    GAS    LIGHT    CO.  V.  CLAFFY.  737 

junction  or  for  the  forfeiture  of  their  charters.  If  a  lease  by  a  cor- 
poration, made  in  excess  of  its  powers  and  without  legislative  sanc- 
tion, is  illegal  in  the  ordinary  and  proper  sense  of  the  term,  it  may 
be  properly  conceded  that  no  action  could  be  maintained  upon  it. 
The  lessee,  when  sued  for  the  rent,  could  set  up  the  illegality  of  the 
contract,  and  the  defense  would  prevail,  however  inequitable  the 
defense  might  be.  But  the  term  "illegal,"  which  is  frequently  used 
to  describe  a  contract  made  by  a  corporation  in  excess  of  its  cor- 
porate powers,  in  most  cases  means  simply  that  the  contract  is  un- 
authorized, or  one  which  the  corporation  had  no  legal  capacity  to 
make.  Such  a  contract  may  be  illegal  in  the  true  and  proper  sense, 
but  it  may  also  be  one  involving  no  moral  turpitude  and  offending 
against  no  express  statute.  The  inexact  and  misleading  use  of  the 
word  ''illegal,"  as  applied  to  contracts  of  corporations,  ultra  vires 
only,  has  been  frequently  alluded  to.  Comstock,  C.J.,  Bissell  v. 
M.S.  Railroad  Co.,  22  N.Y.  268;  Archibald,  J.,  Riche  v.  Ashburij 
Raihvay  Carriage  Co.,  L.R.  (9  Exch.)  293;  Lord  Cairns,  S.  C.  on 
appeal,  L.R.  (7  Eng.  &  Ir.  App.)  672. 

The  lease  now  in  question  was  not  in  any  true  sense  of  the  word 
illegal.  It  was  undoubtedly  void  as  against  the  State.  The  parties  to 
the  lease  assumed  it  to  be  valid.  It  was  contemplated,  as  the  pro- 
visions of  the  lease  show,  that  the  lessee  would  continue  and  extend 
the  business  before  carried  on  by  the  plaintiff,  and  it  is  not  suggested 
that  it  did  not,  during  its  occupation,  discharge  all  the  obligations  to 
the  public  which  rested  upon  the  plaintiff.  The  State  has  not  inter- 
vened, and  the  possession  of  the  property  has  now  been  restored  to 
its  original  proprietors.  The  contract  has  been  terminated  as  to  the 
future,  and  all  that  remains  undone  is  the  payment  by  the  lessee  of 
the  unpaid  rent.  We  think  the  demands  of  public  policy  are  fully 
satisfied  by  holding  that,  as  to  the  public,  the  lease  was  void,  but 
that,  as  between  the  parties,  so  long  as  the  occupation  under  the 
lease  continued,  the  lessee  was  bound  to  pay  the  rent,  and  that  its 
recovery  may  be  enforced  by  action  on  the  covenant.  Public  policy 
is  promoted  by  the  discouragement  of  fraud  and  the  maintenance 
of  the  obligation  of  contracts,  and  to  permit  a  lessee  of  a  corporation 
to  escape  the  payment  of  rent  by  pleading  the  incapacity  of  the  cor- 
poration to  make  the  lease,  although  he  has  had  the  undisturbed  en- 
joyment of  the  property,  would  be,  we  think,  most  inequitable  and 
unjust.  It  has  been  suggested,  to  avoid  the  apparent  injustice  which 
would  result  from  holding  that  there  could  be  no  recovery  on  the 
contract  for  past-due  rent,  that  there  might  be  a  remedy  on  an  im- 
plied contract  to  pay  the  value  of  the  use  of  the  property.  But  if  the 
express  contract  was  illegal  in  a  proper  sense,  and  the  parties  to  the 
lease  were  guilty  of  a  public  wrong,  so  as  to  preclude  a  court  of 
equity  to  entertain  jurisdiction  on  the  application  of  a  lessor  to  be 
relieved  from  the  lease  and  to  be  restored  to  the  possession  of  the 


738  BATH    GAS    LIGHT    CO.  V.  CLAFFY.  [CHAP.   11. 

leased  property,  as  was  held  in  the  case  of  The  St.  Louis,  V.  tt  T.II. 
Railroad  Co.  v.  Terrc  Haute  &  I.  Railroad  Co.,  145  I'.S.  39;i,  llicn 
surely  it  would  be  a  mere  evasion  and  would  be  incon.sistcnt  with 
legal  principles  for  the  court  to  imply  a  contract  from  the  occupation 
under  the  illegal  lease  to  relieve  the  wrongdoer  from  the  dilcrimia 
into  which  he  had  voluntarily  placed  him.self.  We  think  the  rule  wliich 
shoukl  l)e  applied  is  that  the  lessee  is  bound  by  the  contract  so  long 
as  he  remains  in  possession. 

It  is  unnecessary  now  to  determine  whether  a  lessee  under  an 
ultra  tires  lease  may  relieve  himself  from  liability  in  the  future  by 
abandoning  the  possession  and  restoring,  or  offering  to  restore,  it  to 
the  lessor. 

Vann,  J.,  dissented. 

Note.  —  Midual  Life  Ins.  Co.  v.  Stephens,  214  N.Y.  488.  A  lease 
was  made  which  i)rovided  that  upon  a  certain  contingency  an  ap- 
praisal should  be  made  of  the  leased  premises  and  that  the  lessee 
should  have  an  option  to  purchase  at  the  apprai.sed  value.  Im- 
provements of  the  leased  property  were  made  b}-  the  lessee,  or  the 
assigns  of  the  lessee.  Plaintifl".  a  hfe  insurance  company,  chiinied  to  be 
the  assignee  of  the  lease,  and  ijrought  an  action  to  compel  specific 
performance  of  the  provision  relating  to  appraisal.  The  lessors  de- 
fended on  the  ground  that  it  was  ultra  i-ires  for  the  {)laintifT  to  ac- 
quire the  premises  in  question.  Miller,  J.,  said  (p.  493):  "We  shall 
assume  for  the  purposes  of  this  appeal  that  the  statute  (Insurance 
Law,  §  20)  does  not  authorize  the  plaintiff  to  acquire  anfl  hold  the 
said  real  property.  It  now  has  an  estate  for  years  in  the  property  and 
the  question  arises  whether  a  court  of  equity  will  aid  it  to  acquire 
the  fee.  If  the  agreement  were  wholly  executory  the  answer  to  that 
question  would  not  be  doubtful.  Chamberlain  v.  Chamberlain,  43 
N.Y.  424;  Matter  ofMcGraw,  111  N.Y.  66;  Case  v.  Kelly,  133  U.8.  21. 
But  it  has  been  so  far  executed  that  it  is  impossible  to  restore  the 
parties  to  their  original  situation.  Improvements  have  been  made 
on  the  faith  of  the  agreement  and  presumably  the  plaintiff  will  lose 
the  value  of  its  investment  in  whole  or  in  part  unless  the  agreement 
is  carried  out.  The  defendants  have  recognized  the  plaintiff  as  their 
tenant  and  have  accepted  pcM-formance  of  the  contract  from  it.  They 
should  not  now  be  peilnitted  to  plead  its  ultra  vires  act  to  avoid  per- 
forming their  part  of  the  agreement,  certainly  not  without  first  pay- 
ing or  offering  to  pay  the  value  of  the  improvements.  Appleton  v. 
Citizens'  Central  National  Bank,  190  N.Y.  417.  The  record  does  not 
disclose  under  what  circumstances  or  for  what  purpose  the  plaintiff 
acquired  the  lease.  We  assume  that  it  exceeded  its  corporate  powers. 
But  the  act  was  not  malum  in  se,  nor  does  the  statute  expresslj'  pro- 
hibit the  acquisition  of  real  property  by  insurance  corporations  for 
any  purpose.   On  the  contrary,  it  authorizes  such  corporations  to 


SECT.  II.]  BATH    GAS    LIGHT    CO.  V.  CLAFFY.  739 

purchase,  hold  and  convey  real  property,  but  only  for  certain  enum- 
erated purposes.  The  acquisition  of  the  lease  by  the  plaintiff,  as- 
suming that  it  was  not  acquired  for  one  of  the  enumerated  purposes, 
was  unlawful  only  in  the  sense  that  it  was  ultra  vires.  As  the  In- 
surance Law  stood  when  the  plaintiff  acquired  the  lease,  it  could 
hold  such  real  property  indefinitely  '  as  shall  have  been  acquired  for 
the  accommodation  of  its  business.'  (Laws  of  1892,  chap.  690,  §  20.) 
But  as  the  act  was  amended  by  chapter  326  of  the  Laws  of  1906  it  is 
required  to  sell  and  dispose  of  such  property  within  five  years  after 
acquiring  title  unless  it  shall  be  necessary  for  its  accommodation  in 
the  convenient  transaction  of  its  business,  or  unless  it  shall  procure  a 
certificate  from  the  superintendent  of  insurance  extending  the  time 
during  which  it  may  hold  the  same.  If  the  property  is  not  necessary 
for  the  plaintiff's  accommodation  in  the  convenient  transaction  of 
its  business,  it  will  be  for  the  superintendent  of  insurance  to  see  that 
the  statute  is  complied  with  precisely  as  would  be  the  case  if,  instead 
of  acquiring  a  lease,  it  had  taken  a  mortgage  which  it  had  to  fore- 
close. The  option  to  purchase  must  be  exercised  now,  if  at  all. 
Neither  public  pohcy  nor  good  morals  require  that  the  plaintiff  shall 
be  burdened  with  a  lease  without  having  the  privilege  to  exercise  the 
right  thereby  given  to  acquire  the  fee,  and  it  is  of  no  concern  to  the 
defendants  who  exercises  that  right.  It  is  not  for  them  to  enrich 
themselves  because  the  plaintiff  may  have  exceeded  its  corporate 
powers,  but  it  is  solely  for  the  State  to  challenge  the  plaintiff's  ultra 
vires  act." 

But  cf.  Africani  Loan  Ass'n  v.  Carroll,  267  111.  380. 


r40  citizens'    national    bank    v.  AI'PLETON.  (cuAr.   II. 

D.  Quasi  Contracts. 


CITIZENS'  NATIONAL  BANK  v.  APPLETON. 

216  U.S.  19G.     1909. 

Mr.  Justice  Harlan  clelivored  the  opinion  of  the  court. 

This  action  was  commenced  in  the  Supreme  Court  of  New  York 
])y  the  Receiver  of  the  Cooper  Exchanpe  Bank,  a  New  York  cor- 
poration, against  the  Citizens'  Central  National  Bank  of  New  "^'ork, 
a  national  bank  corporation  formed  by  the  consolitlation  (Uev.  Stat., 
§§  5220  and  5221)  of  the  Central  National  Bank  of  the  city  of  New 
York  with  the  National  Citizens'  Bank  of  the  same  city.  The  action 
was  (lismis.sed  on  denunrer  to  the  complaint,  and  that  judgment  was 
affirmed  in  the  Appellate  Division.  110  App.  I)iv.  404.  liut  on  ap- 
peal to  the  highest  court  of  New  York  the  judgment  was  reversed,  IIJO 
N.Y.  417,  and  the  cause  was  remitted  to  the  Supreme  Court  of  that 
State  for  judgment  in  accordance  with  the  opinion  of  the  former  court. 

The  complaint  alleges  — 

That  the  defenilant,  the  Citizens'  National  Bank  of  New  York, 
by  the  consolidation  referred  to,  acquired  all  the  assets  and  became 
subject  to  the  liabilities  of  the  Central  National  Bank  of  that  city; 

That  on  and  prior  to  January  4th.  1004,  one  Michael  Sanuiels 
was  indebted  to  the  Central  National  Bank  in  the  sum  of  S10,000; 

That  "at  the  instance  and  request  of  Samuels,  trading  under  the 
name  of  Mikael  Samuels  &  Co.,  and  the  Central  Notional  Bank  of  the 
city  of  New  York,"  the  Cooper  E.xchange  Bank  loaned  and  advanced 
to  the  former  the  sum  of  812,000,  Samuels  executing  his  written 
obligation,  dateil  January  4th,  1904,  to  return  or  repay  the  same  on  or 
before  four  months  after  date  with  interest,  and  at  the  same  time  the 
Central  National  Bank  of  the  city  of  New  York,  under  seal,  exe- 
cuted a  written  guaranty  for  the  payment  of  the  debt,  as  follows: 
"For  and  in  consideration  of  one  dollar  and  other  good  and  valuable 
considerations,  the  Central  National  Bank  of  the  city  of  New  York 
hereby  guarantees  to  the  Cooper  Exchange  Bank  the  payment  at 
maturity  of  a  loan  of  twelve  thousand  dollars,  made  this  day  to 
Mikael  Samuels  tk  Co.  by  the  Cooper  Exchange  Bank;" 

That  previous  to  the  obtaining  of  said  loan  of  812,000,  Samuels 
"agreed  with  the  said  Central  National  Bank  to  pay  to  it  the  said 
sum  of  $10,000  of  the  said  812,000  so  obtained,  and  the  said  loan  was 
obtained  by  the  said  Mikael  Samuels  and  was  guaranteed  by  the 
said  Central  National  Bank  in  order  that  the  said  Central  National 
Bank  might  obtain  the  said  sum  of  810,000,  which  it  did  receive  and 
which  was  owed  to  it  by  the  said  Samuels;" 


SECT.  II.]  citizens'    NATIONAL   BANK   V.  APPLETON.  741 

That  previous  to  the  maturity  of  the  loan,  namely,  on  January 
30th,  1904,  only  a  few  weeks  after  the  loan  was  made,  Samuels  was 
adjudged  a  bankrupt;  and, 

That  no  part  of  said  loan  had  ever  been  paid,  except  $1,000,  which 
was  paid  April  7th,  1906. 

The  Court  of  Appeals  of  New  York  —  Cullen,  C.J.,  delivering 
the  opinion  —  held  and  the  counsel  for  the  Cooper  Exchange  Bank 
conceded  in  that  court,  that  no  recovery  could  be  had  against  the 
guaranteeing  bank  in  excess  of  the  amount  actually  received  by  it 
out  of  the  $12,000  loaned,  as  above  stated.  190  N.Y.  417.  The  case 
being  remitted  to  the  inferior  state  court,  judgment  was  therefore 
rendered  against  the  defendant  only  for  $10,000,  with  interest  from 
January  4th,  1904,  with  costs  in  all  courts. 

The  plaintiff  in  error  insists  that  the  guaranty  given  by  the  Central 
National  Bank  to  the  Cooper  Exchange  Bank  was  beyond  its  power, 
was  in  violation  of  the  National  Banking  Act,  and,  therefore,  could 
not  be  made  the  foundation  of  an  action  against  the  guarantor  bank. 
But  this  action  need  not  be  regarded  as  one  on  the  written  contract 
of  guaranty,  but  as  based  on  an  implied  contract  between  the  Cooper 
Exchange  Bank  and  the  Central  National  Bank,  whereby  the  latter, 
under  the  circumstances  disclosed  by  the  record,  came  under  a  duty 
to  account  to  the  former  for  the  $10,000  of  the  $12,000  actually 
paid  to  Samuels  at  its  request  and  on  its  guaranty.  The  law  would  be 
very  impotent  to  do  justice  if  it  could  not,  under  those  circumstances 
and  without  violating  established  legal  principles,  compel  the  Cen- 
tral National  Bank  to  recognize  and  discharge  that  duty.  Samuels 
owed  the  Central  National  Bank  $10,000,  and  —  with  knowledge 
perhaps  of  his  financial  condition  —  he  was  put  forward  by  that  bank 
to  obtain  $12,000  from  the  Cooper  Exchange  Bank  so  that  it  could 
get  $10,000  out  of  that  sum,  for  its  own  use.  The  circumstances  show 
that  the  latter  bank  would  not  have  loaned  the  money  to  Samuels 
except  at  the  request  and  on  the  guaranty  of  the  Central  National 
Bank.  All  this,  it  may  be  observed,  occurred  under  a  previous  agree- 
ment between  the  Central  National  Bank  and  Samuels,  that  that 
bank  was  to  have  $10,000  of  the  $12,000  in  discharge  of  its  claim 
upon  him.  In  short,  the  Central  National  Bank,  by  means  of  the 
device  mentioned,  got  $10,000  of  the  money  of  the  Cooper  Exchange 
Bank  for  its  own  use,  and  having  used  it  for  its  own  benefit,  it  now 
seeks  to  avoid  liability  therefor,  upon  the  ground  that  it  was  not 
allowed  by  the  law  of  its  creation  to  execute  the  guaranty  in  ques- 
tion. We  know  of  no  adjudged  case  that  stands  in  the  way  of  relief 
being  granted  as  asked  by  the  plaintiff.  But  there  are  many  that  will 
authorize  such  relief.  .  .  . 

These  views  are  supported  by  many  other  adjudged  cases.  In 
Central  Transportation  Co.  v.  Pullman^ s  Car  Co.,  139  U.S.  24,  60, 
the  court,  speaking  by  Mr.  Justice  Gray,  said:  "A  contract  ultra 


742  citizens'  national  bank  i'.  appleton.        [chap.  II. 

mres  being  unlawful  and  void,  not  because  it  is  in  itself  immoral,  but 
because  the  corporation,  by  the  law  of  its  creation,  is  incapable  of 
making  it,  the  courts,  while  refusing  to  maintain  any  action  upon 
the  unlawful  contract,  have  always  striven  to  do  justice  between 
the  parties,  so  far  as  could  l)e  done  consistently  with  adherence  to 
law,  by  permitting  property  or  money,  parteil  with  on  tht*  faith  of  the 
unlawful  contract,  to  be  recovered  back,  or  compensation  to  be  made 
for  it.  In  such  case,  however,  the  action  is  not  maintained  upon  the 
unlawful  contract,  nor  according  to  its  terms,  but  on  an  implied 
contract  of  the  defendant  to  return,  or,  failing  to  do  that,  to  make 
compensation  for,  property  or  money  which  it  has  no  right  to  retain. 
To  maintain  such  an  action  is  not  to  aflirm,  but  to  disaflirm  the  un- 
lawful contract."  So,  in  Pullman's  Car  Co.  v.  Tratusporlation  Co., 
171  U.S.  138,  151,  the  court,  speaking  by  Mr.  Justice  Peckham, 
said:  "The  right  to  a  recovery  of  the  property  transferred  under  an 
illegal  contract  is  founded  upon  the  im|)licd  promise  to  return  or  to 
make  compensation  for  it." 

We  need  not  go  farther.  It  is  entirely  clear  that  the  judgment 
against  the  defendant  bank  —  which  came  into  the  posses.sion  of  the 
property,  and  Wiis  subject  to  the  lial)ilities  of  the  Central  National 
Bank  —  was  consistent  with  sound  legal  principles  and  was  in- 
trinsically right,  even  if  the  guaranty  in  question  was  Ijeyond  the 
power  of  the  guaranteeing  bank,  under  the  national  l)anking  statutes. 
Whatever  may  be  said  as  to  the  validity  of  the  written  guaranty,  now 
alleged  to  be  illegal,  the  judgment  can  be  su[)ported  as  based  wholly 
on  the  implied  contract,  which  made  it  the  duty  of  the  Central  Na- 
tional Bank,  under  the  facts  disclosed,  to  account  to  the  Cooper 
Exchange  Bank  for  the  money  obtained  from  the  latter  in  execution 
of  the  agreement  made  by  the  former  with  the  borrower. 

The  judgment  must  be  affirmed. 

It  is  so  ordered. 


SECT.  II.]  SANFORD  V.   MCARTHUR.  743 


E.  Liability  of  Human  Beings. 


SANFORD  V.   McARTHUR. 

18  B.  Mon.  (Ky.)  411.     1857. 

This  suit  was  brought  by  Sanford,  who  held  a  large  amount  in  notes 
purporting  to  be  notes  of  the  Newport  safety  fund  bank  of  Kentucky, 
all  of  less  denomination  than  five  dollars,  against  McArthur,  who  was, 
during  its  existence,  the  president  of  the  bank.  A  judgment  was  asked 
against  McArthur  individually  for  the  amount  of  said  notes. 

As  appears  by  the  charter  of  the  bank,  as  originally  passed  by  the 
legislature,  all  notes  to  be  issued  thereby  were  to  be  printed  and  en- 
graved by  the  auditor  of  the  state,  and  to  be  secured  by  the  deposit 
of  stocks  or  mortgages  and  real  estate.  Said  notes  were  to  be  num- 
bered and  registered  by  the  auditor,  and  countersigned  by  him  before 
they  were  delivered  to  the  president  of  the  bank.  By  an  amendment 
to  the  charter  notes  of  a  less  denomination  than  five  dollars  were  au- 
thorized to  be  issued  without  being  countersigned  by  the  auditor; 
this  alone  was  dispensed  with,  all  other  provisions  of  the  original 
charter  remained  unchanged  by  the  amendment.  Sanford,  in  his 
petition,  charges  that  under  color  of  this  amendment  of  the  charter 
the  president,  McArthur,  confederated  with  others,  some  of  whom 
were  directors,  and  caused  to  be  issued  large  amounts  of  notes  of 
various  denominations  under  five  dollars,  which  were  not  received 
from  the  auditor,  nor  printed,  nor  engraved,  nor  numbered,  nor  reg- 
istered, by  him,  and  for  the  security  of  which  no  stocks,  nor  bonds, 
nor  mortgages  [were]  deposited  with  the  auditor,  but  that  McArthur, 
etc.,  caused  said  notes  to  be  printed  and  engraved,  and  then  issued 
as  the  notes  of  said  bank,  well  knowing  at  the  same  time  that  such 
an  issue  was  unauthorized,  and  in  violation  of  the  charter,  and  that 
this  act  was  a  fraud  upon  the  persons  to  whom  said  notes  were  de- 
livered, and  of  all  others  into  whose  hands  they  might  come.  It  is 
alleged  that  the  said  notes  were  made  payable  to  bearer,  and  on  their 
face  contained  the  promise  of  said  bank  to  pay  the  same.  They  were 
received  and  passed  in  the  community  as  legal  notes,  and  being  thus 
put  upon  the  public  they  ultimately  came,  for  a  valuable  considera- 
tion, into  the  hands  of  the  plaintiff. 

To  this  petition  the  defendant  demurred,  and  assigned  the  fol- 
lowing as  causes  of  demurrer:  1.  That  the  court  had  no  jurisdiction 
of  the  case.  2.  That  there  was  a  deficit  of  parties  defendant.  3.  That 
the  petition  shows  no  cause  of  action.  The  cour^  overruled  the 
demurrer  as  to  the  first  and  second  grounds,  but  sustained  it  as  to 
the  third,  and  judgment  was  rendered  for  the  defendant. 


744  SANFORD    V.  MCARTIIUR.  [cHAP.   II. 

On  a  subsequent  day  of  the  term  the  judgment  was  set  aside,  and 
the  plaintiff  offered  an  amended  petition,  in  substance  averring  that 
the  notes  so  issued  by  the  defendant  purport  to  be  the  notes  of  said 
bank,  but  were  not  issued  by  the  said  bank,  and  were  not  tiic  bills  or 
notes  of  said  bank;  that  they  were  made  and  passed  by  said  de- 
fendant as  a  circulating  medium,  in  lieu  of  and  as  the  representative 
of  money;  but  were  not  the  notes  or  bills  of  any  legally  incorporated 
banking  institution. 

The  defendant  objected  to  the  filing  of  the  amendment.  The 
court  rejected  the  amendment,  and  rendered  judgment  in  bar  of  the 
action.  The  plaintiff  praj^d  an  appeal. 

Judge  Simpson  delivered  the  opinion  of  the  court. 

It  is  not  alleged  in  these  cases  that  the  plaintiffs  themselves  have 
had  any  dealings  with  the  defendants  or  that  they  received  from 
them  the  notes  which  they  hold,  or  that  they  were  deceived  with 
respect  to  the  value  of  these  notes  by  any  misrepresentations  or 
concealment  on  the  part  of  the  defendants.  Neither  do  they  allege 
that  they  received  them  in  consequence  of  any  inducements  held 
out  by  the  defendants,  or  any  promises  made  bj'  them  that  they 
would  be  liable  for  them.  They  may  be  regarded,  therefore,  as  having 
received  them  as  the  notes  of  the  corporation,  which  they  purported 
to  be,  looking  to  it  for  their  paj'ment,  and  relying  upon  its  liability 
for  the  amount  of  them. 

The  only  question,  therefore,  that  arises  upon  this  state  of  case  is, 
has  the  board  of  directors  made  themselves  personally  liable  for  these 
notes  to  the  holders  thereof,  by  exceeding  the  authority  which  the 
charter  conferred  upon  them,  in  issuing  and  putting  them  into  cir- 
culation as  the  notes  of  the  corporation,  it  having  been  heretofore 
decided  by  this  court,  in  the  case  of  Watson  v.  The  Bank,  that  they 
were  issued  without  authoritj^? 

The  directors  are  the  agents  of  the  corporation,  and  derive  their 
powers  not  from  the  corporators  but  from  the  charter,  and  cannot 
bind  their  principal  beyond  it.  The  charter  did  not  authorize  them 
to  issue  the  notes  held  by  the  plaintiffs,  nor  is  the  corporation  bound 
for  them  as  its  notes,  although  we  suppose  that  it  is  liable  for  the 
amount  of  them  so  far  as  it  received,  and  used  any  of  the  benefits  or 
profits  derived  from  them.  The  holders  may  have  a  right  to  look 
to  the  general  assets  of  the  corporation,  although  they  have  no 
claim  upon  the  fund  set  apart  for  the  redemption  of  those  notes  which 
were  issued  in  the  manner  prescribed  by  the  charter. 

It  is  a  general  principle,  that  where  a  person  undertakes  to  do  an 
act  as  an  agent  of  another,  and  exceeds  the  authoritj^  delegated  to 
him,  he  will  be  personally  responsible  therefor  to  the  person  with 
whom  he  is  dealing;  but  this  liability  is  founded  upon  the  supposi- 
tion, that  the  want  of  authority  is  unknown  to  the  other  party. 

A  distinction  has  been  taken  between  acts  of  an  agent  for  his  prin- 


SECT.  II.]  SANFORD  V.   MCAETHUR.  745 

cipal  in  common  cases,  and  similar  acts  done  by  the  servants  or 
officers  of  a  corporation.  In  the  first  case  it  is  said  the  extent  of  the 
authority  is  known  only  between  the  principal  and  agent,  whereas, 
in  the  latter  the  authority  is  created  by  statute,  to  which  all  may 
have  access  who  deal  with  the  officers.  Salem  Bank  v.  Gloucester 
Bank,  17  Mass.  Rep.  29;  Angel  &  Ames  on  Corporations,  §  299. 

According  to  this  doctrine  it  was  the  duty  of  those  dealing  with 
the  officers  of  the  corporation  to  know  the  extent  of  their  powers, 
and  to  know  whether  the  notes  held  by  the  plaintiffs  were  legally 
or  illegally  put  into  circulation.  If  they  received  them,  knowing 
that  they  had  been  issued  without  authority,  they  cannot  hold  the 
officers  personally  responsible  for  them,  inasmuch  as  the  liability  of 
the  agent  is  founded  upon  the  want  of  knowledge  by  the  other  party 
that  he  has  exceeded  his  authority.  The  notes  not  having  been 
stamped  "secured  by  the  pledge  of  state  bonds  and  real  estate,"  as 
required  by  the  charter,  carried  on  their  face  intrinsic  evidence  of 
the  fact  that  they  had  not  been  lawfully  issued,  evidence  which  was 
visible  to  all  persons,  and  which  all  persons  receiving  them  were 
bound  to  notice. 

Is  the  position  correct,  that  it  is  the  duty  of  those  who  deal  with 
the  officers  of  a  bank  to  know  the  extent  of  the  power  conferred  upon 
them  by  the  charter  under  which  they  profess  to  act?  We  think  it  is 
as  a  general  proposition.  Although  such  corporations  are  private, 
yet  as  their  notes  are  intended  for  general  circulation,  and  the  acts 
by  which  they  are  created  are  made  public,  and  are  of  general  inter- 
est, they  do  not  properly  fall  under  the  denomination  of  private 
statutes,  but  must  be  classed  with  those  that  are  general  and  public, 
or  at  least  they  should  be  considered  as  quasi  public  acts.  The  pub- 
lic, therefore,  is  as  much  bound  to  take  notice  of  their  provisions 
as  they  are  to  know  the  provisions  of  any  of  the  statutes  passed  by 
the  legislature. 

It  is  a  general  rule  that  a  party  cannot  rely  upon  his  own  ignor- 
ance of  such  matters,  as  it  was  his  duty  to  know,  and  which  he  could 
have  known  by  the  use  of  reasonable  diligence.  If,  for  instance,  an 
agent  should  refer  the  party  with  whom  he  was  dealing  to  a  recorded 
power  of  attorney  as  showing  the  extent  of  his  authority,  the  latter 
could  not  hold  the  former  liable  on  the  ground  that  he  had  exceeded 
his  authority  in  contracting  in  the  name  of  his  principal. 

Here  the  charter  containing  the  powers  under  which  the  officers 
acted  was  published,  and  made  accessible  to  all  persons.  Ignor- 
ance of  its  provisions  must,  according  to  well  settled  legal  princi- 
ples, be  considered  willful  and  inexcusable.  Knowledge  of  them 
discharges  the  officers  from  all  liability  for  having  exceeded  their 
authority,  and  as  no  other  ground  of  liability  is  made  out  by  the 
plaintiffs  their  action  cannot  be  maintained  according  to  the  well 
settled  principles  of  law  by  which  such  cases  are  governed. 


746  SANFORD    V.  MCARTHUR.  [CHAP.  II, 

It  might,  as  a  matter  of  public  policy,  be  right  to  liold  the  officers 
of  a  corporation  personally  responsible  whenever  they  transcended 
the  powers  conferred  upon  them  by  their  charter,  to  the  injury  of  the 
pul/lic.  But,  if  such  a  liability  be  proper,  it  should  be  imposed  by  the 
terms  of  the  charter,  or  by  some  general  statute  ahke  applicable  to 
all  corporations. 

The  defendants  may  have  made  themselves  responsible  to  those 
persons  with  whom  they  had  immediate  dealings,  if  they  were  guilty 
of  any  fraudulent  misrepresentations  or  concealments,  but  not  being 
liable  on  the  ground  of  a  mere  excess  of  authority,  and  the  plaintiffs 
not  having  had  any  dealings  with  them,  have  Jiot  made  out  any 
valid  cause  of  action  against  them. 

Wherefore,  the  judgments  are  affirmed. 

Note.  —  See,  accord,  Aheles  v.  Cochran,  22  Kan.  405'.  See  also 
Humphrey  v.  Jones,  71  Mo.  62. 

In  Nicollet  National  Bank  v.  Frisk-Turner  Co.,  71  Minn.  413,  the 
plaintiff  sold,  in  form,  to  a  corporation  goods  which  it  was  ultra  vires 
for  it  to  buy.  The  stockholders  in  such  a  corporation  were,  as  such, 
under  a  certain  liability  defined  by  the  constitution.  It  was  held 
that  this  did  not  make  them  individually  liable  to  the  plaintiff  for  the 
goods  sold.  This  would  seem  to  be  plain  on  the  ground  that  the 
liability  in  question  was  a  liability  only  for  claims  for  which  the 
corporation  was  liable.  But  the  court  used  this  language  (p.  420) : 
''The  articles  in  question  were  duly  recorded  in  the  office  of  the 
register  of  deeds  of  Hennepin  county,  where  the  corporation  was 
located,  and  filed  and  recorded  in  the  office  of  the  secretary  of  state, 
and  published  in  a  public  newspaper,  as  required  by  law.  Stran- 
gers or  third  persons  arc  presumed  to  know  the  law  of  the  land,  and 
are  bound,  when  dealing  with  corporations,  to  know  the  powers 
conferred  by  their  charters.  Kraniger  v.  Peoples,  00  Minn.  94,  61 
N.W.  904.  The  act  of  the  corporation  in  buying  and  selling  ready- 
made  clothing  was  not  only  a  direct  violation  of  the  law  above 
quoted,  but  a  violation  of  the  articles  of  its  incorporation.  But 
this  violation  was  well  known  to  the  plaintiff,  from  actual  knowl- 
edge received  as  to  what  the  corporation  was  doing  and  intended  to 
do,  as  well  as  from  its  presumptive  knowledge  of  the  contents  of  the 
articles  so  recorded  and  published,  and  the  law  above  quoted.  The 
representation  of  the  incorporators  was  not  made  upon  an  apparent 
authority  based  upon  private  papers,  to  which  strangers  had  no 
access,  but  that  they  were  buying  and  selling,  and  intended  to  con- 
tinue to  buy  and  sell,  ready-made  clothing  in  \'iolation  of  law  and 
their  articles  of  incorporation,  which  plaintiff,  knowing  such  acts 
to  be  unlawful,  had  no  right  to  rely  upon." 

In  Thilmany  v.  Iowa  Paper-Bag  Co.,  108  Iowa,  357,  the  court  said 
that  the  person  assuming  to  act  as  agent  for  a  corporation  "simply 


SECT.   II.]  SEEBERGER    V.  MCCORMICK.  747 

• 

covenants  that  he  has  authority  to  act  for  his  principal,  not  that  the 
act  of  the  principal  is  legal  and  binding.  .  .  .  There  is  no  implied 
warranty  by  an  agent  that  his  principal  has  authority  to  make  the 
contract.  As  a  rule  that  is  a  question  of  law,  of  which  each  party  has 
equal  knowledge." 


SEEBERGER  v.  McCORMICK. 

178  111.  404.     1899. 

Mr.  Chief  Justice  Carter  delivered  the  opinion  of  the  court. 

Defendant  in  error,  Leander  J.  McCormick,  brought  assumpsit  in 
the  superior  court  of  Cook  County  against  the  plaintiffs  in  error, 
Anthony  F.  Seeberger  and  others,  as  co-partners,  to  recover  rent 
accruing  from  August  15,  1893,  to  May  1,  1895,  upon  a  lease  made  by 
McCormick  to  the  Market  National  Bank  of  Chicago  of  a  certain 
office,  to  be  used  exclusively  for  the  purposes  of  a  bank.  The  rent 
stipulated  in  the  lease  was  $13,000  per  annum,  payable  $1083.33 
monthly.  Besides  the  common  counts  the  declaration  contained  a 
special  count  declaring  specially  on  the  written  lease.  Besides  the 
general  issue  the  defendants  below  filed  special  pleas  denying  their 
joint  liability,  but  before  the  issues  were  made  the  parties  waived  a 
j  ury  and  submitted  the  case  to  the  court  for  decision  upon  a  written 
stipulation  as  to  the  pleadings  and  the  facts,  which  was  incorporated 
in  the  bill  of  exceptions  and  which  contains  the  following:  "The 
foregoing  facts  shall  be  held  to  be  competent  evidence,  under  the 
pleadings  in  this  cause,  to  the  same  extent  that  they  would  be  under 
any  form  of  pleadings,  the  intention  of  the  parties  being,  that  under 
the  pleadings  in  this  cause  the  respective  parties  may  establish  any 
cause  of  action  or  defense  that  they  could,  respectively,  establish  un- 
der any  form  of  pleadings."  The  lease  was  set  out  in  full  in  the  stipu- 
lation, and  showed  that  it  was  executed  by  plaintiff,  McCormick, 
and  by  the  Market  National  Bank,  by  Seeberger,  as  its  president,  and 
Cox,  its  cashier.  The  defendants  were  all  shareholders  and  directors 
of  the  bank.  The  bank  was  organized  and  incorporated  but  had  not 
received  a  certificate  of  the  comptroller  of  the  currency  authorizing 
it  to  transact  a  banking  business.  No  such  certificate  was  ever  issued, 
and  the  organization  was  abandoned  within  a  few  months  after  its 
inception,  but  it  and  its  officers  occupied  the  leased  premises  from 
May  1  until  August  15,  1893,  when  the  officers  of  the  bank  vacated 
and  offered  to  surrender  the  premises  to  McCormick,  and  upon  his 
refusal  to  accept  such  surrender  left  the  ke}^  upon  his  desk.  In 
October  following,  under  another  agreement  between  the  lessor  and 
lessee,  the  lessor  took  possession  of  the  premises  to  lease  the  same 
upon  such  terms  as  might  be  agreed  upon,  to  avoid  as  much  loss  as 
possible,  with  the  agreement  that  it  was  to  be  without  prejudice  to 


748  SJIEBERGER    V.  MCCORMICK.  [CHAP.   II. 

• 

the  rights  of  either  party;  but  the  property  was  not  rented,  and  it 
remained  vacant  until  the  lease  was  terminated,  in  1895,  in  pursu- 
ance of  its  terms,  when  McCormick  brought  suit  against  the  Market 
National  Bank  to  recover  the  rent  stipulated  in  the  lease,  but  as  the 
National  Banking  act  provides  that  "no  association  shall  transact 
any  business,  except  such  as  incidental  and  necessarily  preliminary 
to  its  organization,  until  it  has  been  authorized  by  the  comptroller 
of  the  currency  to  commence  the  business  of  banking,"  and  as  the 
comptroller  had  not  given  such  authority,  it  was  held  that  the  bank 
bad  no  power  to  enter  into  the  lease,  and  could  be  held  liable  only  for 
use  and  occupation  until  the  premises  were  vacated,  August  15, 
1893.  McCormick  v.  Market  Nat.  Bank,  61  111.  App.  33;  162  111.  100; 
165  U.S.  538.  McCormick  then  brought  this  suit  for  the  rent  for  the 
rest  of  the  term,  against  the  officers,  directors  and  shareholders  of 
the  bank,  as  before  stated.  .  .  . 

Considering,  then,  the  case  upon  the  questions  of  law  arising  on 
the  record,  the  judgment  of  the  Appellate  Court  nmst  rest,  and  be 
sustained,  if  at  all,  upon  one  of  three  legal  propositions,  and  counsel 
for  McCormick  insist  that  it  can  be  sustained  upon  any  one  of  them: 
First,  that  plaintiffs  in  error  are  liable  to  McCormick  as  co-partners, 
by  virtue  of  the  lease  to  the  bank  of  which  they  were  directors  and 
by  virtue  of  the  agreed  facts,  the  lease  failing  to  bind  the  bank;  or, 
second,  that  they  are  liable  on  their  imjilied  warranty,  in  acting  for 
the  bank,  that  all  the  necessary  steps  had  been  taken  in  organizing 
the  bank,  so  that  it  was  authorized  to  execute  the  lease;  or,  third, 
that  plaintiffs  in  error  are  liable  to  defendant  in  error  in  an  action  on 
the  case  for  deceit,  for  falsely  assuming  an  authority  which  they  did 
not  possess  and  by  which  he  was  misled  to  his  injury. 

The  stipulation,  among  other  things,  contains  the  following:  "The 
said  Leander  J.  McCormick,  at  the  time  of  the  negotiations  prior 
to  the  execution  of  said  lease  and  at  the  time  of  the  execution  of  said 
lease,  and  at  the  time  when  said  officers  of  said  Market  National 
Bank  of  Chicago  took  possession  of  the  demised  premises  on  the  22d 
day  of  June,  a.d.  1893,  understood  and  believed  that  said  Market 
National  Bank  of  Chicago  was  dul}'  and  legally  organized  as  a  na- 
tional bank,  and  that,  as  such,  it  was  ready  to  do  a  banking  business, 
and  that  it  had  the  power  to  enter  into  said  lease  and  the  agreements 
connected  therewith,  and  had  no  knowledge  or  information  to  the 
contrary  until  the  15th  day  of  August,  a.d.  1893,  at  which  time  the 
officers  of  the  said  Market  National  Bank  of  Chicago  informed  said 
McCormick  that  said  Market  National  Bank  of  Chicago  had  no 
power  to  enter  into  said  lease,  and  offered  to  surrender  to  said 
McCormick  said  demised  premises  and  said  lease,  and  the  said  Mc- 
Cormick was  then  and  there  informed  by  the  said  officers  of  said 
Market  National  Bank  of  Chicago  that  said  Market  National  Bank 
of  Chicago  had  never  been  authorized  by  the  comptroller  of  the  cur- 


SECT.  II.]  SEEBERGER  V.   MCCORMICK.  749 

renc}^  to  commence  the  business  of  banking,  but  nevertheless  said 
McCormick  then  and  there  refused  to  accept  such  surrender." 

As  has  been  seen,  the  pleadings  were  sufficiently  broadened  by 
the  stipulation  to  sustain  a  judgment  in  any  form  of  action  which 
the  evidence  agreed  upon  would  establish.    It  is  plain,  upon  prin- 
'ciple  and  authority,  that  plaintiffs  in  error  cannot  be  held  upon  the 
lease  itself,  as  parties  thereto.  They  are  not  named  as  parties  to  or 
otherwise  in  the  instrument,  and  there  are  no  apt  words  to  bind  them 
to  its  covenants.   Hancock  v.  Yunker,  83  111.  208.   But  counsel  for 
defendant  in  error  insist  that  under  all  of  the  facts  as  found,  plaintiffs 
in  error  are  liable  as  co-partners  in  assuming  to  act  for  and  on  behalf 
of  the  bank  as  a  corporation  when  the  bank  had  no  authority  to  enter 
into  the  contract,  and  cite  Bigelow  v.  Gregory,  73  111.  197,  and  Loverin 
v.  McLaughlin,  161  id.  417.    In  these  cases  this  court  held,  in  sub- 
stance, that  persons  who  associate  themselves  together  by  articles 
of  agreement  to  become  a  corporation,  but  do  not  comply  with  the 
law  so  as  to  become  a  corporation,  will  be  liable  as  partners  for  con- 
tracts made  by  them  in  the  name  assumed  as  the  corporate  name. 
In  the  Loverin  case  they  were  held  liable  under  the  statute  of  this 
State,  and  it  was  also  there  said  they  were  liable  independently  of  the 
statute.  But  in  those  cases  there  was  a  failure  to  incorporate,  while 
in  the  case  at  bar  the  lessee,  the  Market  National  Bank,  was  a  cor- 
poration de  jure,  but  was  by  the  act  by  which  it  was  incorporated 
incapacitated  from  transacting  the  business  of  banking,  or  entering 
into  contracts  of  the  character  of  this  lease,  until  it  had  received  the 
certificate  of  the  comptroller,  which  he  was  not  authorized  to  issue 
until  certain  requirements  had  been  complied  with,  one  of  which  was 
that  one-half  of  the  capital  subscribed  had  been  paid  in.    But  the 
bank  had  the  corporate  power  to  transact  such  business  and  make 
such  contracts  as  were  "incidental  and  necessarily  preliminary  to 
its  organization."   It  is  not  a  case  where  the  party  to  the  contract 
had  no  corporate  power,  but  one  where  its  corporate  power  was  ex- 
ceeded, —  a  case  where  the  contract  was  not  ultra  vires  corporations 
organized  under  the  law  under  which  it  was  incorporated,  but  ultra 
vires  this  corporation,  because  it  had  failed  to  comply  with  a  certain 
provision,  without  compliance  with  which  there  was  a  deficiency  of 
corporate  power.  Here  there  was  a  de  jure  corporation,  while  in  the 
cases  cited  there  was  none.  We  are  disposed  to  agree  with  the  Ap- 
pellate Court  that  the  principle  on  which  individuals  so  associated 
are  held  as  partners  is  not  in  causing  the  corporation  to  exceed  its 
powers,  but  in  acting  for  and  in  the  name  of  a  presumed  corporation 
which  has  no  corporate  existence.   Trowbridge  v.  Scudder,  11  Cush. 
83;  First  Nat.  Banky.Abny,  117  Mass.  476;  Gent  v.  Manufacturers* 
and  Merchants^  Mutual  Ins.  Co.,  107  111.  652;  Loverin  v.  McLaughlin, 
supra. 
The  second  proposition  of  defendant  in  error  is,  that  plaintiffs  in 


750  SEEBERGER    V.  MCCORMICK.  [CHAP.  II. 

error,  if  not  liable  as  partners,  are  still  liable  ex  contractu  upon  their 
implied  warranty  of  their  authority  to  execute,  or  to  cause  to  be 
executed  on  behalf  of  the  corporation,  the  lease  in  (juestion.  The. 
principle  is  one  of  agency,  and  that  plaintiffs  in  error,  as  the  agents 
of  the  corporation  in  making  the  contract  of  lease,  by  necessar}^  im- 
plication asserted  to  the  lessor  that  they  were  in  fact  authorized  to 
cause  the  lease  to  be  executed  by  the  corporation.  Where  the  con- 
tract is  made  in  good  faith  and  both  parties  are  fully  cognizant  of  the 
facts,  and  the  mistake  is  one  of  law  only,  the  result  of  which  is  to 
exonerate  the  principal  fiom  liability  because  the  agent  had  no  law- 
ful authority  to  make  the  contract,  it  is  clear  that  the  agent  cannot 
be  held  liable,  either  ex  c&ntractu  or  ex  delicto.  The  Appellate  Court 
was  authorized  to  find,  and  doubtless  did  find,  that  this  was  not  such 
a  case.  These  directors  were  charged  with  knowledge  that  they  had 
not  taken  the  necessary  steps  to  obtain,  and  had  not  obtained,  the 
certificate  of  the  comptroller  necessary  to  confer  power  to  make  the 
lease,  and  it  was  a  fair  inference  for  the  Appellate  Court  to  draw  from 
the  agree(4  facts  that  McCormick  did  not  know  of  this  omission 
until  August  15, 1893,  —  several  months  after  the  lease  was  executed 
and  after  possession  of  the  premises  had  been  taken  by  the  lessee 
under  it.  The  stipulation  also  showed  that  the  plaintiffs  in  error  can- 
celed their  articles  of  association  in  July,  but  remained  in  possession 
of  the  premises  until  the  loth  day  of  August.  They  had  by  resolution 
authorized  and  directed  the  execution  of  the  lease,  and  there  can  be 
no  doubt  of  the  legal  sufficiency  of  the  evidence  to  establish  an  im- 
plied waiTanty  on  their  part  of  their  authority  to  enter  into  the  lease 
on  behalf  of  the  corporation,  if  such  implied  warranty  is  in  law  a 
sufficient  ground  on  which  to  make  them  liable  to  respond  in 
damages  to  McCormick  for  a  breach  of  such  warranty. 

It  is,  however,  contended  bj''  the  plaintiffs  in  error  that  the  law  is 
that  there  is  no  such  liability  ex  contractu,  and  that  the  only  remedy 
is  by  a  special  action  on  the  case,  and  then  only  when  there  has  l)ccn 
some  deception  practiced  on  the  opposite  party,  —  some  misrepre- 
sentation to  or  concealment  from  him  of  some  material  fact,  —  and 
which  deception,  misrepresentation  or  concealment  operated  to 
induce  him  to  enter  into  the  contract;  and  we  are  referred  to  Duncan 
v.  Niks,  32  111.  532,  and  Hancock  v.  Yunker,  83  id.  208,  and  the 
opinion  of  the  Appellate  Court  in  this  case,  as  settling  the  law  to  that 
effect  in  this  State.  We  do  not  regard  the  cases  cited  as  holding  that 
an  action  ex  contractu  upon  the  implied  warranty  cannot  be  main- 
tained. That  question  was  not  in  issue  in  either  of  the  two  cases 
cited,  decided  by  this  court.  True,  it  was  said  that  an  action  on  the 
case  for  deceit  would  lie.  In  the  Duncan-Niles  case  the  action  was 
brought  against  Niles  on  the  note  which  Niles,  assuming  to  act  for 
the  county,  had  given  as  the  note  of  the  county,  and  it  was  held  that 
the  contract  was  void  and  that  neither  party  could  be  held  on  it,  the 


SECT.  II.]  SEEBERGER    V.  MCCORMICK.  751 

county  not  having  authorized  it  and  there  being  no  apt  words  in  the 
instrument  to  bind  Nilcs.  It  was  there  said,  that  "if  the  defendant 
falsely  represented  himself  as  the  agent  of  the  county  and  authorized 
to  obtain  this  money,  and  did  so  obtain  it,  he  may  be  reached  by  a 
special  action  on  the  case  for  the  fraud,  or  in  some  other  appropriate 
action,  but  not  on  the  note  itself."  And  in  the  Hancock-Yunker  case 
the  action  was  covenant  on  the  lease  against  the  individual  trustees 
who  executed  it  on  the  part  of  the  Chicago  Literary  Association, 
and  it  was  held  they  were  not  liable  on  the  instrument,  it  containing 
no  apt  words  to  bind  them  individually.  Mr.  Justice  Scholfield,  in 
delivering  the  opinion  of  the  court,  among  other  things  said:  "The 
question  here  is  not  whether  these  defendants  may  be  held  liable  to 
the  plaintiff  in  a  proper  form  of  action,  but  whether  they  are  liable 
ill  this  form  of  action,  —  i.e.,  covenant  upon  the  lease."  True,  the 
opinion  contains  the  quotation  in  the  Duncan-Niles  case  from 
Abbey  v.  Chase,  6  Cush.  56,  that  in  Massachusetts  the  only  remedy 
against  the  agent  is  by  action  on  the  case  for  falsely  assuming  to  act 
as  agent ;  but  those  cases  cannot  be  treated  as  having  decided  that 
an  action  in  assumpsit,  not  on  the  instrument  itself  but  on  the 
implied  warranty  of  authority  to  execute  it,  cannot  be  maintained 
in  this  State.  We  are  of  the  opinion  that  upon  both  principle  and 
authority  such  an  action  can  be  maintained.  Indeed,  the  fraud,  if 
any,  arises  out  of  the  contractual  relations  which  the  parties  have 
assumed.  The  express  contract  purporting  to  bind  the  principal 
may  be  void,  but  if  the  agent  has  given  his  warranty,  express  or 
implied,  that  he  is  authorized  by  his  principal  to  execute  the  contract 
when  he  has  no  such  authority,  we  know  of  no  principle  of  law  or 
logic  which  would  prevent  the  other  party  from  recovering  for  the 
breach  of  such  warranty  where  injury  has  been  sustained  by  such 
breach.  Why  may  he  not  waive  the  tort,  where  tort  exists,  and  sue 
in  assumpsit?  That  an  action  ex  contractu  on  the  implied  warranty 
will  lie,  has  been  decided  by  many  authorities.  Mechem  on  Agency, 
§  549;  1  Am.  &  Engl.  Ency.  of  Law  (2d  ed.)  1127;  Anson  on  Contracts, 
p.  460;  Mahurin  v.  Harding,  28  N.H.  128;  C alien  v.  Wright,  7  E.  &  B. 
301;  Cherry  v.  Colonial  Bank,  L.R.  3  Privy  Council  App.  24;  Down- 
man  V.  Williams,  7  Q.B.  Ill;  Beattie  v.  Lord  Ebiiry,  7  Eng.  &  Irish 
App.  H.L.  102;  Lewis  v.  Nicholson,  18  A.  &  E.  502;  Story  on  Agency, 
§  264;  Patterson  v.  Lippincott,  47  N.J.L.  457;  While  v.  Madison,  26 
N.Y.  117;  Richardson  v.  Williamson,  L.R.  6  Q.B.  276. 

Doubtless,  in  many  cases  a  recovery  may  be  had  in  either  form  of 
action,  but  in  others  the  character  of  the  suit  must  be  determined 
by  the  facts  of  the  case.  Thus  it  is  said  in  Mechem  on  Agency,  §  549 : 
"Much  question  has  been  raised  as  to  the  form  of  action  in  which 
the  agent  who  acts  without  authority  is  to  be  held  liable,  —  whether 
an  assumpsit  can  be  maintained  or  only  a  special  action  on  the  case. 
It  would  seem  that  this  is  a  question  to  be  determined  largely  by 


752  fcEEBERGER   V.  MCCORMICK.  [CHAP.   II. 

the  particular  facts  of  each  case.  Where  an  agent  who  knows  that 
he  has  no  authority  makes  express  assertions  that  he  possesses  it, 
or  so  acts  as  to  amount  to  an  assertion  of  authority,  and  by  so  doing 
deceives  and  injures  the  other  party  who  has  rehed  thereon,  it  cannot 
be  doubted  that  an  action  on  the  case  for  the  deceit  is  an  appropriate 
remedy.  At  the  same  time,  an  action  of  assumpsit  upon  the  express 
or  impHed  warranty  of  authority  might  also  be  maintained  instead 
of  the  action  on  the  case." 

As  the  record  in  this  case  shows  a  clear  right  of  action  for  a 
breach  of  the  implied  warranty  of  authority  against  the  plaintiffs  in 
error,  we  deem  it  unnecessary  to  decitle  whether  or  not  the  findings 
of  fact  by  the  Appellate  Court  would  sustain  an  action  on  the  case 
for  deceit. 

Note.  —  In  McCormick  v.  Market  Bank,  165  U.S.  538,  in  which 
it  was  held  that  no  recovery  of  the  rent  reserved  could  be  had  against 
the  corporation,  the  court,  by  Mr.  Justice  Gray,  said  (p.  551) :  "The 
result  of  the  Comptroller's  examination,  and  his  certificate  of  that 
result,  and  of  the  authority  thereupon  gianted  the  corporation  to 
commence  the  business  of  l)anking,  of  course  appear  on  the  records  of 
his  office,  as  do  the  articles  of  association  and  the  organization  cer- 
tificate previously  transmitted  to  him.  Every  one  dealing  with  the 
corporation  is  bound  to  take  notice  of  the  facts  thus  appearing  on  a 
public  record,  upon  which,  Ijy  the  very  terms  of  the  National  ]3ank 
Act,  depend  the  right  of  the  association  to  exist  as  a  corporation,  and 
its  capacity  to  transact  business." 

In  Seeberger  v.  McCormick,  175  U.S.  274,  the  principal  case  having 
been  carried  to  the  Federal  Supreme  Court,  the  writ  of  error  was 
dismissed  on  the  ground  that  no  federal  question  was  presented. 

For  other  authorities  that  liability  may  be  cast  upon  human  beings 
sec  Vliet  v.  Simantafi,  03  N.J.L.  458,  404;  Medill  v.  Collier,  16  Ohio 
St.  599;  Trust  Co.  v.  Floyd,  47  Ohio,  525;  Small  v.  Elliott,  12  S.D.  570. 


SECT.  II. 1   ST.  LOUIS  RAILROAD  V.   TERRE  HAUTE  RAILROAD.    753 


F.  Setting  Aside  an  Ultra  Vires  Transaction. 


ST.  LOUIS  RAILROAD  v.   TERRE  HAUTE  RAILROAD. 

•    U5  U.S.  393.     1S92. 

Bill  in  equity,  filed  in  1887,  by  an  Illinois  corporation  against  an 
Indiana  corporation,  to  set  aside  and  cancel  a  conveyance,  or  lease,  of 
the  plaintiff's  railroad  and  franchises  to  the  defendant  for  a  term  of 
999  years.  The  lease  was  made  in  1868.  The  defendants  took  posses- 
sion of  the  road  shortly  after  the  execution  of  the  lease,  and  have 
ever  since  operated  it.  The  bill,  as  amended,  prayed  for  a  cancella- 
tion and  surrender  of  the  lease,  for  a  return  of  the  railroad  and  other 
property  held  under  it,  for  an  injunction  against  disturbing  the 
plaintiff  in  the  possession  and  control  thereof,  and  for  an  account  of 
the  sums  which  the  defendant  had  received,  or  with  due  diligence 
might  have  received,  from  the  use  and  operation  of  the  railroad  and 
property. 

Gray,  J.  ...  It  may  therefore  be  assumed,  as  contended  by  the 
plaintiff,  that  the  contract  in  question  was  ultra  vires  of  the  defend- 
ant, and  therefore  did  not  bind  either  party,  and  neither  party  could 
have  maintained  a  suit  upon  it,  at  law  or  in  equity,  against  the  other. 

It  does  not,  however,  follow  that  this  suit  to  set  aside  and  cancel 
the  contract  can  be  maintained.  If  it  can,  it  is  somewhat  remarkable 
that,  in  the  repeated  and  full  discussions  which  the  doctrine  of  ultra 
vires  has  undergone  in  the  English  courts  within  the  last  fifty  years, 
no  attempt  has  been  made  to  bring  a  suit  like  this.  The  only  cases 
cited  in  the  elaborate  briefs  for  the  plaintiff,  or  which  have  come  to 
our  notice,  approaching  this  in  their  circumstances,  are  in  American 
courts  not  of  last  resort,  and  present  no  sufficient  reasons  for  main- 
taining this  suit.  Auburn  Academy  v.  Strong,  Hopkins  Ch.  278; 
Atlantic  &  Pacific  Telegra-ph  Co.  v.  Union  Pacific  Raihmy,  1  McCrary, 
541 ;  Western  Union  Telegraph  Co.  v.  St.  Joseph  &  Western  Raihuay, 

1  McCrary,  565;  Union  Bridge  Co.  v.  Troy  &  Lansinghurgh  Railroad, 
7  Lansing,  240;  New  Castle  Railway  v.  Simpson,  21  Fed.  Rep.  533. 

The  English  cases  relied  on  by  the  plaintiff  were  either  suits  to 
set  aside  marriage  brokage  bonds,  as  in  Drury  v.  Hooke,  1  Vernon, 
412,  and  Smith  v.  Bruning,  2  Vernon,  392;  S.  C.  nmi.  Goldsmith  v. 
Bruning,  1  Eq.  Cas.  Ab.  89;  or  to  recover  back  money  paid  for  the 
purchase,  without  leave  of  the  Crown,  of  a  commission  in  the  mili- 
tary or  naval  service,  as  in  Morris  v.  McCuUock,  Ambler,  433;  S.  C. 

2  Eden,  190.  Those  cases  have  sometimes  been  justified  upon  the 
ground  that,  the  agreement  being  against  the  policy  of  the  law,  the 
rehef  was  given  to  the  public  through  the  party.  Debenham  v.  Ox, 


754        ST.  LOUIS    RAILROAD    V.  TERRE    HAUTE    RAILROAD.       [cHAP.  II. 

1  Ves.  Sen.  276;  St.  John  v.  St.  John,  11  Vea.  526,  536;  Cone  v.  Russell , 
3  Dickinson  (48  N.J.  Eq.)  208.  But  Sir  William  Grant  explained 
them  as  proceeding  upon  the  ground  that  the  plaintiff  was  less  guilty 
than  the  defendant.  Osborne  v.  Williayns,  18  \'es.  379,  382.  And 
Morris  v.  McCidlock  can  hardly  l)e  reconciled  with  his  decision  in 
Thomson  v.  Thomson,  7  Ves.  470,  or  with  the  current  of  later  au- 
thorities. 

The  general  rule,  in  equity,  as  at  law,  is  In  pari  delicto  potior  est 
conditio  defendentis;  and  therefore  neither  party  to  an  illegal  contract 
will  be  aided  by  the  court,  whether  to  enforce  it  or  to  set  it  aside.  If 
the  contract  is  illegal,  affirmative  relief  against  it  will  not  be  granted, 
at  law  or  in  equity,  unless  the  contract  remains  executory,  or  unless 
the  parties  are  con.sidered  not  in  equal  fault,  as  where  the  law  vio- 
lated is  intended  for  the  coercion  of  the  one  party  and  the  protec- 
tion of  the  other,  or  where  there  has  been  fraud  or  oppression  on  the 
part  of  the  defendant.  Thomas  v.  Richmond,  12  Wall.  349,  355; 
Spring  Co.  v.  Knmvlton,  103  U.S.  49;  Story  Eq.  Jur.  §  298. 

While  an  unlawful  contract,  the  parties  to  which  are  in  pari 
delicto,  remains  executory,  its  invalidity  is  a  defence  in  a  court  of 
law;  and  a  court  of  equity  will  order  its  cancellation  only  as  an 
equitable  mode  of  making  that  defence  effectual,  and  when  necessary 
for  that  purpose.  Adams  on  Eq.  175.  Consequently,  it  is  well  settled, 
at  the  present  day,  that  a  court  of  equity  will  not  entertain  jurisdic- 
tion to  order  an  instrument  to  be  delivered  up  and  cancelled,  upon 
the  ground  of  illegality  appearing  on  its  face,  and  when,  therefore, 
there  is  no  danger  that  the  lapse  of  time  may  deprive  the  party  to  be 
charged  upon  it  of  his  means  of  defence.  Story  Eq.  Jur.  §  700a,  and 
cases  cited;  Simpson  v.  Howden,  3  ]\I\'l.  &  Cr.  97;  Ayerst  v.  Jenkins, 
L.R.  10  Eq.  275,  282. 

When  the  parties  are  in  pari  delicto,  and  the  contract  has  been 
fully  executed  on  the  part  of  the  plaintiff,  by  the  conveyance  of 
property,  or  by  the  payment  of  money,  and  has  not  been  repudiated 
by  the  defendant,  it  is  now  equally  well  settled  that  neither  a  court  of 
law  nor  a  court  of  equity  will  assist  the  plaintiff  to  recover  back  the 
property  conveyed  or  money  paid  under  the  contract.  Thomas  v. 
Richmond,  above  cited;  Aijerst  v.  Jenkins,  L.R.  16  Eq.  275,  284.  For 
instance,  property  conveyed  pursuant  to  a  contract  made  in  consid- 
eration of  the  compounding  of  a  crime,  and  the  stifling  of  a  criminal 
prosecution,  and  therefore  clearly  illegal,  cannot  be  recovered  back 
at  law,  nor  the  conveyance  set  aside  in  equity,  unless  obtained  by 
such  fraud  or  oppression  on  the  part  of  the  grantee,  that  the  convey- 
ance cannot  be  considered  the  voluntary  act  of  the  grantor.  Worcester 
v.  Eaton,  11  Mass.  368,  and  13  Mass.  371;  Atwood  v.  Fisk,  101  Mass. 
363;  Bryant  v.  Peck  &  Whipple  Co.,  154  Mass.  460;  Williams  v. 
Bayley,  L.R.  1  H.L.  200;  Jones  v.  Merionethshire  Society,  1892,  1 
Ch.  173,  182,  185,  187. 


SECT.  II.]       ST.  LOUIS    RAILROAD    V.  TERRE    HAUTE    RAILROAD.         755 

In  the  case  at  bar,  the  contract  by  which  the  plaintiff  conveyed 
its  raih-oad  and  franchise  to  the  defendant  for  a  term  of  nine  hundred 
and  ninety-nine  years  was  beyond  the  defendant's  corporate  powers, 
and  therefore  unlawful  and  void,  of  which  the  plaintiff  was  bound  to 
take  notice.  The  plaintiff  stood  in  the  position  of  alienating  the 
powers  which  it  had  received  from  the  State,  and  the  duties  which 
it  owed  to  the  public,  to  another  corporation,  which  it  knew  had  no 
lawful  capacity  to  exercise  those  powers  or  to  perform  those  duties. 

If,  as  the  plaintiff  contends,  the  contract  was  also  beyond  its  own 
corporate  powers,  it  is  certainly  in  no  better  position.  In  either  aspect 
of  the  case,  the  plaintiff  was  in  pari  delicto  with  the  defendant.  The 
invalidity  of  the  contract,  in  view  of  the  laws  of  which  both  parties 
were  bound  to  take  notice,  was  apparent  on  its  face.  The  contract 
has  been  fully  executed  on  the  part  of  the  plaintilT  by  the  actual 
transfer  of  its  railroad  and  franchise  to  the  defendant;  and  the 
defendant  has  held  the  property,  and  paid  the  stipulated  considera- 
tion from  time  to  time,  for  seventeen  years,  and  has  taken  no  steps 
to  rescind  or  repudiate  the  contract. 

Upon  this  state  of  facts,  for  the  reasons  above  stated,  the  plaintiff, 
considered  as  a  party  to  the  unlawful  contract,  has  no  right  to  invoke 
the  assistance  of  a  court  of  equity  to  set  it  aside.  And  so  far  as  the 
plaintiff  corporation  can  be  considered  as  representing  the  stock- 
holders, and  seeking  to  protect  their  interests,  it  and  they  are  barred 
by  laches.  Harwood  v.  Railroad  Co.,  17  Wall.  78;  Graham  v.  Birken- 
head &c.  Railway,  2  Hall  &  Twells,  450;  /S.  C.  2  Macn.  &  Gord.  146; 
F jocks  V.  Southwestern  Railway,  1  Sm.  &  Gif.  142,  164;  Gregory  v. 
Patchett,  11  Law  Times  (N.S.)  357. 

This  case  is  not  like  those  in  which  the  defendant,  having  aban- 
doned or  refused  to  perform  the  unlawful  contract,  has  been  held 
liable  to  the  plaintiff,  as  upon  an  implied  contract,  for  the  value  of 
what  it  had  received  from  him  and  had  no  right  to  retain.  Spring  Co. 
v.  KnowUon,  103  U.S.  49;  Logan  County  Bank  v.  Townsend,  139  U.S. 
67,  and  cases  there  cited. 

But  the  case  is  one  in  which,  in  the  words  of  ]\Ir.  Justice  ]Miller 
in  a  case  often  cited  in  this  opinion,  the  court  will  not  disturb  the 
possession  of  the  property  that  has  passed  under  the  contract,  but 
will  refuse  to  interfere  as  the  matter  stands.  Pennsijlvania  Railroad 
v.  St.  Louis,  Alton  &  Terre  Haute  Railroad,  118  U.S.  290,  316,  317. 
See  also  Union  Trust  Co.  v.  Illinois  Midland  Co.,  117  U.S.  434,  468, 
469;  Central  Transportation  Co.  v.  Pullman's  Car  Co.,  139  U.S.  24,  56, 
pfj  fti 
*^  '      '  Decree  affirmed. 

Note.  —  In  the  Central  Transportation  case,  supra,  Mr.  Justice 
Gray  reasoned  that  the  corporation  could  not  make  the  lease.  In 
the  principal  case,  he  reasoned  that  the  corporation  is  a  guilty 
party  because  it  has  made  the  lease. 


756  HARRIS    V.  GAS    CO.  [ciIAP.  II. 

If  the  objection  to  the  ultra  vires  lease  was,  as  stated  in  the  Central 
Transportation  case,  "not  merely  that  the  corporation  ought  not  to 
have  made  it,  but  that  it  could  not  make  it,"  it  would  seem  to  follow 
that  the  act  of  making  the  lease  was  simply  the  act  of  certain  human 
beings  to  which  no  corporate  significance  could  be  given;  that  the 
lease  was  a  cloud  upon  the  plaintiff's  title;  and  that  it  was  entitled 
to  a  declamtion  to  that  effect,  with  the  relief  propcrl}-  predicated 
upon  such  a  declaration. 

Sec  Memphis  R.R.  Co.  v.  Grayson,  88  Ala.  572,  578. 


HARRIS  V.  GAS  CO. 

7G  Kan.  750.     1907. 

Mason,  J.  Cornelius  Carr  and  his  wife  executed  to  the  Independ- 
ence Gas  Company  an  oil-and-gas  lease;  that  is,  an  instrument 
granting  the  right  to  explore  a  tract  of  land  for  oil  or  gas  and  to  ap- 
propriate either  if  found.  The  company  is  a  Kansas  corporation  and 
at  the  time  of  the  execution  of  the  lease  the  only  purpose  mentioned 
in  its  charter  was  "to  dig  or  mine  for  natural  gas  and  Sell  the  same 
for  heat  and  lighting  purposes."  Later  an  amendment  was  made 
adding  thereto  the  mining  and  selling  of  oil.  What  are  called  the 
"gas  rights"  under  the  lease  have  been  transferred  to  another  gas 
company  and  no  point  is  raised  with  regard  to  them.  The  Carrs, 
claiming  that  the  lease  so  far  as  it  related  to  oil  was  void  because  at 
the  time  it  was  executed  the  lessee  had  no  authority  to  engage  in  the 
oil  business,  undertook  to  grant  the  oil  privileges  anew  to  C.  C. 
Harris,  who  upon  that  ground  brought  a  suit  against  the  Independ- 
ence Company  to  cancel  all  of  its  contract  excepting  that  portion 
relating  to  gas,  joining  his  grantors  as  co-plaintiffs.  The  trial  court 
sustained  a  demurrer  to  a  petition  setting  out  substantially  these 
facts  and  this  proceeding  is  brought  to  review  that  ruling. 

The  defendant  maintains:  (1)  That  it  had  the  implied  power  to 
produce  and  market  oil  as  an  incident  to  the  express  power  granted 
to  it  to  produce  and  market  gas;  (2)  that  if  it  originally  lacked  such 
power  the  defect  was  supphed  by  the  charter  amendment ;  and  (3) 
that  even  if  it  had  no  authority  to  enter  into  the  contract  the  plain- 
tiffs cannot  take  advantage  of  the  fact.  It  will  only  be  necessary  to 
consider  the  questions  involved  in  the  third  proposition. 

Although  the  decisions  relating  to  the  doctrine  of  ultra  vires  are 
characterized  by  some  confusion  as  well  as  by  much  conflict,  they 
admit  of  classification  into  fairly  well-defined  groups  and  exhibit  a 
development  in  the  direction  of  restricting  the  scope  of  its  operation. 
Those  courts  w^hich  accord  it  the  most  favorable  treatment  —  allow 
it  the  largest  field  of  action  —  proceed  upon  the  conception  that  a 


SECT.  II.]  HARRIS    V.  GAS    CO.  757 

corporation,  being  the  creature  of  the  state,  possesses  no  power  what- 
ever beyond  that  granted  in  its  charter,  and  cannot  directly  or  indi- 
rectly acquire  rights  or  incur  liabilities  under  any  contract  not 
thereby  authorized.  They  refuse  under  any  circumstances  to  enforce 
or  give  effect  to  an  unauthorized  contract,  as  such,  but  where  it  has 
been  acted  upon  will  protect  the  parties  against  hardship  and  injus- 
tice by  allowing  whatever  relief  may  be  suited  to  the  facts  of  the 
case;  for  instance,  by  permitting  either  party  to  recover  money  or 
property  which  has  been  parted  with  in  the  transaction,  or  to  have 
compensation  therefor.  The  cases  illustrating  this  treatment  of  the 
matter  are  collected  in  volume  29  of  the  American  and  English 
Encyclopaedia  of  Law,  at  page  54,  note  2.  The  theory  is  consistent 
and  logical,  but  its  practical  effect  is  so  to  circumscribe  the  power  of 
the  court  as  to  make  the  relief  furnished  at  times  inadequate  to  the 
occasion. 

In  a  larger  number  of  jurisdictions,  although  the  same  conception 
of  corporate  capacity  is  adopted,  its  effect  is  greatly  changed  by  the 
application  of  another  principle.  Here  the  courts  concede  that  a 
corporation  has  no  power  to  make  a  contract  except  such  as  is  con- 
ferred by  its  charter,  expressly  or  by  necessary  implication.  But 
they  hold  that  as  it  must  have  some  discretion  in  the  manner  of 
carrying  out  the  purposes  of  its  creation  —  some  freedom  of  action 
—  it  is  amenable  to  the  same  rules  of  conduct  as  a  natural  person, 
and  may  estop  itself  to  question  the  validity  of  an  agreement  it  has 
assumed  to  make,  or  may  acquire  the  right  to  invoke  a  similar 
estoppel  in  its  own  behalf.  Where  this  theory  is  accepted  recovery 
may  be  had  upon  a  contract  which  is  in  fact  void,  simply  because 
its  validity  cannot  be  put  in  issue.  The  cases  in  point  are  gathered  in 
volume  29  of  the  American  and  English  Encyclopaedia  of  Law,  at 
page  57,  note  1. 

These  cases  have  been  criticised  for  the  use  they  make  of  the  word 
"estoppel"  as  descriptive  of  the  principle  upon  which  they  are  based. 
It  is  argued  that  as  a  corporation  must  know  the  terms  of  its  own 
charter,  and  as  one  dealing  with  it  is  charged  with  like  knowledge, 
neither  party  to  an  ultra  vires  contract  can  be  misled  in  that  respect, 
and  therefore  there  must  always  be  lacking  an  essential  element  of 
what  could  with  technical  accuracy  be  called  estoppel.  This,  how- 
ever, is  a  mere  question  of  terminology.  The  requirement  that  one 
shall  be  consistent  in  conduct  —  shall  not  occupy  contradictory 
positions  —  shall  not  retain  the  advantages  of  a  transaction  and 
reject  its  burdens  —  is  often  spoken  of  as  a  form  of  estoppel.  The 
term  is  convenient,  and,  if  inaccurate,  is  not  misleading.  This  rule 
of  estoppel  affords  a  good  working  hypothesis  to  accomplish  just 
results.  If  it  fails  to  accomplish  all  that  might  be  desired  in  a  prac- 
tical way  it  is  because  it  is  not  made  sufficiently  far-reaching.  It  is 
generally  held  to  be  inapplicable  to  purely  executory  contracts,  one 


758  HARRIS    V.  GAS    CO.  [CHAP.  II, 

reason  stated  being  that  "where  neither  party  has  acted  upon  the 
contract,  the  only  injustice  caused  by  a  refusal  to  enforce  it  is  the 
loss  to  the  parties  of  prospective  profits,  and  this  is  too  slight  a  con- 
sideration to  weigh  against  the  reasons  of  public  policy  for  declaring 
it  void  and  not  enforceable."   2.9  A.  &  E.  Encyd.  of  L.  49. 

It  might  seem  reasonable  that  a  system  which  attempts  not  only 
to  protect  a  party  to  an  ultra  vires  contract  from  actual  loss,  but, 
where  equity  requires  it,  to  insure  to  him  the  actual  fruits  of  his 
bargain,  ought  for  the  sake  of  completeness  and  symmetry  to  enable 
him  to  insist  upon  the  performance  even  of  a  purely  executory  con- 
tract. It  certainly  seems  against  conscience  that  one  who  has 
entered  into  a  contract  in  the  expectation  of  deriving  a  profit  from 
it  may  upon  discovering  the  probability  of  a  loss  repudiate  it  and 
escape  responsibility  by  raising  the  question  of  want  of  corporate 
capacity.  Parties  to  a  contract  who  deal  with  each  other  upon  the 
assumption  that  one  of  them  is  a  corporation  are  orilinaril}'  precluded 
from  questioning  the  validity  of  its  organization. 

The  question  whether  a  corporation  has  power  under  its  charter 
to  engage  in  a  particular  business  is  so  like  the  question  whether  a 
body  has  capacity  to  act  as  a  corporation  at  all  as  to  afford  good 
ground  for  arguing  that  whatever  circumstances  work  an  estoppel 
to  raise  the  one  have  the  same  effect  with  respect  to  the  other.  This 
is  recognized  in  volume  10  of  the  Cyclopedia  of  Law  and  Procedure, 
at  page  248,  where  it  is  said:  "A  person  contracting  with  an  ostensi- 
ble corporation  to  do  an  act  which  is  not  prohibited  by  law  becomes 
estopped,  in  an  action  by  the  corporation  to  enforce  the  contract, 
either  to  deny  the  existence  of  the  corporation  or  its  power  to  enter 
into  such  a  contract."   (f  i.) 

The  cases  cited  in  support  of  this  text,  however,  arose  upon  exe- 
cuted contracts,  and  we  do  not  discover  that  the  principle  has  actu- 
ally been  applied  in  actions  upon  purely  executory  agreements,  unless 
where  the  question  sought  to  be  raised  was  whether  a  body  assuming 
to  act  as  a  corporation  had  a  legal  existence  as  such.  Nevertheless, 
no  good  ground  is  apparent  for  a  distinction  in  this  regard.  .  .  . 

The  question  whether  a  corporation  has  a  legal  existence  is  a 
question  whether  it  has  capacity  to  act  at  all.  This  is  essentially  of 
the  same  character  as  the  question  whether  it  has  capacity  to  enter 
into  a  particular  contract  —  in  other  words,  whether  it  has  a  legal 
existence  for  that  purpose.  The  State  grants  the  corporation  the 
right  to  do  business  under  limitations  expressed  in  language  to  which 
both  agree.  Whether  the  language  of  the  charter  shall  be  interpreted 
to  authorize  a  given  act  is  a  matter  between  the  parties  to  it.  If  the 
State  is  satisfied  with  the  construction  upon  which  the  corporation 
acts  no  reason  is  apparent  why  it  should  be  open  to  question  by  a 
stranger,  much  less  by  one  who  has  recognized  it  as  vaUd  by  con- 
tracting with  the  corporation  upon  that  basis. 


SECT.   II.]  HARRIS    V.  GAS    CO.  759 

No  Kansas  statute  declares  that  a  contract  made  by  a  corporation 
in  excess  of  its  legitimate  powers  shall  be  void,  or  in  terms  permits 
the  question  of  corporate  capacity  to  be  raised  by  one  of  the  parties. 
Where  it  is  held  that  no  recoveiy  can  ever  be  had  upon  an  idtra  vires 
contract,  as  such,  whatever  relief  is  afforded  is  logically  made  to  turn 
upon  whether  and  how  far  the  agreement  has  been  acted  upon. 
Where  a  recovery  is  sometimes  permitted  under  the  contract  itself, 
upon  the  principle  of  estoppel,  the  question  whether  it  has  been  car- 
ried out  is  likewise  of  manifest  importance,  there  being  a  difference 
in  degree  at  least  between  the  attitude  of  one  who  has  merely  entered 
into  an  engagement  in  expectation  of  obtaining  an  advantage  from 
it  and  that  of  one  who  has  actually  reaped  its  benefits  in  whole  or  in 
part.  But  the  doctrine  that  only  the  state  can  challenge  the  validity 
of  acts  done  under  color  of  a  corporate  charter,  if  accepted,  must 
necessarily  protect  an  executory  contract  from  collateral  attack 
equally  with  one  that  has  been  executed.  The  court  is  con\dnced  of 
the  soundness  of  the  view  that  in  the  absence  of  special  circumstances 
affecting  the  matter  neither  party  to  even  an  executory  contract 
should  be  allowed  to  defeat  its  enforcement  by  the  plea  of  ultra  vires. 
The  doctrine  is  logical  in  theory,  simple  in  application,  and  just  in 
result.  It  of  course  does  not  apply  to  contracts  which  are  immoral 
or  which  are  illegal,  as  distinguished  from  merely  unauthorized,  or 
to  those  made  by  public  corporations.  Nor  does  it  forbid  interfer- 
ence by  a  stockholder  to  protect  his  rights  as  such. 

Upon  these  considerations  the  judgment  is  affirmed.  . 

Note.  —  In  Railroad  Co.  v.  Railroad  Co.,  196  Pa.  452,  a  lease  of 
railroad  property,  ultra  vires  of  the  parties,  was  treated  as  the  foun- 
dation of  rights  between  the  parties,  and  the  court  refused  to  set  it 
aside,  at  the  instance  of  the  lessor. 

In  Camden  and  Atlantic  R.R.  Co.  v.  Mays  Landing  R.R.  Co.,  48 
N.J.L.  530,  railroad  corporation  M  agreed  that,  if  a  certain  branch 
line  were  built  by  railroad  corporation  N,  it  would  guarantee  the 
bonds  of  N,  and  take  a  lease  of  the  line  for  999  years  at  a  specified 
rental.  It  was  idtra  vires  of  M  to  make  such  an  agreement.  The  road 
was  built,  the  bonds  of  N  guaranteed,  the  lease  executed,  and  M  took 
possession.  Later  it  abandoned  possession,  and  gave  notice  of  such 
fact  to  N.  M  paid  the  rent  for  the  full  period  during  which  it  was 
in  possession.  This  action  was  brought  to  recover  rent  thereafter 
accruing,  and  the  court,  by  a  vote  of  11  to  3,  allowed  N  to  recover. 
The  facts  showed  acquiescence  in  the  transaction  by  the  stockholders 
(p.  571).  The  court  regarded  the  transaction  as  in  substance  equiva- 
lent to  a  conveyance  of  the  branch  line  to  M,  in  consideration  of  the 
issue  of  M's  obligations,  and  therefore  an  executed  transaction  which 
would  be  a  foundation  of  rights  between  the  parties  until  the  state 
intervened. 


760  HAERIS    V.  GAS    CO.  [CHAP.  II. 

It  would  seem  plain  from  Thomas  v.  Railroad  Co.,  101  U.S.  71, 
and  the  cases  founded  on  the  Central  Transportation  case,  supra,  that, 
in  the  federal  courts,  where  there  is,  in  form,  a  lease  of  railroad  prop- 
erty, which  lease  is  ultra  vires  of  the  lessor,  or  lessee,  or  both,  the 
lessee  may  at  any  time  abandon  the  possession,  and  thereby  prevent 
any  further  liability  from  accruing  against  it.  What  can  the  lessor 
do?  St.  Louis R.R.  Co.  v.  Terre  Haute  R.R.  Co.,  supra,  bars  avoidance, 
through  court  help.  Suppose  the  lessor  seeks  to  resume  possession 
by  self-help.  Will  the  court  protect  the  lessee  by  an  injunction?  This 
was  done  by  an  inferior  federal  court  in  American  Union  Telegraph 
Co.  V.  Union  Pacific  R.R.  Co.,  1  McCrary,  188;  but  this  case  was 
cited,  with  disapproval,  in  St.  Louis  R.R.  Co.  v.  Terre  Haute  R.R.  Co. 


For  cases  holding  that  an  absolute  transfer  of  property  could  not 
be  set  aside,  on  the  ground  that  it  was  ultra  vires  of  one,  or  both,  of 
the  parties,  see  cases  cited  in  the  note  to  Kerfoot  v.  Farmers  Bank, 
supra. 

For  other  cases  in  which  the  courts  have  treated  ultra  vires  trans- 
actions as  not  being  voidable,  see  First  Presbyterian  Church  v.  State 
Bank,  57  N.J.L.  27;  Pannebaker  v.  Tuscarora  R.R.  Co.,  219  Pa.  GO. 

For  authorities  holding  that,  under  certain  circumstances,  stock 
improperly  issued  may  be  cancelled,  see  cases  cited  in  the  note  to 
Old  Dominion  Copper  Co.  v.  Bigelow,  supra  (pp.  373-377). 


BOOK  VI. 

OFFICERS,   STOCKHOLDERS,   AND 
CREDITORS. 


CHAPTER   I. 
DIRECTORS  AND  OTHER  OFFICERS. 


A.  Unauthorized  Action  by  'de  jure  Officers. 


ROYAL  BRITISH  BANK  v.  TURQUAND. 

6  E.  &  B.  327.     1856. 

The  plaintiffs  declared  against  the  defendant,  as  official  manager 
of  Cameron's  Coalbrook  Steam,  Coal,  and  Swansea  and  London 
Railway  Company,  according  to  The  Joint-Stock  Companies  Wind- 
ing-up Acts  (the  company  being  completely  registered  under  Stat. 
7  &  8  Vict.  c.  110).  The  declaration  alleged  that  the  company,  before 
defendant  became  official  manager,  to  wit,  on  6th  March,  1850,  by 
their  writing  obligatory,  sealed  with  their  common  seal,  acknowl- 
edged themselves  to  be  held  and  firmly  bound  to  plaintiffs  in  2000Z., 
to  be  paid  to  plaintiffs  on  request;  for  which  payment  the  said  last- 
mentioned  company  did  bind  themselves  and  their  successors.  Yet 
the  said  sum,  or  any  part  thereof,  has  not  been  paid. 

Plea  (1),  in  which  was  set  out  the  condition,  which  appeared  to  be 
for  securing  to  the  plaintiffs,  who  were  bankers,  such  sum  as  the 
company  should,  to  the  amount  of  1000/.,  owe  to  plaintiffs  on  the 
balance  of  the  account  current,  from  time  to  time,  and  for  indemni- 
fying plaintiffs  to  that  amount  from  losses  incurred  by  reason  of  the 
account  between  plaintiffs  and  the  company.  The  plea  further  set 
out  clauses  of  the  registered  deed  of  settlement  of  the  company,  by 
which  it  appeared  that  the  directors  were  authorized,  under  certain 
circumstances,  to  give  bills,  notes,  bonds,  or  mortgages;  and  one 
clause  provided  that  the  directors  might  borrow  on  bonds  such  sums 
as  should,  from  time  to  time,  by  a  general  resolution  of  the  company, 
be  authorized  to  be  borrowed.  The  plea  averred  that  there  had  been 
no  such  resolution  authorizing  the  making  of  the  bond,  and  that  the 
same  was  given  and  made  without  the  authority  or  consent  of  the 
shareholders  of  the  company. 

The  plaintiff  demurred  to  the  plea,  and  Jervis,  C.J.,  said  on  this 
point:  — 

It  seems  to  us  that  the  plea,  whether  we  consider  it  as  a  confession 


762  ROYAL    BRITISH    BANK    V.  TURQUAND.  [cHAP.  I. 

and  avoidance  or  a  special  Non  est  factum,  does  not  raise  any  objec- 
tion to  this  advance  as  aj^ainst  the  company.  We  may  now  take  for 
granted  that  the  deahngs  with  these  companies  are  not  hke  deahngs 
with  other  partnerships,  and  that  tiie  parties  deaUng  with  them  are 
bound  to  read  tiie  statute  and  the  deed  of  settlement.  But  they  are 
not  bound  to  do  more.  And  the  party  here,  on  reading  the  deed  of 
settlement,  would  find,  not  a  prohibition  from  borrowing,  but  a  i)er- 
mission  to  do  so  on  certain  conditions.  Finding  that  the  authority 
might  be  made  complete  by  a  resolution,  he  would  have  a  right  to 
infer  the  fact  of  a  resolution  authorizing  that  which  on  the  face  of  the 
document  appeared  to  be  legitimately  done. 

Note.  —  See,  accord,  In  re  Hampshire  Laml  Co.,  [189G]  2  C'h.  713, 
where  the  meeting  of  shareholders  at  which  the  directors  were 
authorized  to  borrow  was  not  properly  called. 

Buckley  on  Comjjanies,  <Sth  ed.  p.  ")7(),  cites  this  case  as  an  author- 
ity for  the  proposition  that  "a  stranger  dealing  with  a  company  has 
a  right  to  assume,  as  against  the  company,  that  all  matters  of  internal 
management  have  l^een  complied  with." 

This  is  a  large  proposition.  If  the  president  of  a  comi)any  con- 
tracts, in  behalf  (jf  the  company,  with  A,  and  the  company  has 
power  to  make  such  a  contract,  is  the  company  bound,  without 
more?  The  act  of  the  directors  in  giving  authority  to  the  president 
woukl  seem  to  be  a  matter  of  internal  management. 

Again.  If  a  person,  who  is  not  president  of  a  company  but  who 
assumes  to  be,  makes  such  a  contract  in  behalf  of  the  company  with 
A,  is  the  company  bound  without  more?  The  election  of  a  president 
would  also  seem  to  be  a  matter  of  internal  management. 

In  Duck  V.  Tower  Galvanizing  Co.,  Ltd,  [1901]  2  K.B.  314,  a  de- 
benture was  issued  in  the  name,  and  untler  the  seal,  of  the  company 
by  persons  who  a.ssumed  to  be  directors  but  who  were  not  directors. 
The  court  held  that  "from  the  case  of  Royal  British  Bank  v.  Turquand 
down  to  Mahony  v.  Ea.'^t  Hohjford  Mining  Co.,  L.R.  7  H.L.  800,  in 
the  House  of  Lords,  it  has  always  been  held  that  it  is  not  incumbent 
on  the  holder  of  such  a  document  purporting  to  be  issued  by  a  com- 
pany to  inquire  whether  the  persons  pretending  to  .^ign  as  directors 
have  been  duly  appointed.  .  .  .  The  memorandum  of  association 
allowed  the  company  to  borrow  money  on  debentures,  and  the  arti- 
cles of  association  of  the  company  might  very  well  have  justified  the 
issuing  of  such  a  debenture  as  this."  The  facts  of  the  case  show  that 
a  person  with  a  small  business  formed  a  limited  company  and  con- 
veyed his  business  to  it,  and  thereafter  carried  on  the  business  in  the 
name  of  the  company,  without  consulting  the  other  incorporators, 
and  that  the  debenture  was  issued,  with  his  approval,  for  an  advance 
made  to  the  company.  The  decision  that  the  company  was  bound 
may  well  be  supported,  but,  it  is  submitted,  the  proposition  stated 
by  the  court  is  too  broad. 


CHAP.  I.]  ROYAL    BRITISH    BANK    V.  TURQUAND.  763 

In  the  United  States,  the  principal  case  was  followed  in  Louisville 
Ry.  Co.  V.  Louisville  Trust  Co.,  174  U.S.  552.  The  directors  of  a  cor- 
poration were  authorized  to  guarantee  bonds  of  another  corporation, 
upon  the  petition  of  the  majority  of  the  stockholders.  They  caused 
the  guaranty  to  be  made  in  the  corporate  name,  although  there  had 
been  no  such  petition.  It  was  held  that  the  guaranty  was  enforceable 
by  a  person  who  purchased  the  bonds  without  notice  of  this  defect. 
"  The  records  of  the  railroad  corporation  and  of  its  board  of  directors, 
which  would  naturally  show  whether  such  a  petition  had  or  had  not 
been  filed,  were  private  records,  which  a  purchaser  of  the  bonds  was 
not  obliged  to  inspect,  as  he  would  have  been  if  the  fact  had  been 
required  by  law  to  be  entered  upon  a  pubhc  record." 

In  Commissioners  of  Knox  County  v.  Aspinwall,  21  How.  (U.S.) 
539,  one  ground  of  decision  was  that  an  express  representation  by 
certain  officials  that  certain  acts  had  been  done  was  binding  upon 
the  municipal  corporation  in  question. 

The  principal  case  may  be  explained  as  deciding  (1)  that  a  repre- 
sentation by  the  directors  that  certain  acts  have  been  done  binds  the 
corporation ;  and  (2)  that  if  the  directors  are  authorized  to  do  an  act, 
only  when  certain  conditions  precedent  have  been  satisfied,  their 
doing  the  act  is,  without  more,  a  representation  that  the  conditions 
precedent  have  been  satisfied. 

There  is  authority  reaching  a  result  opposite  to  that  reached  in  the 
principal  case,  even  when  so  explained.  In  McShane  v.  Carter,  80 
Cal.  310,  it  was  held  that  the  act  of  chrectors  in  making  a  conveyance 
of  corporate  property  did  not  bind  the  corporation.  The  statute 
required  that  the  holders  of  two-thirds  of  the  capital  stock  should 
assent,  and  there  had  been  no  such  assent.  See  also  Williams  v. 
Gaylord,  186  U.S.  157. 

It  is  submitted  that  the  large  proposition  laid  down  by  Buckley  as 
to  "  matters  of  internal  management "  is  not  law  in  the  United  States. 
See  chapter  II  of  Book  III,  supra. 

But  certain  minor  propositions  with  regard  to  matters  of  internal 
management  have  been  established  in  this  country. 

1.  Where  de  jure  directors  have  acted  on  a  matter  within  their 
authority,  their  action  will  be  presumed  to  be  according  to  law,  in 
the  absence  of  proof  to  the  contrary.  Barrell  v.  Lake  View  Land  Co., 
122  Cal.  129;  Sargent  v.  Webster,  13  Mete.  (Mass.)  497;  Mimn^f  Co.  v. 
Anglo-Calif ornian  Bank,  104  U.S.  192. 

2.  Where  de  jure  directors  have  authorized  an  act  to  be  done  by 
the  executive  officers,  and  this  act  is  done,  but  not  in  the  mode  indi- 
cated in  the  by-laws,  and  the  irregularity  was  unknown  to  the  out- 
sider, the  corporation  is  bound.  Smith  v.  Smith,  62  111.  493. 

3.  Where  de  jure  directors  have  authorized  an  act  to  be  done,  but 
the  meeting  of  the  directors  was  held  in  an  improper  place,  and  the 
irregularity  was  unknown  to  the  outsider,  the  corporation  is  bound. 
Galveston  R.R.  v.  Cowdrey,  11  Wall.  (U.S.)  459. 


764  KUSER    V.  WRIGHT.  [CHAP.  I. 

B.  De  Facto  Officers. 


KUSER  V.  WRIGHT. 

52  N.J.  Eq.  825.     1894. 

Van  Syckel,  J.  The  Ott  &  Brewer  Company  was  organized  under 
the  laws  of  this  State,  with  three  directors,  viz.,  Brewer,  Tucker,  and 
Bell. 

In  June,  1891,  Bell  made  an  assignment  for  the  benefit  of  creditors, 
and  soon  after  that  left  the  State. 

In  November,  1891,  the  Ott  &  Brewer  Company,  by  the  two  direc- 
tors, Brewer  and  Tucker,  executed  a  mortgage  on  its  real  estate  and 
certain  goods  and  chattels,  to  the  First  National  Bank  of  Trenton,  to 
secure  a  pree.xisting  indei)tedness.  This  mortgage  was  recorded  as  a 
real  estate  mortgage,  but  was  not  sworn  to  or  recorded  as  a  chattel 
mortgage. 

In  August,  1892,  the  said  company,  by  the  same  two  directors, 
executed  three  several  chattel  mortgages  to  Anthony  R.  Kuser,  John 
L.  Kuser,  and  Albert  Brewer  respectively,  to  secure  to  each  of  them 
the  sum  of  ?.')000,  at  that  time  loaned  by  them  to  the  said  company. 

In  May,  1893,  a  bill  was  filed  in  the  court  of  chancery,  all(>ging  that 
the  said  "The  Ott  &  Brewer  Company"  was  insolvent,  and  thereupon 
John  Wright  was  appointed  receiver  of  the  said  company. 

The  receiver  exhibited  his  bill  to  set  aside  all  these  mortgages. 

The  alleged  infirmity,  chiefly  relied  upon,  is  that  two  directors  had 
no  power  to  establish  a  lien  upon  the  property  of  the  corporation. 

Our  act  concerning  corporations,  section  16,  provides  — 

"That  the  business  of  every  such  corporation  shall  be  managed 
and  conducted  by  the  directors  thereof,  who  shall  respectively  be 
shareholders  therein." 

Section  17  provides:  — 

"The  directors  shall  not  be  less  than  three  in  number,  and  they 
shall  be  chosen  annually  l)y  the  stockholders  at  such  time  and  place 
as  shall  be  provided  by  the  by-laws  of  the  company,  and  shall  hold 
their  office  for  one  year,  and  until  others  are  chosen  and  qualified  in 
their  stead." 

Section  20  provides  that  —  , 

"when  any  vacancy  occurs  among  the  directors,  or  secretary,  or 
treasurer,  by  death,  resignation,  removal,  or  otherwise,  it  shall  be 
filled  for  the  remainder  of  the  year  in  such  manner  as  may  be  pro- 
vided for  by  the  by-laws  of  the  said  company." 

Section  47  provides  that  — 
"it  shall  not  be  lawful  for  any  person  to  be  elected  a  director  of  any 


CHAP.   I.]  KUSER    V.  WRIGHT.  765 

body  corporate  in  this  state  issuing  stock  unless  that  person  shall  be, 
at  the  time  of  his  election,  a  bona  fide  holder  of  some  of  the  stock 
thereof." 

Section  48  provides  that  — 
"when  any  person,  a  director  of  any  body  corporate,  shall  cease  to  be 
a  bona  fide  holder  of  some  of  the  stock  thereof,  he  shall  cease  there- 
upon to  be  a  director  thereof." 

The  point  made  against  these  mortgagees  is  that  under  our  statute 
there  must  be  at  least  three  directors  to  manage  the  corporate  busi- 
ness; that  by  the  assignment  made  by  Bell  for  the  benefit  of  his  cred- 
itors he  ceased  to  be  a  stockholder,  and  by  force  of  the  statute  ceased 
at  the  same  time  to  be  a  director  of  the  company,  thereby  leaving  the 
corporation  without  a  board  of  directors  legally  qualified  to  conduct 
its  affairs.  ' 

That  such  a  result  justly  or  legally  flows  from  these  premises  can- 
not be  conceded.  It  is  apparent  that  dealing  with  these  corporate 
bodies  would  be  in  the  highest  degree  hazardous  and  unsafe  if  the 
public,  without  notice  in  fact,  is  chargeable  in  law  with  knowledge  of 
a  latent  infirmity  in  the  title  of  every  director  of  the  company.  A 
doctrine  so  destructive  to  the  security  of  commercial  transactions, 
now  so  largely  conducted  by  corporate  action,  has  no  support  in  the 
law.  The  receiver  stands  for  the  corporation,  and  cannot  impeach 
any  act  which  the  corporation  itself  could  not  successfully  assail. 

Bell's  original  title  to  the  office  of  director  was  good ;  it  is  not  de- 
nied that  he  was  legally  elected.  The  corporation  held  him  out  to 
the  public  as  one  of  its  dulj^-authorized  agents  by  failing  to  declare 
his  office  vacant  and  electing  his  successor. 

In  Doremus  v.  The  Dutch  Reformed  Church,  2  Gr.  Ch.  349,  Chan- 
cellor Vroom  said  "that  where  the  original  title  of  an  officer  is  suffi- 
cient, though  good  cause  of  amotion  be  shown,  even  in  a  case  where 
the  charter  declares  that  for  such  cause  of  amotion  the  officer  shall 
vacate  his  office,  the  office  is  not  determined  until  there  be  an  amo- 
tion."       I  H  '  ■ 

He  also  said  "that  where  persons  are  officers  de  facto  they  are  in 
colore  officii,  and  their  acts  will  be  valid  until  they  are  lawfully  ousted, 
and  more  especially  as  they  respect  third  persons  they  are  binding 
on  the  corpor^ation." 

The  authorities  are  cited  in  the  opinion. 

This  rule  has  never  been  departed  from  in  this  State. 

Vice-Chancellor  Van  Fleet,  in  Mechanics^  Bank  v.  Burnet  Com- 
pany, 5  Stew.  Eq,  2.36,  adopted  it.  He  there  declares  "that  if  the 
officers  selected  are  inefigible  or  are  elected  irregularly  or  illegally, 
but  are  allowed  by  the  proprietors  of  the  corporation  to  take  control 
of  its  property,  and  to  exercise  its  functions  and  powers,  they  become 
officers  de  facto,  and  as  such  may  act  for  and  bind  the  corpora- 
tion.   An  officer  de  facto  is  one  who  has  the  reputation  of  being 


766  KUSER    V.  WRIGHT.  [CHAP.   I. 

the  officer  he  assumes  to  be,  and  yet  is  not  a  good  officer  in  point 
of  law. 

"From  a  very  early  time  it  has  been  lieKl  that  the  acts  of  de  facto 
officers  are  binding  upon  the  corporation  until  they  are  lawfully 
ousted,  especially  so  far  as  their  acts  create  rights  in  favor  of  third 
persons." 

That  such  is  the  current  of  authority  will  appear  by  reference  to 
the  books.  Mining  Company  v.  Bank,  104  U.S.  192;  Beach  Corp. 
§§  233,  234;  Ang.  &  A.  Corp.  §  287. 

In  San -Jose  Snrirujs  Bank  v.  Sierra  Lumber  Company,  G3  Cul.  179, 
a  director  who  had  ceased  to  be  a  stockholder,  no  judgment  of  ouster 
having  been  pronounced  against  him,  was  held  to  be  a  director  de 
facto,  and  his  acts  valid  as  to  third  persons. 

Mr.  Taylor,  in  his  book  on  Private  Corporations,  §§  187,  188,  after 
stating  the  rule  as  formulated  in  the  ca.ses  above  cited,  says  that  — 

"  It  is  submitted  that  this  statement  of  the  rule  does  not  give  suffi- 
cient prominence  to  the  principle  of  estoppel,  on  which  the  rule  de- 
pends; a  principle  which,  in  its  application  to  the  responsibility  of 
corporations  for  the  acts  of  de  facto  officers,  may  be  stated  thus:  If  a 
body  of  men,  acting  as  a  corporation,  permits  certain  persons  to  act 
openly  as  corporate  officers,  or  if  it  is  permitted  by  the  directors, 
assuming  them  to  have  had  the  power  to  appoint  the  officer  in  ques- 
tion, the  corporation  will  not,  to  the  detriment  of  persons  who,  in 
good  faith,  have  acted  on  the  assurance  that  the  persons  acting  as 
officers  were  the  officers  they  assumed  to  be,  be  permitted  to  impeach 
the  validity  of  their  acts  and  contracts  on  the  ground  that  such  per- 
sons were  not  legally  corporate  officers." 

Bottmnley's  Case,  L.R.  16  Ch.  Div.  G81,  is  not  in  conflict.  In  that 
case  the  contest  was  between  the  company  and  its  own  stockholders. 
Five  directors  were  necessarj-^  to  conduct  the  business.  After  one 
became  disqualified  by  insolvency,  the  other  four  took  proceedings 
by  which  they  attempted  to  enforce  a  forfeiture  against  some  of  their 
stockholders. 

Sir  George  Jessel,  master  of  the  rolls,  held  that  the  shareholders 
were  entitled  to  have  the  business  of  the  company  conducted  accord- 
ing to  the  articles  of  the  association  in  relation  to  that  proceeding. 
As  between  stockholders  and  the  company,  that  was  the  correct  rule. 

In  In  re  Country  Life  Assurance  Company,  L.R.  5  Ch.  App.  Cas. 
288,  a  policy  signed  by  three  de  facto  directors  of  the  company  was 
enforced  in  favor  of  the  party  insured. 

Lord  Justice  Giffard  o])serve(l,  in  delivering  his  judgment,  that 
he  did  not  hesitate  to  say  that  the  business  of  companies  could  not  be 
carried  on  if  this  was  not  held  to  be  the  law. 

As  to  the  public.  Bell  was  clearly  a  director  de  facto,  and  the  cor- 
poration was  represented  in  the  affair  before  us  by  three  directors,  as 
required  by  the  statute. 


CHAP.  I.]  KUSER    V.  WRIGHT.  767 

This  court  has  adjudged  that,  as  in  favor  of  creditors  and  third 
persons  deahng  with  a  corporation  in  good  faith,  the  regularity  and 
vahdity  of  its  organization,  effected  under  color  of  its  charter,  cannot 
be  impeached,  and  the  acts  of  its  officers,  who  are  officers  de  facto 
under  color  of  an  election,  are  binding  on  the  corporation.  Hacken- 
sack  Water  Co.  v.  De  Kay,  9  Stew.  Eq.  548. 

A  majority  of  the  directors  of  a  corporation,  in  the  absence  of  any 
statutory  regulation,  is  a  quorum,  and  such  majority,  when  convened, 
can  do  any  act  within  the  power  of  directors.  Wells  v.  Railway 
Rubber  Co.,  4  C.  E.  Gr.  402. 

Under  these  cases,  the  fact  that  no  notice  of  the  meeting  of  direc- 
tors, at  which  the  mortgages  were  authorized,  was  given  to  Bell  can- 
not affect  the  validity  of  these  securities.  That  is  a  subject  into 
which  those  who  are  dealing  with  a  corporation  are  not  bound  to  in- 
quire. That  duty  falls  on  the  company  alone  when  it  holds  out  its 
officers  as  its  accredited  agents.  Nothing  like  an  approach  to  safety 
could  exist  in  transactions  with  corporate  bodies  if  such  an  obliga- 
tion was  laid  upon  third  parties  contracting  with  them.  After  the 
most  careful  inquiry,  the  question  would  still  be  open  to  contro- 
versy. 

The  assignment  by  Bell  for  the  benefit  of  creditors  was  not  con- 
structive notice  to  the  appellants  that  he  had  ceased  to  become  a 
shareholder.  Actual  notice  must  be  shown,  and  that  was  not  proven. 

Those  only  are  chargeable  with  constructive  notice  of  the  assign- 
ment who  seek  to  estabhsh  a  title  to  his  individual  property. 

The  company  is  estopped  from  denjnng  the  authority  of  one  who 
is,  de  facto,  a  director,  and  in  that  capacity  authorized  to  represent  it. 

The  fact  that  the  mortgage  to  the  bank  was  executed  to  secure  an 
antecedent  debt  does  not  impair  its  standing  as  between  the  corpora- 
tion and  its  creditor.  It  was  taken  in  good  faith,  and  it  was  as  much 
the  duty  of  the  company  to  pay  the  debt  as  though  it  had  been  con- 
tracted at  the  date  of  the  mortgage. 

Note.  —  See,  accord,  Robinson  v.  Blood,  151  Cal.  504. 

For  other  cases  where  the  corporation  was  held  to  be  bound  by  the 
action  of  de  facto  officers,  in  favor  of  a  third  person  without  notice 
of  the  irregularity,  see  Chandler  v.  Hart,  161  Cal.  405  (directors 
elected  at  a  meeting  of  stockholders  not  validly  called) ;  Gleason  v. 
Insurance  Co.,  73  N.H.  583  (directors  elected  at  a  meeting  of  stock- 
holders the  proceedings  in  which  were  not  regular);  Wright  v.  Lee, 
2  S.D.  596  (directors  elected  at  a  meeting  of  stockholders  held  with- 
out the  State);  Hall  v.  Publishing  Co.,  180  Pa.  561  (directors  elected 
at  meeting  of  directors,  instead  of  meeting  of  stockholders) ;  Baird 
V.  Bank  of  Washington,  11  S.  &  R.  (Pa.)  411  (elected  by  a  proper 
body,  but  by  a  less  number  of  that  body  than  the  charter  authorized) ; 
Bradford  v.  Frankfort  R.R.  Co.,  142  Ind.  383  (oflficers  elected  under 


768  KUSER    V.  WRIGHT.  [CHAP.  I. 

an  unconstitutional  act);  Despatch  Line  v.  Bellamy  Co.,  12  N.H.  205 
(officer  elected  was  ineligible  when  elected). 

Such  action  may  bind  the  corporation,  even  though  proceedings  to 
oust  the  de  facto  officers  are  pending,  and  in  such  proceedings  they 
are  later  ousted.  Zearfoss  v.  Farmers  Institute,  154  Pa.  449;  Mining 
Co.  V.  Anylo-Californian  Bank,  104  U.S.  192.  In  the  later  case,  the 
de  facto  directors  took  action  after  a  decision  had  been  rendered 
ousting  them  (but  before  the  judgment  had  been  filed)  and  with 
knowledge  of  the  decision.  It  did  not  appear  that  the  outsider  in 
whose  favor  the  action  was  taken  h:ul  knowledge  of  the  decision. 

It  has  been  held  that  a  corporation  may  benefit  by  the  action  of 
de  facto  officers.  Thus  a  contract  made,  by  such  officers,  with  an 
outsider  is  enforceable  by  the  corporation.  Delaware  &  Hudson 
Canal  Co.  v.  Pennsylvania  Coal  Co.,  21  Pa.  131;  Ohio  R.It.  Co.  v. 
McPhcrson,  35  Mo.  13,  27  (subscription  to  stock).  And  a  conveyance 
to  a  corporation,  having  only  a  dc  facto  board  of  directors,  vests  little 
in  the  corporation.  Myott  v.  Greer,  204  Mass.  389,  393.  Thus  also, 
where  the  outsider  has  contracted  with  the  corporation,  and  seeks  to 
defend  on  the  ground  that  certain  corporate  acts,  conditions  prece- 
dent to  a  suit  by  the  corporation  on  the  contract,  have  not  been 
performed,  since  the  persons  assuming  to  perform  them  were  only 
de  facto  officers.  Charitable  Association  v.  Baldmn,  1  Mete.  (Mass.) 
359;  Trustees  of  Vernon  v.  Hills,  6  Cowcn  (N.Y.)  23.  This  principle 
would  cover  a  suit  by  a  corporation  on  a  subscription  to  its  stock, 
where  the  call  was  made  by  de  facto  directors;  and  see,  to  that  effect, 
contra  to  the  dictum  in  the  principal  case,  San  Joaquin  Co.  v.  Beccher. 
101  Cal.  70.  Similarly,  a  de  facto  board  may  make  a  valid  ilischarge 
of  an  employee.  Ellis  v.  Morth  Carolina  Institution,  68  N.C.  423. 

The  conveyance  of  the  right  of  redemption  belonging  to  a  corpora- 
tion, by  de  facto  officers,  is  valid  against  a  purchaser,  at  foreclosure 
sale,  of  the  property  to  be  redeemed.  Baggot  v.  Turner,  21  Wash.  339. 

But  mere  usurpation  will  not  make  a  person  a  de  facto  officer.  See 
Waterman  v.  Chicago  R.R.  Co.,  139  111.  658;  Franco-Texan  Land  Co. 
V.  Laigle,  59  Tex.  339. 


CHAP.  I.]  spering's  appeal.  769 

C.  Liability  of  Directors  for  Action  or  Inaction. 


SPERING'S  APPEAL. 

71  Pa.  11.     1872. 

The  National  Safety  Insurance  and  Trust  Company  became  insol- 
vent in  the  winter  of  1860-1861,  and  losses  to  a  large  amount  were 
sustained  by  its  depositors.  They  made  an  assignment  for  the  benefit 
of  creditors  on  the  18th  of  April,  1861,  to  Henry  L.  Benner,  and 
others.  Spering,  the  plaintiff,  was  afterwards  appointed  trustee  in 
their  place.  This  bill  was  brought  by  the  trustee  to  compel  the  direc- 
tors and  others,  alleged  to  be  connected  with  them,  to  make  good  the 
losses,  on  the  ground  of  fraudulent  mismanagement. 

Sharswood,  J.  Upon  a  careful  examination  of  the  record  and 
paper-books,  which  make  up  nine  hundred  and  sixty-six  printed 
octavo  pages,  we  have  come  to  the  following  conclusions  of  fact, 
which  are  supported  also  by  the  opinion  of  the  Master.  First,  That 
no  fraudulent  conduct  is  imputable  to  any  one  of  the  defendants, 
at  any  period  of  time  during  their  administration  of  the  trust.  No 
pecuniary  advantage,  to  the  amount  of  a  dollar,  was  ever  realized  or 
sought  by  any  one  of  them.  There  was  no  embezzlement  or  misap- 
propriation of  the  funds  by  any  officer  or  agent  of  the  corporation. 
There  is  no  pretence  that  the  defendants  are  liable  to  account  upon 
either  of  these  grounds.  .  .  .  Third,  Looldng  at  the  history  of  the 
institution  in  the  light  of  subsequent  events,  its  direction  was  unwise 
and  unfortunate.  The  money  of  the  depositors  was  not  invested  in 
first-rate  and  perfectly  safe  securities,  as  they  engaged  to  do,  and 
as  the  funds  of  such  a  charity  unquestionably  ought  to  be.  Loans 
were  largely  made  upon  very  doubtful  collaterals.  Their  investments 
in  real  estate  were  injudicious.  They  lost  from  a  failure  to  insure. 
They  sought  to  realize  large  profits  at  usurious  rates  of  interest.  The 
crash  came  in  1860,  just  before  the  breaking  out  of  the  civil  war.  All 
doubtful  securities  fell  in  the  market.  Their  debtors  went  to  the  wall. 
In  the  vain  attempt  to  sustain  their  credit  they  sacrificed  securities 
and  collaterals.  Had  they  stopped  and  made  an  assignment  at  once, 
a  large  amount  of  the  loss  which  subsequently  fell  upon  them  would 
undoubtedly  have  been  prevented.  The  story  might  be  much  am- 
plified by  entering  into  a  detail  of  particulars:  but  the  conclusion 
would  be  the  same.  Such  is  a  brief  resum^  of  the  facts.  It  is  not  the 
history  of  this  institution  alone,  but  of  many  others  in  this  country. 

The  broad  question  then  is,  whether  upon  such  a  state  of  facts,  the 
directors  of  a  corporation  can  be  made  to  account  for  losses  arising 
from  mismanagement  merely. 


770  spering's  appeal.  [chap.  i. 

It  is  by  no  means  a  wcll-settlod  point  what  is  the  prcci.se  relation 
which  directors  sustain  to  stockholders.  They  are  undoiihtedly  said 
in  many  authorities  to  be  trustees,  but  that  as  I  apprehend  is  only  in 
a  general  sense,  as  we  term  an  agent  or  any  Ixiilee  intrusted  with  the 
care  and  management  of  the  property  of  another.  It  is  certain  that 
they  are  not  technical  trustees.  They  can  only  be  regarded  as  man- 
datories —  persons  who  have  gratuitously  undertaken  to  perform 
certain  duties,  and  who  are  therefore  l)Ound  to  apply  ordinary  skill 
and  diligence,  but  no  more.  Indeed,  as  the  directors  are  themselves 
stockhoklers,  interested  as  well  as  all  others  that  the  affairs  and  l)usi- 
ness  of  the  corporation  should  be  successful,  when  we  ascertain  and 
determine  that  they  have  not  sought  to  make  any  profit  not  common 
to  all  the  stockholders,  we  raise  a  strong  presumption  that  they  have 
brought  to  the  administration  their  best  judgment  and  skill.  Ought 
they  to  be  held  responsible  for  mistakes  of  judgment  or  want  of  skill 
and  knowledge?  They  have  been  requested  by  their  co-stockholders 
to  take  their  positions,  and  they  have  given  their  services  without 
compensation.  We  are  dealing  now  with  their  responsibility  to  stock- 
holders, not  to  outside  parties  —  creditors  and  depositors.'  It  is 
unnecessary  to  consider  what  the  rule  may  be  as  to  them.  Upon  a 
close  examination  of  all  the  reported  cases,  although  there  are  many 
dicta  ncrt  easily  reconcilable,  yet  I  have  found  no  judgment  or  decree 
which  has  held  directors  to  account,  except  when  they  have  them- 
selves been  personally  guilty  of  some  fraud  on  the  corporation,  or 
have  known  and  connived  at  some  fraud  in  others,  or  where  such 
fraud  might  have  been  prevented  had  they  given  ordinary  attention 
to  their  duties.  I  do  not  mean  to  say  by  any  means  that  their  respon- 
sibility is  limited  to  these  cases,  and  that  there  might  not  exist  such 
a  case  of  negligence  or  of  acts  clearly  ultra  vires,  as  would  make  per- 
fectly honest  directors  personally  lial)le.  But  it  is  evident  that  gentle- 
men elected  by  the  stockholders  from  their  own  body  ought  not  to 
be  judged  by  the  same  strict  standard  as  the  agent  or  trustee  of  a 
private  estate.  Were  such  a  rule  applied,  no  gentlemen  of  character 
and  responsibility  would  be  found  willing  to  accept  such  places.  The 
authorities  I  think  fully  endorse  these  views. 

[After  an  examination  of  the  authorities.]  These  citations,  which 
might  be  multiplied,  establish,  as  it  seems  to  me,  that  while  directors 
are  personally  responsible  to  the  stockholders  for  any  losses  resulting 
from  fraud,  embezzlement  or  wilful  misconduct  or  breach  of  trust 
for  their  own  benefit  and  not  for  the  benefit  of  the  stockholders,  for 
gross  inattention  and  negligence  by  which  such  fraud  or  misconduct 
has  been  perpetrated  by  agents,  officers  or  co-directors,  yet  they  are 

*  But  the  report  of  the  case  states  that  the  corporation  became  insolvent,  that 
losses  to  a  large  amount  were  sustained  by  its  depositors,  that  it  made  an  as-Mgnment 
for  the  benefit  of  its  creditors,  that  this  suit  was  by  the  successor  to  such  assignee, 
and  that  the  prayer  of  his  bill  was  "for  a  decree  against  the  defendants,  to  pay  the 
plaintiff  sufficient  to  make  good  the  liabilities  of  the  company." 


CHAP.  I.]  spering's  appeal.  771 

not  liable  for  mistakes  of  judgment,  even  though  they  may  be  so 
gross  as  to  appear  to  us  absurd  and  ridiculous,  provided  they  are 
holiest  and  provided  they  are  fairly  within  the  scope  of  the  powers 
and  discretion  confided  to  the  managing  body. 

Note.  —  In  Overend  &  Oiirney  Co.  v.  Gihh,  L.R.  5  H.L.  480,  the 
question  was  whether  a  director  was  liable  for  using  the  funds  of  the 
company  in  making  a  purchase  which  had  proved  very  unprofitable. 
The  director  had  not  derived  any  personal  benefit  from  the  purchase, 
and  had  acted  in  good  faith.  Lord  Hartherly  said  (p.  486):  "The 
question  is  then  simply  reduced  to  this,  —  whether  or  not  the  direc- 
tors exceeded  the  powers  entrusted  to  them,  or  whether  if  they  did 
not  so  exceed  their  powers  they  were  cognisant  of  circumstances  of 
such  a  character,  so  plain,  so  manifest,  and  so  simple  of  apprecia- 
tion, that  no  men  with  any  ordinary  degree  of  prudence,  acting  on 
their  own  behalf,  would  have  entered  into  such  a  transaction  as 
they  entered  into?  Was  there  crassa  negligentia  on  their  part  which, 
though  not  charged  in  words,  is,  it  is  argued,  shown  by  the  facts,  so 
that  they  should  be  fixed  with  the  loss  of  the  fund  intrusted  to  their 
hands  for  the  purpose  of  making  the  acquisition  of  the  business; 
was  the  acquiring  of  that  subject-matter,  through  the  medium  of 
those  funds,  with  the  amount  of  knowledge  w^hich  the  directors  had 
attained,  an  instance  of  crassa  negligentia?'' 

In  Yates  v.  National  Bank,  206  U.S.  158,  the  court  was  consider- 
ing the  standard  of  conduct  required  from  a  director  of  a  national 
bank.  A  director  is  required  to  swear  "that  he  will,  so  far  as  the 
duty  devolves  on  him,  diligently  and  honestly  administer  the  affairs 
of  such  association,  and  will  not  knowingly  violate,  or  willingly  per- 
mit to  be  \'iolated,  any  of  the  provisions  of  this  Title."  Mr.  Justice 
White  said  (p.  178):  "Tvlark  the  contrast  between  the  general  com- 
mon law  duty  to  'diligently  and  honestly  administer  the  affairs  of 
the  association'  and  the  distinct  emphasis  embodied  in  the  promise 
not  to  'knowingly  violate,  or  willingly  permit  to  be  violated,  any 
of  the  provisions  of  this  Title.'  In  other  words,  as  the  statute  does 
not  relieve  the  directors  from  the  common  law  duty  to  be  honest 
and  diligent,  the  oath  exacted  responds  to  such  requirements.  But 
as,  on  the  other  hand,  the  statute  imposes  certain  express  duties  and 
makes  a  knowing  violation  of  such  commands  the  test  of  civil 
liability,  the  oath  in  this  regard  also  conforms  to  the  requirements 
of  the  statute  by  the  promise  not  to  'knowingly  violate,  or  willingly 
permit  to  be  violated,  any  of  the  provisions  of  this  Title.' " 


772  HUN    V.  CARY.  [chap.  I. 

HUN  V.  CARY. 

82  N.Y.  05.     1880. 

Earl,  J.  This  action  was  brouplit  l)y  the  receiver  of  tiic  Central 
Savings  Bank  of  the  city  of  New  York,  against  the  defendants 
who  were  trustees  of  the  bank,  to  recover  damages  which,  it  is  al- 
leged, they  caused  the  bank  by  their  misconduct  as  such  trustees. 

The  first  question  to  be  considered  is  the  measure  of  fidelity,  care 
and  diligence  which  such  trustees  owe  to  such  a  bank  and  its  de- 
positors. The  relation  existing  between  the  corporation  and  its 
trustees  is  mainly  that  of  principal  and  agent,  and  the  relation 
between  the  trustees  and  the  depositors  is  similar  to  that  of  trustee 
and  cestui  que  trust.  The  trustees  are  bound  to  observe  the  limits 
placed  upon  their  powers  in  the  charter,  and  if  they  transcend  such 
limits  and  cause  damage,  they  incur  liability.  If  they  act  fraudu- 
lently or  do  a  willful  wrong,  it  is  not  doubted  that  they  may  be  held 
for  all  the  damage  they  cause  to  the  bank  or  its  depositors.  But  if 
they  act  in  good  faith  within  the  limits  of  powers  conferred,  using 
proper  prudence  antl  diligence,  they  are  not  responsible  for  mere  mis- 
takes or  errors  of  judgment.  That  the  trustees  of  such  corporations 
are  bound  to  use  some  diligence  in  the  discharge  of  their  duties 
cannot  be  disputed.  All  the  authorities  hold  so.  What  degree  of 
care  and  diligence  are  they  bound  to  exercise?  Not  the  highest 
degree,  not  such  as  a  very  vigilant  or  extremely  careful  person  would 
exercise.  If  such  w^ere  required,  it  would  be  difficult  to  find  trustees 
who  would  incur  the  responsibility  of  such  trust  positions.  It  would 
not  be  proper  to  answer  the  question  by  saying  the  lowest  degree. 
Few  persons  would  be  willing  to  deposit  money  in  savings  banks, 
or  to  take  stock  in  corporations,  with  the  understanding  that  the 
trustees  or  directors  were  bound  only  to  exercise  slight  care,  such 
as  inattentive  persons  would  give  to  their  own  business,  in  the  man- 
agement of  the  large  and  important  interests  committed  to  their 
hands.  When  one  deposits  money  in  a  savings  bank,  or  takes  stock 
in  a  corporation,  thus  divesting  himself  of  the  immediate  control  of 
his  property,  he  expects,  and  has  the  right  to  expect,  that  the  trustees 
or  directors,  who  are  chosen  to  take  his  place  in  the  management  and 
control  of  his  property,  will  exercise  ordinary  care  and  prudence  in 
the  trusts  committed  to  them  —  the  same  degree  of  care  and  pru- 
dence that  men  prompted  by  self-interest  generally  exercise  in  their 
own  affairs.  When  one  voluntarily  takes  the  position  of  trustee  or 
director  of  a  corporation,  good  faith,  exact  justice,  and  public  policy 
unite  in  requiring  of  him  such  a  degree  of  care  and  prudence,  and  it 
is  a  gross  breach  of  duty  —  crassa  negligentia  —  not  to  bestow  them. 

It  is  impossible  to  give  the  measure  of  culpable  negligence  for  all 
cases,  as  the  degree  of  care  required  depends  upon  the  subjects  to 


CHAP.  I.]  HUN    V.  GARY.  773 

which  it  is  to  be  applied.  (First  Nat.  Bank  v.  Ocean  Nat.  Bank,  60 
N.Y.  278.)  What  would  be  slight  neglect  in  the  care  of  a  quantity 
of  iron  might  be  gross  neglect  in  the  care  of  a  jewel.  What  would  be 
slight  neglect  in  the  care  exercised  in  the  affairs  of  a  turnpike  cor- 
poration, or  even  of  a  manufacturing  corporation,  might  be  gross 
neglect  in  the  care  exercised  in  the  management  of  a  savings  bank 
intrusted  with  the  savings  of  a  multitude  of  poor  people,  depend- 
ing for  its  life  upon  credit  and  liable  to  be  wrecked  by  the  breath  of 
suspicion.  There  is  a  classification  of  negligence  to  be  found  in 
the  books,  not  always  of  practical  value  and  yet  sometimes  service- 
able, into  slight  negligence,  gross  negligence,  and  that  degree  of  negli- 
gence intermediate  the  two,  attributed  to  the  absence  of  ordinary 
care;  and  the  claim  on  behalf  of  these  trustees  is  that  they  can  only 
be  held  responsible  in  this  action  in  consequence  of  gross  negligence, 
according  to  this  classification.  If  gross  negligence  be  taken  accord- 
ing to  its  ordinary  meaning  —  as  something  nearly  approaching  fraud 
or  bad  faith  —  I  cannot  yield  to  this  claim;  and  if  there  are  any 
authorities  upholding  the  claim,  I  emphatically  dissent  from  them. 

It  seems  to  me  that  it  would  be  a  monstrous  proposition  to  hold 
that  trustees,  intrusted  with  the  management  of  the  property,  inter- 
ests and  business  of  other  people,  who  divest  themselves  of  the  man- 
agement and  confide  in  them,  are  bound  to  give  only  slight  care  to 
the  duties  of  their  trust,  and  are  liable  only  in  case  of  gross  inatten- 
tion and  negligence;  and  I  have  found  no  authority  fully  upholding 
such  a  proposition.  It  is  true  that  authorities  are  found  which  hold 
that  trustees  are  liable  only  for  crassa  negligentia,  which  literally 
means  gross  negligence;  but  that  phrase  has  been  defined  to  mean 
the  absence  of  ordinaiy  care  and  dihgence  adequate  to  the  particular 
ease. 

In  Spering's  Appeal,  Judge  Sharswood  said  that  directors  "are 
not  liable  for  mistakes  of  judgment,  even  though  they  may  be  so 
gross  as  to  appear  to  us  absurd  and  ridiculous,  provided  they  were 
honest,  and  provided  they  are  fairly  within  the  scope  of  the  powers 
and  discretion  confided  to  the  managing  body."  As  I  understand 
this  language,  I  cannot  assent  to  it  as  properly  defining  to  any  ex- 
tent the  nature  of  a  director's  responsibility.  Like  a  mandataiy,  to 
whom  he  has  been  likened,  he  is  bound  not  only  to  exercise  proper 
care  and  diligence,  but  ordinary  skill  and  judgment.  As  he  is  bound 
to  exercise  ordinary  skill  and  judgment,  he  cannot  set  up  that  he  did 
not  possess  them.  When  damage  is  caused  by  his  w^ant  of  judgment, 
he  cannot  excuse  himself  by  alleging  his  gross  ignorance.  One  who 
voluntarily  takes  the  position  of  director,  and  invites  confidence  in 
that  relation,  undertakes,  like  a  mandatary,  with  those  whom  he 
represents  or  for  whom  he  acts,  that  he  possesses  at  least  ordinary 
knowledge  and  skill,  and  that  he  will  bring  them  to  bear  in  the  dis- 
charge of  his  duties.    (Story  on  Bailments,  §  182.)   Such  is  the  rule 


774  HUN    V.  CAKT.  (chap.  I. 

applicable  to  public  officers,  to  professional  men  and  to  mechanics, 
and  such  is  the  rule  wiiich  nmst  be  applicable  to  every  person  who 
undertakes  to  act  for  another  in  a  situation  or  employment  requiring 
skill  and  knovvledp;e;  and  it  matters  not  that  the  service  is  to  Ix* 
rendered  gratuitously.  These  defendants  voluntarily  took  the  posi- 
tion of  trustees  of  the  l)ank.  They  invited  depositors  to  confide  to 
them  their  savings,  and  to  intrust  the  safe-keeping  and  management 
of  them  to  their  skill  and  prutlence.  They  undertook  not  only  that 
they  would  discharge  their  duties  with  proper  care,  but  that  they 
would  ex(Mcise  the  ordinary  skill  and  judgment  refjuisite  for  the  dis- 
charge of  their  delicate  trust. 

Enough  has  now  been  said  to  show  what  measure  of  diligence, 
skill  and  prudence  the  law  exacts  from  managers  and  directors  of 
corporations;  and  we  are  now  prepared  to  examine  the  facts  of  this 
case,  for  the  purpose  of  seeing  if  these  trustees  fell  short  of  this 
measure  in  the  matters  alleged  in  the  complaint. 

[The  bank  was  incorporated  in  18G7,  and  did  business  until  1875, 
when  a  receiver  was  appointed.  During  this  time  the  deposits  aver- 
aged about  S70,000.  Fiom  18G7  to  1K73  the  total  expenses,  including 
interest  paid  to  depositors,  exceetled  the  income.  In  1878  the  trustees 
of  the  bank,  which  had  hitherto  occupied  hired  premises,  purchased, 
in  behalf  of  the  institution,  four  lots  of  land,  with  a  view  to  erecting 
a  l)ank  l)uilding  upon  one  of  the  lots.  The  greater  part  of  the  pur- 
chase price  was  secured  by  mortgages  on  the  lots.  At  the  time  of 
purchase  the  bank  became  obligated  to  erect  upon  the  corner  lot 
a  five  story  building.  Such  a  buikling  was  thereafter  erected  at  an 
expense  of  about  $27,000.  The  other  lots  were  disposed  of  without 
loss.  The  corner  lot  had  cost  the  bank  S29,250  (presumably  its  fair 
value),  exclusive  of  the  building.  It  was  mortgaged  for  $30,500. 
When  the  receiver  was  appointed,  t-hat  lot  and  building,  and  other 
assets  which  produced  less  than  SIOOO,  constituted  the  whole  prop- 
erty of  the  l)ank,  and  subsequently  the  lot  and  building  were  swept 
away  by  a  mortgage  foreclosure.  The  present  action  was  brought  to 
recover  the  damages  caused  to  the  bank  by  the  alleged  improper 
investment  of  its  funds,  as  above  stated.] 

At  the  time  of  the  purchase  of  the  lot,  the  bank  was  substantially 
insolvent.  If  it  had  gone  into  licjuidation,  its  assets  would  have 
fallen  several  thousand  dollars  short  of  discharging  its  liabilities, 
and  this  state  of  things  was  known  to  the  trustees.  It  had  been  in 
existence  about  six  years,  doing  a  losing  business.  The  amount  of 
its  deposits,  which  its  managers  had  not  been  al)le  to  increase,  shows 
that  the  enterprise  was  an  abortion  from  the  beginning,  either  be- 
cause it  lacked  public  confidence,  or  was  not  needed  in  the  place 
where  it  was  located.  It  had  changed  its  location  once  without  any 
benefit.  It  had  on  hand  but  about  S13,000  in  cash,  of  which  810,000 
were  taken  to  make  the  first  pajanents.   The  balance  of  its  assets 


CHAP.  I.]  HUN    V.  CARY.  775 

was  mostl}'  in  mortgages  not  readily  convertible.  One  was  a  mort- 
gage for  $40,000,  which  had  been  pui'chased  at  a  large  discount,  and 
we  may  infer  that  it  was  not  very  salable,  as  the  trustees  resolved  to 
sell  it  as  early  as  May,  1873,  and  in  August,  1873,  authorized  it  to  be 
sold  at  a  discount  of  not  more  than  $2500,  and  yet  it  was  not  sold 
until  1874.  In  this  condition  of  things  the  trustees  made  the  pur- 
chase complained  of,  under  an  obligation  to  place  on  the  lot  an  expen- 
sive banldng-house.  Whether,  under  the  circumstances,  the  purchase 
was  such  as  the  trustees,  in  the  exercise  of  ordinary  prudence,  skill 
and  care,  could  make;  or  whether  the  act  of  purchase  was  reckless, 
rash,  extravagant,  showing  a  want  of  ordinary  prudence,  skill  and 
care,  were  questions  for  the  jury.  It  is  not  disputed  that,  under  the 
charter  of  this  bank,  as  amended  in  1868  (chap.  294),  it  had  the 
power  to  purchase  a  lot  for  a  banking-house  "requisite  for  the  trans- 
action of  its  business."  That  was  a  power,  like  every  other  pos- 
sessed by  the  bank,  to  be  exercised  with  prudence  and  care.  Situated 
as  this  moribund  institution  was,  was  it  a  prudent  and  reasonable 
thing  to  do,  to  invest  nearly  half  of  all  the  trust  funds  in  this  ex- 
pensive lot,  with  an  obligation  to  take  most  of  the  balance  to  erect 
thereon  an  extravagant  building?  The  trustees  were  urged  on  by 
no  real  necessity.  They  had  hired  rooms  where  they  could  have  re- 
mained ;  or  if  those  rooms  were  not  adequate  for  their  small  business, 
we  may  assume  that  others  could  have  been  hired.  They  put  for- 
ward the  claim  upon  the  trial  that  the  rooms  they  then  occupied 
were  not  safe.  That  may  have  been  a  good  reason  for  making  them 
more  secure,  or  for  getting  other  rooms,  but  not  for  the  extravagance 
in  which  they  indulged.  It  is  inferable,  however,  that  the  principal 
motive  which  influenced  the  trustees  to  make  the  change  of  location 
was  to  improve  the  financial  condition  of  the  bank  by  increasing  its 
deposits.  Their  project  was  to  buy  this  corner  lot  and  erect  thereon 
an  imposing  edifice,  to  inspire  confidence,  attract  attention,  and  thus 
draw  deposits.  It  was  intended  as  a  sort  of  advertisement  of  the 
bank,  a  very  expensive  one  indeed.  Savings  banks  are  not  organized 
as  business  enterprises.  They  have  no  stockholders,  and  are  not  to 
engage  in  speculations  or  money-making  in  a  business  sense.  They 
are  simply  to  take  the  deposits,  usually  small,  which  are  offered,  ag- 
gregate them,  and  keep  and  invest  them  safely,  pajdng  such  interest 
to  the  depositors  as  is  thus  made,  after  deducting  expenses,  and  pay- 
ing the  principal  upon  demand.  It  is  not  legitimate  for  the  trustees 
of  such  a  bank  to  seek  deposits  at  the  expense  of  present  depositors. 
It  is  their  business  to  take  deposits  when  offered.  It  was  not  proper 
for  these  trustees  —  or  at  least  the  jury  may  have  found  that  it  was 
not  —  to  take  the  money  then  on  deposit  and  invest  it  in  a  banking- 
house,  merely  for  the  purpose  of  drawing  other  deposits.  In  making 
this  investment,  the  interests  of  the  depositors,  whose  money  was 
taken,  can  scq-rcely  be  said  to  have  been  consulted. 


776  HUN    V.  CARY.  [chap.  I. 

It  matters  not  that  the  trustees  purchased  this  lot  for  no  more  than 
a  fair  value,  and  that  the  loss  was  occasioned  by  the  subsequent  gen- 
eral decline  in  the  value  of  real  estate.  They  had  no  right  to  expose 
their  bank  to  the  hazard  of  such  a  decline.  If  the  purchase  was  an 
improper  one  when  made,  it  matters  not  that  the  loss  came  from  the 
unavoidable  fall  in  the  value  of  the  real  estate  purchased.  The  jury 
may  have  found  that  it  was  grossly  careless  for  the  trustees  to  lock 
up  the  funds  in  their  charge  in  such  an  investment,  where  they  could 
not  be  reached  in  any  emergency  which  was  likely  to  arise  in  the 
affairs  of  the  crippled  bank. 

We  conclude,  therefore,  that  the  evidence  justified  a  finding  by  the 
jury  that  this  was  not  a  case  of  mere  error  or  mistake  of  judgment  on 
the  part  of  the  trustees,  but  that  it  was  a  case  of  improvidence,  of 
reckless,  unreasonable  extravagance,  in  which  the  trustees  failed  in 
that  measure  of  reasonable  prudence,  care  and  skill  which  the  law 
requires. 

Judgment  [on  verdict  for  plaintiff]  affirmed. 

Note.  —  See,  accord,  Greenfield  Savings  Bank  v.  Abercrombie,  211 
Mass.  252;  Williams  v.  McKay,  46  N.J.  Eq.  25  ("the  duty  was  to 
lend  the  bank's  money,  not  only  in  the  manner  indicated  and  required 
by  the  charter,  but  also  prudently;  the  prudence  required  being 
measured  by  the  character  and  objects  of  the  institution"). 

There  are  many  cases  dealing  with  the  liability  of  directors  for 
inaction,  —  cases  in  which  subordinate  officers  misconducted  them- 
selves to  the  damage  of  the  corporation,  and  the  question  was  pre- 
sented whether  the  directors  were  responsible  for  not  having  pre- 
vented this.  The  fact  that  the  director  has  gained  no  personal  benefit 
and  that,  he  has  acted  honestly  will  not  excuse  him.  All  the  authori- 
ties agree  that  there  is  a  duty  of  reasonable  supervision.  In  Briggs  v. 
Spaidding,  141  U.S.  132,  the  judges  divided,  5  to  4,  as  to  whether, 
on  the  facts,  certain  directors  were  liable.  As  to  the  standard  of  con- 
duct, Mr.  Chief  Justice  Fuller,  speaking  for  the  majority,  said 
(p.  165):  "Without  reviewing  the  various  decisions  on  the  su))ject, 
we  hold  that  directors  must  exercise  ordinary'  care  and  prudence 
in  the  administration  of  the  affairs  of  a  bank,  and  that  this  includes 
something  more  than  officiating  as  figure-heads.  They  are  entitled 
under  the  law  to  commit  the  banking  business,  as  defined,  to  their 
duly-authorized  officers,  but  this  does  not  absolve  them  from  the 
duty  of  reasonable  supervision,  nor  ought  they  to  be  permitted  to 
be  shielded  from  liability  because  of  want  of  knowledge  of  wrong- 
doing, if  that  ignorance  is  the  result  of  gross  inattention." 

Mr.  Justice  Harlan,  speaking  for  the  minority,  said:  "As  to  the 
degree  of  diligence  and  the  extent  of  supervision,  to  be  exercised  by 
directors,  there  can  be  no  room  for  doubt  under  the  authorities.  It  is 
such  diligence  and  supervision  as  the  situation  and  the  nature  of  the 


CHAP.  I.]  HODGES    V.  NEW    ENGLAND    SCREW    CO.  777 

business  requires.  Their  duty  is  to  watch  over  and  guard  the  inter- 
ests committed  to  thera.  In  fidehty  to  their  oaths,  and  to  the  obliga- 
tions they  assume,  the}^  must  do  all  that  reasonably  prudent  and 
careful  men  ought  to  do  for  the  protection  of  the  interests  of  others 
entrusted  to  their  charge." 

.  If  the  act  done  is,  or  is  not,  ultra  vires  of  the  corporation,  accord- 
ing to  the  facts,  it  would  seem  to  be  plain  that  the  director  should  be 
required  to  use  ordinary  care  and  reasonable  skill  in  determining  the 
facts.  See  Leeds  Co.  v.  Shepherd,  L.R.  36  Ch.D.  787  (declaration  of 
a  dividend);  Davenport  v.  Li7ies,  77  Conn.  473,  480  (same).  But  see 
Lyman  v.  Bonney,  118  Mass.  222  (return  of  capital  to  stockholders). 


HODGES  V.  NEW  ENGLAND  SCREW  CO. 

1  R.I.  312.     1850. 

The  directors  of  a  corporation  caused  some  of  its  property  to  be 
sold,  in  part,  for  stock  of  another  corporation.  It  was  claimed  that 
this  act  was  ultra  vires  of  the  corporation,  and  that  the  directors  were 
Hable  for  the  consequences.  The  directors  had  acted  in  good  faith 
and  with  good  business  judgment. 

Greene,  C.J.  In  1845,  the  Screw  Company  were  desirous  of  en- 
larging their  business,  and  obtained  an  amendment  of  their  charter, 
under  which  they  erected  a  rolling-mill,  and  carried  on  the  business 
of  rolling  iron;  and,  afterwards,  finding  this  unprofitable,  went  into 
the  business  of  making  railroad  iron,  and  carried  on  that  business 
until  it  ceased  to  be  profitable,  which  was  in  the  latter  part  of  the 
year  1847.   The  business  was  then  suspended. 

The  rolling-mill  establishment  was  then  without  employment. 
It  had  cost  $155,000,  and  was  discredited  in  the  market  by  the  un- 
profitable business  which  had  been  carried  on  there.  In  erecting  the 
rolling-mill  establishment,  and  in  carrying  on  the  business  there, 
the  Screw  Company  had  incurred  a  heavy  debt.  Under  these  circum- 
stances, the  directors  of  the  Screw  Company  formed  the  plan  of 
purchasing  the  nail  machine  and  patent  for  making  wrought  nails, 
and  of  forming  a  new  company,  who  were  to  become  the  purchasers 
of  the  rolling-mill  and  works,  and  patent  and  nail  machine,  and  to 
carry  on  the  business  of  making  wrought  nails.  The  Screw  Company 
were  to  sell  their  nail  machine  and  patent,  and  rolling-mill,  to  the 
new  company  at  cost,  being  $182,000,  and  to  receive  $82,000  in 
money,  and  the  balance,  being  $100,000,  in  the  stock  of  the  new  com- 
pany. The  whole  capital  of  the  new  company  was  to  be  $300,000,  to 
be  divided  into  six  hundred  shares  of  five  hundred  dollars  each,  of 
which  the  Screw  Company  were  to  take  two  hundred  shares,  pro- 
vided two  hundred  shares  were  taken  by  others,  and  the  company 
organized  in  three  months. 


778  HODGES   V.  NEW    ENGLAND    SCREW    CO.  [CHAP.  I. 

One  great  object  of  the  directors,  in  making  this  arrangement, 
was  to  effect  a  sale  of  their  rolling-mill  upon  advantageous  terms, 
and  to  realize  from  the  sale,  in  order  partially,  at  least,  to  relieve 
themselves  from  debt. 

Another  object  was  the  anticipated  profits  of  the  new  business. 

The  immediate  effect  of  the  arrangement  was,  that  the  Screw 
Company  received  $82,000  in  cash,  for  their  rolling-mill  and  nail 
machine  and  patent,  and  still  retained,  as  a  stockholder  in  the  Iron 
Company,  one-third  of  the  same  property,  the  other  subscribers  to 
the  Iron  Company  putting  their  money  against  the  rolling-mill  of 
the  Screw  Company,  at  cost.  .  .  . 

In  considering  the  question  of  the  personal  rcsponsil>ility  of  the 
directors,  therefore,  we  shall  assume  that  they  violated  the  charter 
of  the  Screw  Company.  The  question  then  will  be,  was  such  viola- 
tion the  result  of  mistake,  as  to  their  powers,  and  if  so,  did  they  fall  into 
this  mistake  from  want  of  proper  care,  such  care  as  a  man  of  ordi- 
nary prudence  practices  in  his  own  affairs.  For,  if  the  mistake  be  such 
as  with  proper  care  might  have  been  avoided,  they  ought  to  be  liable. 
If,  on  the  other  hand,  the  mistake  be  such  as  the  directors  might  well 
make,  notwithstanding  the  exercise  of  proper  care,  and  if  they  acted 
in  good  faith  and  for  the  benefit  of  the  Screw  Company,  they  ought 
not  to  be  liable. 

Let  us  look  at  the  circumstances,  under  which  the  directors  sub- 
scribed for  this  stock. 

At  the  time  of  the  transaction,  no  case,  in  which  this  question  of 
authority  was  decided  or  considered,  had  occurred,  either  in  England 
or  this  country.  The  law  on  the  subject  cannot  be  considered  as 
known  and  settled. 

There  are  large  classes  of  corporations  in  Rhode  Island  and  the 
other  States,  which  may  and  do  rightfully  invest  their  capital  in  the 
stock  of  other  corporations;  such,  for  instance,  as  religious  and  char- 
itable corporations,  and  corporations  for  literary  and  scientific  pur- 
poses. So  insurance  companies  may  rightfully  invest  their  capital  in 
the  stock  of  other  corporations,  such  as  banks  and  railroads,  and 
the  like.  Nor  have  we  any  doubt  that  the  Screw  Company  might 
have  rightfully  taken  this  stock  in  the  Iron  Company,  in  payment 
for  their  rolling-mill,  if  it  had  been  taken  with  a  view  to  sell  again 
and  not  permanently  to  hold  it. 

Again,  it  is  to  be  observed,  the  directors  were  not  investing  the 
dividends  of  the  Screw  Company  in  the  stock  of  the  Iron  Company. 
They  had  on  hand  an  unsaleable  rolling-mill,  and  they  owed  a  heavy 
debt  for  it,  and  one  great  object  in  taking  the  stock  in  the  Iron 
Company,  was  to  realize  for  the  rolling-mill  and  in  part  pay  thereby 
the  debt. 

The  business,  too,  of  the  Iron  Company  was  of  a  kindred  nature 
with  that  carried  on  by  the  Screw  Company;  and,  so  far  as  the  man- 


CHAP.  I.]  GILBERT    V.  FINCH.  779 

ufacture  of  rods  was  concerned,  intimately  connected  with  the  busi- 
ness of  the  Screw  Company. 

It  was  Hke  the  case  of  a  corporation  for  printing  cahcoes  taking 
stock  in  the  corporation  which  manufactured  and  suppHed  the  print 
clotlis.  It  deserves,  also,  to  be  remarked  in  this  connection,  that  this 
question  of  power  never  seems  to  have  been  raised  by  the  directors 
or  the  stockholders  in  either  company,  or,  by  the  plaintiff  himself, 
until  the  present  bill  was  filed.  Under  these  circumstances,  and  giv- 
ing proper  weight  to  the  answers  of  the  defendants,  we  feel  bound  to 
say,  that  in  subscribing  for  this  stock,  they  have  acted  in  good  faith 
and  with  as  much  care  and  discretion,  as  a  man  of  ordinary  prudence 
exercises  about  his  own  affairs,  and  that,  if  they  have  fallen  into  a 
mistake  in  regard  to  their  powers,  it  was  an  innocent  mistake,  for 
which  they  ought  not  to  be  held  answerable.  We  have  in  Rhode 
Island  a  large  number  of  corporations,  whose  affairs  are  managed 
by  directors,  who  are  generally  large  stockholders  and  act  without 
compensation.  If  the  innocent  mistakes  of  these  gentlemen,  in  cases 
where  the  law  was  unsettled  or  unknown,  is  to  subject  them  for 
damages,  great  injustice  would  be  done.  The  law  requires  of  them 
care  and  discretion,  such  as  a  man  of  ordinary  prudence  exercises 
in  his  own  affairs;  and  if  they  practice  this,  and  nevertheless  make 
a  mistake,  the  law  does  not  hold  them  answerable. 


GILBERT  V.  FINCH. 

72  N.Y.  App.  Div.  38.     1902. 

McLaughlin,  J.  The  complaint  alleges,  and  the  evidence  adduced 
upon  the  trial  establishes,  that  the  Commercial  Alliance  Insurance 
Company  was  incorporated  in  1888  under  the  statutes  of  the  State 
of  New  York,  and  that  immediately  following  its  incorporation  it 
commenced,  and  thereafter  continued,  to  do  business  until  October, 
1894,  when  the  plaintiff  was  appointed  receiver  in  an  action  brought 
for  that  purpose  by  the  Attorney-General  of  the  State;  that  on  and 
prior  to  the  3d  of  May,  1893,  the  defendants  and  other  persons  be- 
yond the  jurisdiction  of  the  court  were  the  directors  of  such  com- 
pany, and  as  such  entered  into  negotiations  with  the  surviving 
incorporators  (ten  in  number)  of  the  IVIaine  and  New  Brunswick 
Insurance  Company,  a  corporation  organized  under  the  laws  of  the 
State  of  Maine,  for  the  purchase  and  control  of  the  latter  companj^ 
by  the  former;  that  such  negotiations  were  finally  consummated  on 
the  day  last  mentioned,  when  one  Dunham,  the  president  of  the 
Commercial  Alliance  Company,  acting  in  pursuance  of  the  direction 
of  the  defendants  and  their  associate  directors,  took  from  the  funds 
of  such  company  $35,000  and  paid  the  same  to  the  ten  surviving 


780  GILBERT    V.  FINCH.  [CHAP.  I. 

incorporators  of  the  Maine  and  New  Brunswick  Company,  for  "a 
valuable  consideration,"  as  expressed  therein,  and  in  connection 
with  such  bill  of  sale,  Dunham  and  three  others  (all  of  whom  were 
directors  of  the  Connnercial  Alliance  Company)  received  a  transfer 
or  assignment  from  such  surviving  incorporators,  at  the  expressed 
consideration  of  $3,500  each,  of  "all  their  right,  title  and  interest  as 
corporators,  associates  or  otherwise,  in  said  Maine  and  New  Bruns- 
wick Insurance  Company;"  that  simultaneously  with  the  execution 
and  delivery  of  such  papers,  under  an  agreement  previously  made, 
all  of  the  officers  and  directors  of  the  Maine  and  New  Brunswick 
Company  resigned,  and  their  places  were  filled  by  some  of  the 
defendants  or  persons  acting  for  or  on  behalf  of  the  Commercial 
Alliance  Company;  that  on  the  22d  of  July,  1893,  the  Maine  and 
New  Brunswick  Company  was  judicially  declared  by  the  Supreme 
Judicial  Court  of  Maine  to  be  insolvent,  and  a  receiver  was  appointed 
to  wind  up  its  affairs  and  distribute  its  assets  among  its  creditors; 
that  shortly  thereafter,  in  an  action  brought  b}''  this  plaintifl'  in  the 
United  States  Circuit  Court  for  the  district  of  Maine,  against  the 
ten  surviving  incorporators  of  the  Maine  and  New  Brunswick 
Company,  to  recover  the  money  paid  to  them,  aggregating  S3o,000, 
the  plaintiff  received  as  a  compromise  of  such  action  the  sum  of 
$25,000,  and  this  action  was  brought  to  recover  the  difference  be- 
tween said  sum  and  the  835,000  paid  to  them,  together  with  interest 
thereon. 

The  real  question  is,  whether  the  directors  of  an  insurance  com- 
pany can  take  its  property  and  assets  and  give  them  away,  in  the 
belief  and  with  the  expectation  that  such  gift  will  ultimately  benefit 
the  companj'^  by  bringing  to  it  new  business.  That  directors  have 
no  such  power  cannot  be  seriously  questioned.  The  transaction  by 
which  $35,000  in  money  was  taken  from  the  Commercial  Company 
and  paid  to  the  surviving  incorporators  of  the  Maine  and  New 
Brunswick  Company  was  not  only  an  ultra  vires  act,  but  it  constituted 
a  waste  of  the  funds  of  the  Commercial  Company,  and  to  such  an 
extent  that  those  who  acquiesced  in  it  or  consented  to  it  were  liable 
to  respond  not  only  to  the  stockholders  but  to  the  creditors  of  the 
Commercial  Company  to  the  extent  of  the  funds  used.  Mason  v. 
Henry,  152  N.Y.  529.  What  was  done  was  not  a  purchase  of  property 
at  all  or  even  of  the  good  will  of  a  competing  company.  The  Maine 
Company  had  nothing  which  it  could  sell;  it  had  no  assets,  and  its 
good  will,  so  far  as  value  was  concerned,  was  purely  mythical,  as 
evidenced  by  the  fact  that,  within  a  few  days  after  the  consumma- 
tion of  the  transaction  with  the  Commercial,  it  passed  into  the 
hands  of  a  receiver  on  the  ground  that  it  was  insolvent;  and,  had  it 
been  otherwise,  it  had  no  more  power  to  sell  its  good  will  than  had 
the  Commercial  Company  the  power  to  buy  it.  But  what  was  done 
was  not  even  an  attempted  purchase  of  either  the  assets  or  good  will 


CHAP.  I.]  GILBERT   V.  FINCH,  781 

of  that  company.  The  most  charitable  view  that  can  be  taken  of  the 
whole  transaction  is  that  the  $3,500  paid  to  each  of  the  surviving 
incorporators  of  that  company  was  a  gift,  because  there  is  no  claim 
made  that  they  had  anything  to  transfer,  in  return  for  which  they 
permitted  the  control  of  the  corporation  which  they  represented  to 
pass  into  the  hands  of  the  persons  representing  the  Commercial 
Alliance  Company.  The  Maine  and  New  Brunswick  Company 
parted  v/ith  no  property,  nor  did  the  Commercial  Company  receive 
anything  for  the  money  paid.  The  new  officers  and  directors  of  the 
Maine  and  New  Brunswick  Company,  substituted  for  those  who  had 
resigned,  even  had  there  been  any  property  or  assets  of  that  com- 
pany, could  not  have  turned  it  over  to  or  used  it  for  the  benefit  of 
the  Commercial  Company.  The  ]\Iaine  Company,  it  will  be  remem- 
bered, vv^as  a  mutual  company.  Its  assets  were  not  represented  by 
stock.  Its  officers  and  directors  as  such  had  no  interest  whatever  in 
the  company  or  its  assets,  except  to  manage  the  same  for  all  the 
members.  Huntington  v.  Savings  Bank,  96  U.S.  388.  The  defendants, 
therefore,  were  not  authorized,  and  they  had  no  right  whatever,  to 
use  the  funds  of  the  Commercial  Alliance  Company  in  the  man- 
ner in  which  thej''  did,  and,  upon  every  principle  applicable  to  the 
management  of  the  business  and  affairs  of  a  corporation,  they  must 
be  held  liable  to  make  good  the  loss  which  was  sustained. 

Nor  is  the  fact  that  they  acted  in  good  faith  of  the  slightest 
importance  or  any  excuse  for  what  they  did.  It  may  be  conceded, 
and  it  is  undoubtedly  true,  that  what  the  defendants  did  was  done 
in  good  faith  upon  the  supposition  that  their  acts  would  ultimately 
turn  out  for  the  best  interests  of  the  Commercial  Company.  It  is 
not  difficult  to  see  the  object  sought  to  be  accomplished  by  the  trans- 
action. It  was  the  destruction  of  the  Maine  and  New  Brunswick 
Company,  upon  the  supposition  that,  when  destruction  had  finally 
taken  place,  out  of  its  ruins  would  come  cUsappointed  policy-holders, 
the  majority  of  whom  would  be  glad  to  surrender  policies  in  that 
company  and  take  new  ones  in  the  Commercial  Company,  for  which 
the  Commercial  Company  would  receive  the  premiums,  which  would 
largely  increase  both  its  business  and  assets.  But  the  directors,  as 
indicated,  had  no  power  to  use  the  funds  of  the  Commercial  Com- 
pany for  this  purpose,  and  the  courts,  so  far  as  we  have  been  able 
to  discover,  never  yet  have  sanctioned,  but,  on  the  contrary,  have 
always  condemned,  this  method  of  acquiring  business.  Once  judicial 
sanction  is  given  to  it,  it  is  not  difficult  to  see  how  the  funds  of  an 
insurance  company  might  be  used  in  a  stock  speculation,  a  mining 
scheme,  or  lost  in  many  other  ways  which  might  be  suggested.  Good 
business  methods  forbid  it,  and  the  statutes  of  the  State  prohibit  it. 

Note.  —  Affirmed,  173  N.Y.  455. 

If  directors  do  acts  in  the  name  of  the  corporation  which  are  ultra 


782  MOBILE    IMPROVKMENT    CO.  t'.  GA88.  [CHAP.  I. 

vires  of  the  corporation,  and  from  which  damage  to  the  corporation 
results,  and  if  tiiey  coukl  not  have  honestly  and  reasonably  c(jnsidered 
the  acts  to  be  inlra  vires,  it  wjuld  seem  to  Jje  clear  that  they  shoulii 
be  liable.  Hill  v.  Murphy,  212  Mass.  1;  In  re  Xaliomd  Furul^i  Astrur- 
ance  Co.,  L.R.  10  Ch.D.  118. 

People  ex  ret.  Perkins  v.  Moss,  187  N.Y.  410.  AUhough  it  is  ultra 
vires  for  an  insurance  corporation  to  contribute  money  to  a  poHtical 
party,  a  director  who  made  such  contributioli  in  Ix'half  of  the  cor- 
poration out  of  his  own  money  and  then  received  reimbursement 
from  the  corporation  is  not  guilty  of  larceny  from  the  corporation. 


D.  Contracts  mih  the  Corporation. 


MOBILE  IMPROVEMENT  CO.  v.  GASS. 

142  Ala.  520.     1904. 

Gass  and  three  other  directors  voted  to  convey  certain  land  belong- 
ing to  the  corporation  to  (Jass,  on  the  performance  of  certain  acts  by 
Gass.  The  three  other  directors  were  lc*ss  than  a  quorum.  The  con- 
veyances were  thereafter  made,  and  the  corporation  sought  the  can- 
cellation of  the  deeds.   The  court  granted  relief  against  (ia.Ks. 

Anderson,  J.  While  the  dei'ds  sought  to  Ik*  cancelled  puri)ort  to 
have  been  authorized  by  a  resolution  passed  at  a  meeting  in  Mobile  in 
the  year  1891,  it  is  an  undisputed  fact  that  they  were  made  under  and 
pursuant  to  a  resolution  of  a  bare  (juorum  of  directors,  at  a  meeting 
held  at  Flint,  Michigan,  in  tiie  year  1896.  The  evidence  also  discloses 
the  fact  that,  at  said  meeting,  the  presence  of  and  the  partic-ipa- 
tion  therein  by  the  respondent,  Gass,  was  necessary  to  constitute  a 
quorum  and  to  give  it  legal  vitality,  and  that  the  vote  of  Gass  secured 
the  passage  of  the  resolution. 

The  directors  of  a  corporation  are  the  trustees  and  managing  part- 
ners, and  the  stoclcholders  are  the  cestui  que  trust,  and  have  a  joint 
interest  in  all  of  the  property  and  effects  of  the  corporation.  Robinson 
V.  Smith,  3  Paige,  222,  232;  Cunningham  v.  Pell,  5  lb.  607;  Slee  v. 
Bloom,  19  Johns.  479. 

*'If  this  is  the  relation,  then  the  rules  of  law  applicable  to  pur- 
chasers by  agents  and  trustees  apply  to  the  purchase  in  question. 
There  is  a  manifest  impropriety  in  allowing  the  same  person  to  act  as 
the  agent  of  the  seller  and  to  become  himself  the  buyer.  There  may 
be,  in  all  such  cases,  a  conflict  between  the  duty  and  interest.  Acting 
for  the  best  interests  of  the  corporation,  his  disinterested  and  un- 
biassed convictions  of  duty  might  be  to  ad\'ise  against  a  sale  of  the 
entire  property  to  one  creditor,  or  against  any  sale  at  all.    It  is  in 


CHAP.  I.]  MOBILE    IMPROVEMENT    CO.  V.  GASS.  783 

view  of  these  considerations  that  'the  wise  pohcy  of  the  law  hath  put 
the  sting  of  a  disabihty  into  the  temptation,  as  a  defensive  weapon 
against  the  strength  of  the  danger  which  hes  in  the  situation.'  Even 
these  principles  would  not,  in  my  judgment,  apply  in  the  case,  if 
there  had  been  a  quorum  without  Buell. 

"Now  the  purchase  of  property  by  an  agent  or  trustee,  or  by  any 
person  acting  in  a  fiduciary  capacity,  is  not  void  ab  origine  and  abso- 
lutely. It  is  voidable  only.  It  is  made  subject  to  the  right  of  the 
principal  or  beneficiary,  in  a  reasonable  time,  to  say  that  he  is  not 
satisfied  with  it.  It  is  valid  in  equity  as  well  as  law,  unless  the  parties 
interested  repudiate  it,  or  complain  of  it;  and  these  may  set  it  aside 
without  showing  either  fraud  or  injury.  Bank  of  Old  Dominion  v. 
Dubuque  Railroad  Co.,  8  Iowa,  227;  Davoue  v.  Fanning,  2  Johns.  Ch. 
252;  Bostwick  v.  Atkins,  3  Comst.  53,  60;  1  Parsons,  Cont.  75,  76  and 
case  in  note;  1  Lead.  Cases  in  Eq.  167;  MacGregor  v.  Gardner,  14 
Iowa,  326,  335. 

"As  the  principal  or  parties  interested  may  confirm  the  sale,  a  mere 
stranger  cannot  make  the  objection,  that  the  trustee  was  the  pur- 
chaser, or  that  the  sale  was  irregular.  The  remedy  belongs  only  'to 
persons  who  had  an  interest  in  the  property  before  the  sale,  and  no 
other  person  can  apply  to  set  aside  the  sale.'"  Coreij  v.  Wadsworth, 
118  Ala.  507,  508;  Hawley  v.  Cramer,  4  Cow.  717,  744;  Edmondson  v. 
Welsh,  27  Ala.  578;  Foster  v.  Goree,  5  Id.  428;  Hannah  v.  Carrington, 
18  Ark.  85;  Herbert  v.  Henrick,  16  Ala.  581;  Greenleafy.  Queen,  1  Pet. 
138;  5  Barr.  97;  Wightman  v.  Doe,  24  Miss.  675. 

The  directors  of  a  corporation  are  its  agents.  Their  position  im- 
phes  that  confidence  is  reposed  in  them.  The  duties  which  a  director 
assumes  to  the  corporation  and  the  stockholders  thereof,  disquahfies 
him  from  binding  the  corporation  in  a  transaction  in  which  he  is 
already  interested.  O'Connor  Mining  &  Mfg.  Co.  v.  Coosa  Furnace 
Co.,  88  Ala.  630. 

Note.  —  The  authorities,  accord,  are  very  numerous. 

The  transaction  is  voidable,  not  void,  and  if  the  property  came 
into  the  hands  of  a  bona  fide  purchaser  the  equity  of  rescission  would 
be  cut  off.  In  the  principal  case  the  plaintiff  did  not  ask  the  court  to 
disturb  the  title  of  the  grantees  from  Gass  of  a  portion  of  the  prop- 
erty conveyed  to  him.  See  also  Aberdeen  By.  Co.  v.  Blaikie,  1  Macq. 
H.L.  461,  476. 

On  the  sale  by  a  corporation  of  property  held  by  it  in  trust  to  a 
person  acting  in  behalf  of  a  director,  see  Purchase  v.  Atlantic  Safe 
Deposit  Co.,  81  N.J.  Eq.  344,  aff'd,  91  A.  1070. 


784  MUNSON    V.  SYIUCUSE    R.It.  CO.  [cilAP.  I. 

MUNSON  V.  SYRACUSE  Il.R.  CO. 

103  N.Y.  58.     1886. 

A  CONTRACT  was  made  between  Munson  and  his  associates  with 
the  defendant,  by  the  terms  of  which  they  were  to  transfer  certain 
property  to  the  defendant  and  the  defendant  was  to  issue  to  lliem 
certain  of  its  bonds.  They  sought  specific  performance  of  the  con- 
tract. 

Andrews,  J.  .  .  .  We  are  of  opinion  that  the  contract  of  September 
14,  1875,  is  repu{j;nant  to  the  preat  rule  of  hiw  whicli  invahdates  all 
contracts  matle  by  a  trustee  or  fuluciaiy,  in  whicli  he  is  personally 
interested,  at  the  election  of  the  party  he  represents.  There  is  no 
controversy  as  to  the  facts  l)rinp;ing  the  case  as  to  Munson  within 
the  operation  of  the  rule.  He  and  his  associates  were  dealing  with  a 
corporation  in  which  Munson  was  a  director,  in  a  matter  where  the 
interests  of  the  contracting  parties  were  or  might  be  in  conflict.  The 
contract  bound  the  corporation  to  purchase,  and  Mun.son,  as  one  of 
the  directors,  participated  in  the  action  of  the  corporation  in  a.ssum- 
ing  the  obligation,  and  in  binding  itself  to  pay  the  price  primarily 
agreed  upon  between  the  plaintiffs  an<l  Magee.  He  stood  in  the 
attitude  of  selling  as  owner  and  purchasing  as  trustee.  The  law 
permits  no  one  to  act  in  such  inconsistent  relations.  It  does  not  stop 
to  inquire  whether  the  contract  or  transaction  was  fair  or  unfair. 
It  stops  the  inquiry  when  the  relation  is  disclosed,  antl  sets  aside  the 
transaction  or  refuses  to  enforce  it,  at  the  instance  of  the  party 
whom  the  fiduciary  undertook  to  represent,  without  undertaking 
to  deal  with  the  question  of  abstract  justice  in  the  particular  case. 
It  prevents  frauds  by  making  them  as  far  as  may  be  impossible, 
knowing  that  real  motives  often  elude  the  most  searching  inquiry, 
and  it  leaves  neither  to  judge  nor  jury  the  right  to  determine  upon 
a  consideration  of  its  advantages  or  disadvantages,  whether  a  con- 
tract made  under  such  circumstances  shall  stand  or  fall.  It  can 
make  no  difference  in  the  application  of  the  rule  in  this  case,  that 
Munson's  associates  were  not  themselves  disabled  from  contracting 
with  the  corporation,  or  that  Munson  was  only  one  of  ten  directors 
who  voted  in  favor  of  the  contract.  The  contract  on  its  face,  notified 
Munson's  associates  of  his  relation  to  the  corporation,  and  that  the 
contract  was  subject  to  be  defeated  on  that  ground,  and  on  the  other 
hand  a  corporation  in  order  to  defeat  a  contract  entered  into  by 
directors,  in  which  one  or  more  of  them  had  a  private  interest,  is  not 
bound  to  show  that  the  influence  of  the  director  or  directors  having 
the  private  interest,  determined  the  action  of  the  board.  The  law 
cannot  accurately  measure  the  influence  of  a  trustee  with  his  asso- 
ciates, nor  will  it  enter  into  the  inquiry,  in  an  action  by  the  trustee  in 
his  private  capacity,  to  enforce  the  contract  in  the  making  of  which 


CHAP.  I.]  FORT    PAYNE    ROLLING    MILL    V.  HILL.  785 

he  participated.  The  value  of  the  rule  of  equity,  to  which  we  have 
adverted,  hes  to  a  great  extent  in  its  stubbornness  and  inflexibihty. 
Its  rigidity  gives  it  one  of  its  chief  uses  as  a  preventive  or  discourag- 
ing influence,  because  it  weakens  the  temptation  to  dishonesty  or 
unfair  deahng  on  the  part  of  trustees,  by  vitiating,  without  attempt 
at  discrimination,  all  transactions  in  which  they  assume  the  dual 
character  of  principal  and  representative. 

Note.  —  Cf .  Porter  v.  Lassen,  127  Cal.  261 ;  Clark  v.  American 
Coal  Co.,  86  Iowa,  436,  449. 


FORT  PAYNE  ROLLING  MILL  v.  HILL. 

174  Mass.  224.     1899. 

Holmes,  C.J.  This  is  an  action  to  recover  a  sum  received  or  re- 
tained by  the  defendant  by  way  of  discount  upon  debts  of  the  plaintiff 
company  which  the  defendant  settled.  This  discount  was  or  might 
have  been  found  to  have  been  received  by  the  defendant  in  pursuance 
of  votes  of  the  directors  by  which  he  was  employed  to  settle  claims 
against  the  plaintiff  company,  and  was  to  be  allowed  five  per  cent  of 
the  face  value  of  bonds  used  in  paj^ment  and  whatever  discount  he 
could  get  from  the  claims.  He  was  a  director,  but  took  no  part  in 
the  votes.  The  main  question  is,  whether  after  the  services  have 
been  rendered  a  receiver  of  the  company  has  the  right  as  matter  of 
law  to  avoid  the  contract  under  which  they  were  rendered.  The  jury 
have  found  that  all  parties  acted  in  good  faith  and  that  the  contract 
was  not  improvident.  They  may  have  found  more  specifically  that 
the  defendant  advanced  his  own  money  to  settle  the  claims,  that  the 
claims  were  secured  by  liens  and  were  being  pressed,  and  that  the 
company  had  no  other  way  of  raising  money.  We  are  not  prepared 
to  say  that  the  receiver  may  avoid  the  contract  now.  If  made  with 
any  one  else,  it  would  have  been  binchng.  It  was  not  illegal  or  void 
because  made  with  a  director,  the  only  person  likely  to  be  willing  to 
make  it.  In  this  country  it  very  generally  has  been  deemed  impracti- 
cable to  adopt  a  rule  which  absolutely  prohibits  such  contracts.  Nye 
v.  Storer,  168  Mass.  53,  55.  Whatever  small  conflict  of  interest  be- 
tween himself  and  the  company  there  may  have  been,  was  no  greater 
or  other  than  that  between  a  broker  paid  by  a  percentage  and  his 
principal.  It  was  manifest  and  must  have  been  understood.  The 
contract  called  for  action  outside  the  defendant's  duty  as  director, 
or  at  least,  on  the  defendant's  evidence,  needed  such  action  before  it 
could  have  any  effect,  for  it  was  no  part  of  the  defendant's  duty  as 
director  to  advance  his  own  money.  Assuming  the  contract  to  have 
been  a  provident  one,  as  it  well  may  have  been,  and  as  the  jury  have 


786  UNITED    STATES    STEEL    CORPORATION    V.   HODGE.       [cHAP.  I. 

found  that  it  was,  it  seems  to  us  not  much  more  open  to  objection 
than  a  contract  with  a  managing  director  to  pay  liini  a  salary. 

Note.  —  Where  the  interested  director  took  no  part  in  the  cor- 
porate proceedings,  the  weight  of  authority  in  the  United  States  is 
that  the  contract  is  not  void,  if  otherwise  unoljjectionahle.  (The 
burden  of  proving  that  the  transaction  was  fair  should,  it  is  submit- 
ted, be  upon  the  director.  See  Cumherlaiul  Co.  v.  Parish,  42  Md.  598.) 

But  see,  contra,  Stewart  v.  Lehigh  Valley  Co.,  38  N.J.L.  505,  in 
which  the  court  said  (p.  528):  "Nor  is  it  proper  for  one  of  a  board  of 
directors  to  support  his  contract  with  his  company,  upon  the  ground 
that  he  abstained  from  participating  as  director  in  the  negotiations 
for  and  final  adoption  of  the  l)argains  by  his  co-directors;  the  very 
words  in  which  he  asserts  his  right  declare  his  wrong;  he  ought  to 
have  participated,  and  in  the  interest  of  the  stockholders,  and  if  he 
did  not,  and  they  have  thereby  suffered  loss,  of  which  they  shall  be 
the  judges,  he  must  restore  the  rights  he  has  obtained  —  he  must 
hold  against  them  no  advantage  that  he  has  got  through  neglect  of 
his  duty  towards  them." 


UNITED  STATES  STEEL  CORPORATION  v.  HODGE. 

64  N.J.  Eq.  K07.      1902. 

The  directors  of  the  United  States  Steel  Corporation  voted  to 
retire  $200,000,000,  par  value,  preferred  stock,  by  issuing  to  the 
holders  in  exchange  for  such  stock  its  bonds  or  cash  raised  ijy  a  sale 
of  its  bonds.  J.  P.  Morgan  was  a  director  of  the  corporation,  and  a 
member  of  the  firm  of  J.  P.  Morgan  &  Co.  The  corporation,  acting 
by  its  directors,  entered  into  a  contract  with  J.  P.  Morgan  &  Co., 
which  provided  that  the  firm  was  to  purchase  a  certain  number  of 
the  bonds,  and  to  pay  for  them  in  preferred  stock  or  cash,  in  consid- 
eration of  certain  commissions.  This  contract  was  expressly  made 
subject  to  the  approval  of  the  stockholders.  J.  P.  Morgan  &  Co. 
formed  a  syndicate  to  insure  their  performance  of  the  contract.  A 
special  meeting  of  the  stockholders  was  called,  the  notice  stating 
that  some  directors  were  interested  in  the  sjTidicate.  The  stock- 
holders approved  the  contract.  The  court  held  that  under  these 
facts  the  contract  bound  the  corporation. 

Van  Syckel,  J.  The  object  of  the  rule  is  to  prevent  directors  from 
secretly  using  their  fiduciary  position  for  their  own  emolument,  and 
not  to  impair  the  right  of  stockholders  to  enter  into  any  lawful 
engagement  with  a  full  disclosure  of  the  facts. 

In  Stewart  v.  Lehigh  Valley  Railroad  Co.,  supra,  IVIr.  Justice  Dixon, 
in  delivering  the  opinion  of  this  court,  says:  "After  an  examination 


CHAP.  I.]      NORTHWESTERN    TRANSPORTATION    CO.  V.  BEATTY.  787 

of  all  the  cases  cited,  as  also  such  others  as  I  have  found,  and  a  careful 
consideration  of  the  principle,  and  the  results  of  regarding  and  disre- 
garding it,  I  have  come  to  the  conviction  that  the  true  legal  rule  is 
that  such  a  contract  is  not  void,  but  voidable,  to  be  avoided  at  the 
option  of  the  cestui  que  trust,  exercised  within  a  reasonable  time;  I 
can  see  no  further  safe  modification  or  relaxation  of  the  principle 
than  this." 

It  is  a  settled  rule  of  corporation  law  that  the  personal  interest  of 
directors  renders  a  transaction  voidable  at  the  option  of  the  stock- 
holders, and  not  void  per  se. 

Under  the  declaration  of  this  court  in  the  case  last  cited  the  share- 
holders may,  within  a  reasonable  time  after  the  disclosure  to  them  of 
the  interest  of  a  director,  elect  to  avoid  the  contract ;  but  if  an  unrea- 
sonable time  is  allowed  to  elapse  without  exercising  such  option, 
during  which  the  position  of  directors  become  so  changed  that  it 
would  be  inequitable  to  vacate  the  engagement,  equity  would  refuse 
to  interpose. 

A  fortiori,  when  the  contract  is  entered  into  by  the  stockholders 
with  the  directors,  or  when  the  stockholders  expressly  authorize  the 
directors  to  enter  into  a  contract,  when  the  stockholders  have  notice 
of  the  directors'  interest,  the  agreement  will  be  unassailable  in  the 
absence  of  actual  fraud  or  want  of  power  in  the  corporation. 

In  the  case  sub  judice,  the  contract  was  in  effect  made  between 
the  stockholders  themselves  and  J.  P.  Morgan  &  Co.,  and  it  cannot 
be  successfully  assailed  without  maintaining  that  stockholders  are 
without  capacity  to  make  a  valid  contract  with  the  directors  of  their 
company. 

It  would  be  manifestly  contrary  to  fair  dealing  and  good  faith  to 
permit  stockholders  to  invite  directors  to  enter  into  an  engagement, 
and  after  the  directors  had  put  themselves  in  a  position  in  which  the 
contract  could  be  enforced  against  them,  to  permit  the  stockholders 
to  deprive  them  of  the  benefits  of  it. 

In  my  investigation  no  case  has  been  found  which  will  justify  such 
a  result. 


NORTHWESTERN  TRANSPORTATION  CO.  v.  BEATTY 

L.R.  12  A.C.  589.     1887. 

Bill  in  equity  by  Henry  Beatty,  a  minority  stockholder,  against 
the  Northwestern  Transportation  Company,  and  its  directors,  in- 
cluding James  H.  Beatty.  The  bill  seeks  to  rescind  the  purchase  by 
the  corporation  of  the  steamer  United  Empire. 

The  material  facts  are  as  follows :  — 

The  Transportation  Company  is  a  corporation,  with  a  capital  stock 
of  $300,000,  divided  into  600  shares  of  $500  each.   On  January  1, 


788  NORTHWESTERN    TRANSPORTATION    CO.  V.  BEAriY.      [cHAP.  1. 

1883,  James  H.  Beatty  owiietl  200  shares,  and  was  a  diieetor.  He 
was  then  buihhng  a  steamboat,  to  be  called  the  i'nittd  Empire;  and 
desired  to  sell  it  to  the  company.  In  January,  1883,  he  purchased  101 
additional  shares.  On  the  day  of  the  annual  meeting  in  February, 
1883,  he  transferred  5  shares  to  Rose  and  5  to  Laird,  whereby  they 
became  qualified  to  be  directors;  and  they  were  then  elected  directors. 
The  board  was  composed  of  five  directors;  and  James  H.  Beatty, 
Rose,  and  Laird  constituted  a  majority. 

The  board  of  directors,  while  James  H.  Beatty  was  present  and 
acting,  passed  a  vote  (called  a  by-law)  to  purchase  the  steamboat  of 
James  H.  Beatty  upon  specifietl  terms.  The  directors,  at  the  same 
time,  voted  to  submit  the  said  by-law  to  a  special  meeting  of  the 
stockholders.  At  such  meeting,  a  vote  to  adopt  the  by-law  was  car- 
ried by  a  vote  of  306  to  289.  Of  the  30G  affirmative  votes,  291  were 
cast  by  James  H.  Beatty,  and  ten  by  his  transferees.  Rose  and  Laird. 
The  bill  charges  that  the  purcha.se  was  not  entered  into  by  James 
H.  Beatty  d  al.  on  behalf  of  the  company  in  good  faith  for  the  pur- 
pose of  promoting  the  best  interests  of  the  company,  but  for  the  pur- 
pose of  serving  their  private  interests  contrary  to  their  duty  to  the 
company  and  its  stockholders.  ^Subsequently  all  charges  of  fraud  and 
collusion  were  abandoned.  It  was  proved  by  uncontradicted  evi- 
dence, and  was  substantially  admitted,  that,  at  the  date  of  the  pur- 
chase, the  acciuisition  of  another  steamer  was  essential  to  the  efficient 
conduct  of  the  company's  business;  that  the  United  Empire  was  well 
adapted  for  that  purpose;  that  it  was  not  within  the  power  of  the 
company  to  acquire  any  other  steamer  equally  well  adapted  for  its 
business;  and  that  the  price  agreed  to  be  paid  for  the  steamer  was 
not  excessive  or  unreasonable. 

The  case  was  heard  in  the  Chancerj'  Division,  at  Toronto,  before 
Boyd,  Chancellor,  who  decreed  that  the  purchase  should  be  set 
aside.   (6  Ontario,  300.) 

The  Court  of  Appeal  of  Ontario  (Haoarty,  C.J.,  Burton'  and 
OsLER,  JJ.)  unanimously  reversed  the  decree  of  the  Chancellor.  (11 
Ontario  Appeal,  205.) 

The  Supreme  Court  of  Canada  (Ritchie,  C.J.,  Fournier,  IIexry, 
Taschereau,  and  Gwynne,  JJ.)  unanimously  reversed  the  last  men- 
tioned decision,  and  restored  the  decree  of  the  Chancellor. 

Sir  W.  J.  Ritchie,  C.J.  Though  it  may  be  quite  true,  as  a  general 
proposition,  that  a  shareholder  of  a  company,  as  such,  may  vote  as  he 
pleases,  and  for  purposes  of  his  own  interest,  on  a  ciuestion  in  which 
he  is  personally  interested,  does  that  proposition  necessarily  cover 
this  case?  Is  it  not  abundantly  clear  that,  whatever  a  simple  stock- 
holder may  do,  no  director  is  entitled  to  vote,  as  a  director,  in  respect 
to  any  contract  in  which  he  is  personally  interested?  Directors  can- 
not manage  the  affairs  of  the  company  for  their  own  personal  and 
private  advantage;  they  cannot  act  for  themselves  and,  at  the  same 


CHAP.  I.]      NORTHWESTERN    TRANSPORTATION    CO.  V.  BEATTY  .  789 

time  as  the  agents  of  the  corporation  whose  interests  are  conflicting; 
they' cannot  be  the  sellers  of  property  and  the  agents  of  the  vendee; 
there  must  be  no  conflict  between  interest  and  duty;  they  cannot 
occup/ a  position  which  conflicts  with  the  interests  of  the  parties 
they  represent  and  are  bound  to  protect.  Is  it  not  somewhat  of  a 
mockery  to  say  that  this  by-law  and  sale  were  mvahd  and  oad,  and 
not  enforceable  against  the  company  as  being  contrary  to  the  policy 
of  the  law  by  reason  of  a  director  entering  into  the  contract  tor  his 
personal  benefit  where  his  personal  interests  conflicted  with  the 
interests  of  those  he  was  bound  to  protect,  but  that  it  can  be  set 
rio-ht  by  a  meeting  of  the  shareholders,  by  a  resolution  carried  by 
the  vote  of  the  director  himself  against  a  large  majority  of  the  other 
shareholders?  If  this  can  be  done,  how  has  the  conflict  between  seli- 
interest  and  integrity  ceased?  _ 

While  recognizing  the  general  principle  of  non-interference  with 
the  powers  of  the  company  to  manage  its  own  affairs,  this  case  seems 
to  me  to  be  peculiarly  exceptional;  a  director,  acting  for  the  company, 
makes  a  sale,  acting  for  himself,  to  the  company,  a  transaction  admit- 
tedly indefensible;  this  purchase  is  submitted  to  the  shareholders, 
and  the  director,  having  acquired  a  controlling  number  of  votes  tor 
this  purpose,  secures  a  majority  by  his  own  votes  thus  obtamed  with- 
out which  the  purchase  would  not  have  been  sustained,  and  con- 
firms as  a  shareholder  his  invalid  act  as  a  director,  and  thus  validates 
a  transaction  against  which  the  policy  of  the  law  utterly  sets  its 

^  It  does  seem  to  me  that  fair  play  and  common  sense  aUke  dictate 
that  if  the  transaction  and  act  of  the  director  are  to  be  confirmed,  it 
should  be  by  the  impartial,  independent,  and  intelligent  judgment  of 
the  disinterested  shareholders,  and  not  by  the  interested  director 
himself,  who  should  never  have  departed  from  his  duty.  If  he  had 
done  his  duty  and  refrained  from  acting  in  the  transaction  as  a 
director  the  by-law  might  never  have  been  passed,  and  the  contract 
of  sale  never  entered  into;  and  having  acted  contrary  to  his  duty  to 
his  co-shareholders  he  disqualified  himself  from  taking  part  m  the 
proceedings  to  confirm  his  own  illegal  act;  and  then  to  say  that  he 
was  a  legitimate  party  to  confirm  his  own  illegal  act  seems  to  me 
simply  absurd,  for  nobodv  could  doubt  what  the  result  m  such  a  case 
would  be,  as  the  futileness  of  the  interested,  but  discontented,  share- 
holders attempting  to  frustrate  the  designs  of  the  interested  director 
with  his  majority  is  too  manifest;  but  he,  if  he  had  done  his  duty 
towards  them  and  refrained  from  entering  into  the  transaction,  would 
never  have  been  in  the  position  of  going  through  this  farce  of  submit- 
ting this  matter  to  the  shareholders,  and  when  so  submitted  of  him- 
self" voting  that  he,  though  he  had  acted  entirely  illegally,  had  done 
right,  and  thereby  binding  all  the  other  shareholders  who  thought  the 
purchase  undesirable;  or  in  other  words,  by  his  vote  carrying  a  reso- 


790  NORTHWESTERN    TRANSPORTATION    CO.  V.  BEATTT.      (cHAP.  I. 

lution  that  the  bargain  he  himself  had  made  for  tlie  comijany  as 
buyer,  from  himself  as  seller,  was  a  desirable  operation  and  should 
be  confirmed.  .  .  . 

I  rest  this  case  entirely  on  the  position  Beatty  held  a.s  a  director, 
and  the  duty  which  pertained  to  that  oflice.  In  that  view  it  is  not 
necessary  to  discuss  how  far,  or  rather  uiuler  what  circumstances  a 
shareholder  may  vote  at  a  general  meeting  of  shareholders  on  mat- 
ters on  which  he  is  individually  interested.  I  cannot,  however,  but 
look  upon  it  as  rather  a  bold  and  startling  proposition  that  a  share- 
holder should  be  able  to  otYer  a  property  for  sale  to  the  company 
from  a  bare  majority  of  votes  and  by  such  vote,  against  the  will  of 
all  the  other  shareholders,  compel  the  company  to  l)ecome  the  pur- 
chaser at  his  own  price  and  on  his  own  terms,  against  the  wish  of  all 
the  other  shareholders,  who  may,  as  in  this  case,  Imj  a  minority  of 
289  votes  against  300. 

The  case  was  then  carried  by  appeal  to  the  Judicial  Committee 
of  the  Privy  Council. 

Sir  Richard  Baggallay.  .  .  .  The  question  involved  is  doubtless 
novel  in  its  circumstances,  and  the  decision  important  in  its  conse- 
quences; it  would  be  very  undesirable  even  to  appear  to  relax  the 
rules  relating  to  dealings  between  trustees  and  their  beneficiaries; 
on  the  other  hand,  great  confusion  would  be  introduced  into  the 
affairs  of  joint-stock  com[)anies  if  the  circumstances  of  shareholders, 
voting  in  that  character  at  general  meetings,  were  to  be  examined, 
and  their  votes  practically  nullified,  if  thej'  also  stood  in  some  fidu- 
ciary relation  to  the  company. 

It  is  clear  upon  the  authorities  that  the  contract  entered  into  by 
the  directors  on  the  10th  of  Februarj^  could  not  have  been  enforced 
against  the  company  at  the  instance  of  the  defendant  J.  H.  Beatty, 
but  it  is  equally  clear  that  it  was  within  the  competency  of  the  share- 
holders at  the  meeting  of  the  IGth  to  adopt  or  reject  it.  In  form  and 
in  terms  they  adopted  it  by  a  majority  of  votes,  and  the  vote  of  the 
majority  must  prevail,  unless  the  adoption  was  brought  about  by 
unfair  or  improper  means. 

The  only  unfairness  or  impropriety  which,  consistently  with  the 
admitted  and  established  facts,  could  be  suggested,  arises  out  of  the 
fact  that  the  defendant  J.  H.  Beatty  possessed  a  voting  power  as 
a  shareholder  which  enabled  him,  and  those  who  thought  with  him, 
to  adopt  the  by-law',  and  thereby  either  to  ratify  and  adopt  a  void- 
able contract,  into  which  he,  as  a  director,  and  his  co-directors  had 
entered,  or  to  make  a  similar  contract,  which  latter  seems  to  have 
been  what  was  intended  to  be  done  by  the  resolution  passed  on  the 
7th  of  February. 

It  may  be  quite  right  that,  in  such  a  case,  the  opposing  minority 
should  be  able,  in  a  suit  like  this,  to  challenge  the  transaction,  and  to 
shew  that  it  is  an  improper  one,  and  to  be  freed  from  the  objection 


CHAP.  I.]       O'CONNER  MINING    CO.  V.  COOSA    FURNACE    CO.  791 

that  a  suit  with  such  an  object  can  only  be  maintained  by  the  com- 
pany itself. 

But  the  constitution  of  the  company  enabled  the  defendant  J.  H. 
Beatty  to  acquire  this  voting  power;  there  was  no  limit  upon  the 
number  of  shares  which  a  shareholder  might  hold,  and  for  every 
share  so  held  he  was  entitled  to  a  vote;  the  charter  itself  recognised 
the  defendant  as  a  holder  of  200  shares,  one-third  of  the  aggregate 
number;  he  had  a  perfect  right  to  acquire  further  shares,  and  to 
exercise  his  voting  power  in  such  a  manner  as  to  secure  the  election 
of  directors  whose  views  upon  policy  agreed  with  his  own,  and  to 
support  those  views  at  any  shareholders'  meeting;  the  acquisition  of 
the  United  Empire  was  a  pure  question  of  policy,  as  to  which  it 
might  be  expected  that  there  would  be  differences  of  opinion,  and 
upon  which  the  voice  of  the  majority  ought  to  prevail:  to  reject  the 
votes  of  the  defendant  upon  the  question  of  the  adoption  of  the  by- 
law would  be  to  give  effect  to  the  views  of  the  minority,  and  to  dis- 
regard those  of  the  majority. 

The  judges  of  the  Supreme  Court  appear  to  have  regarded  the 
exercise  by  the  defendant  J.  H.  Beatty  of  his  voting  power  as  of  so 
oppressive  a  character  as  to  invalidate  the  adoption  of  the  by-law; 
their  Lordships  are  unable  to  adopt  this  view;  in  their  opinion  the 
defendant  was  acting  within  his  rights  in  voting  as  he  did,  though 
they  agree  with  the  Chief  Justice  in  the  views  expressed  by  him  in 
the  Court  of  Appeal,  that  the  matter  might  have  been  conducted  in 
a  manner  less  likely  to  give  rise  to  objection. 

Their  Lordships  will  humbly  advise  Her  Majesty  to  allow  the  ap- 
peal; to  discharge  the  order  of  the  Supreme  Court  of  Canada;  and  to 
dismiss  the  appeal  to  that  Court  with  costs;  the  respondent  must 
bear  the  costs  of  the  present  appeal. 

Note.  —  See,  accord,  Bjorngaard  v.  Goodhue  Bank,  49  Minn.  483; 
United  States  Steel  Corporation  v.  Hodge,  64  N.J.  Eq.  807,  813; 
Gamble  v.  Water  Co.,  123  N.Y.  91;  Russell  v.  Patterson  Co.,  232  Pa. 
113.  See  also  Middleton  v.  Arastraville  Mining  Co.,  146  Cal.  219. 
Cf.  Klein  v.  Brewing  Ass'n,  231  111.  594. 


O'CONNER  MINING  CO.  v.  COOSA  FURNACE  CO. 

95  Ala.  614.     1891. 

One  question  presented  was  as  to  the  validity  of  certain  transfers 
of  property  by  the  Coosa  Furnace  Co.  ; 

Walker,  J.  ...  It  thus  plainly  appears  that  the  transactions 
were  between  the  Coosa  Furnace  Company  and  some  of  its  own 
stockholders  and  directors,  and  also  two  other  corporations  having 


792  O'CONNER    MlXIXn    CO.  V.  COOSA    FlUNACK    CO.       ICIIAI'.   I. 

hoards  of  diroctors  cornposcd  of  the  same  perwjnw  wlio  niaimKciJ  and 
controlled  the  lirst  named  company. 

The  directors  of  a  bu.sinoss  coriK)ration  are  it8  agentH.  TIiourIi 
they  may  not  he  trustees  in  the  technical  son.so,  yet  they  exerciw 
functions  of  a  fiiluciary  character.  Their  jKwition  impUes  that  confi- 
dence is  reposed  in  tliem.  The  duties  which  a  director  assumes  to 
the  cor|)oration  and  to  the  stockhoKlers  thereof  disqualifies  him  from 
l)in(linfz;  the  corporation  in  a  transaction  in  which  he  is  adversely 
interested.  He  cannot  at  the  same  time  act  for  him.»M'lf  and  for  his 
principal,  without  the  full  knowled^je  and  frtr  consent  of  the  jirinci- 
pal.  In  Morawetz  on  Private  Corporations,  §  528,  it  is  said:  "A 
person  who  is  agent  for  two  parties  cannot,  in  the  alwwnce  of  express 
authority  from  each,  represent  them  l)oth  in  a  transaction  in  which 
they  have  contrary  interests.  This  rule  is  ha.'^cd  uporj  the  same 
rca.><on  as  the  rule  which  prohihits  an  agent  from  representing  his 
principal,  when  his  personal  interests  are  oppose<i  to  his  duty.  The 
principal  stipulates  for  the  judgment  and  skill  of  his  agent,  ami  the 
latter  has  no  authority  to  act,  when  he  is  not  in  a  position  to  give  the 
principal  the  henefits  of  his  In^st  endeavors.  It  follows,  therefore, 
that  the  directors,  or  other  agents  of  a  corfwration,  have  no  implied 
authority  to  bind  the  company  by  making  a  contract  with  another 
corporation  which  they  also  represent."  If  the  same  persons  as 
directors  of  two  dilTerent  comi)anies  represent  lM)th  companies  in  a 
tran.saction  in  which  their  interests  are  opposed,  such  transaction 
may  he  avoided  by  either  company,  or  at  the  instance  of  a  stock- 
holder in  either  company,  without  regard  to  the  question  of  advan- 
tage or  detriment  to  either  company.  Hoth  the  corporations  are 
armed  with  the  right  to  repudiate  such  a  transaction,  no  matter  how 
fair  and  open  it  may  l)e  shown  to  be.  Memphis  d*  Charleston  li.  Co.  v. 
Woo(h,  SS  Ala.  030,  041. 

But  the  duty  which  di.squalifies  the  directors  from  binding  the 
corporation  by  a  tran.siction  in  which  they  have  an  adverse  interest, 
is  one  owing  to  the  corporation  which  they  represent,  and  to  the 
stockholders  thereof.  A  principal  may  consent  to  he  bound  by  a 
contract  made  for  him  ])V  an  agent  who,  at  the  same  time,  represented 
an  interest  adverse  to  that  of  the  principal.  A  cestui  que  trust  may 
elect  to  confirm  a  transaction  which  he  could  have  repudiated  on 
the  ground  that  the  trustee  had  an  interest  in  the  matter  not  con- 
sistent with  his  trust  relation.  In  like  manner,  dealings  Vx-twecn 
corporations,  represented  by  the  same  persons  as  directors,  may 
be  accepted  as  binding  by  each  corporation  anil  the  stockholders 
thereof.  The  general  rule  is,  that  such  dealings  are  not  absolutely 
void,  l)ut  arc  voidable  at  the  election  of  the  respective  corporations, 
or  of  the  stockholders  thereof.  They  become  binding,  if  acquiesced 
in  by  the  corporations  and  their  stockholders. 


CHAP.  I.]     JANNEY  V.  MINNEAPOLIS   INDUSTRIAL  EXPOSITION.  793 

Note.  —  Where  a  contract  is  made  between  corporations  having 
common  directors,  either  corporation  may  avoid  the  contract,  if  it 
was  not  represented  by  a  quorum,  excluding  the  common  directors. 
See,  in  accord  with  the  doctrine  of  the  principal  case,  San  Diego  v. 
San  Diego  R.R.  Co.,  44  Cal.  106;  Pittsburgh  Rij.  Co.  v.  Dodd,  115  Ky. 
176;  McLeod  v.  Lincoln  Medical  College,  69  Neb.  550,  555;  Pearson 
V.  Concord  R.R.  Corp.,  62  N.H.  537;  Metropolitan  Telephone  Co.  v. 
Domestic  Telegraph  Co.,  44  N.J.  Eq.  568;  Continental  Ins.  Co.  v. 
Neiv  York  &  Harlem  R.R.  Co.,  187  N.Y.  225,  238.  As  to  ratification, 
see  San  Diego  R.R.  Co.  v.  Pacific  Beach  Co.,  112  Cal.  53. 

Cf.  Evansville  Co.  v.  Bajik  of  Commerce,  144  Ind.  34  (note  not  in- 
' valid  where  it  represented  a  just  debt) ;  Bank  v.  Prescott,  60  Kan.  490. 

But  it  may  not  be  avoided  if  it  was  represented  by  a  quorum, 
excluding  the  common  directors.  Booth  v.  Robinson,  55  Md.  419,  441 ; 
Rolling  Co.  v.  Railroad,  34  Ohio,  450.  Whether  this  is  law  in  all 
jurisdictions,  qucere. 

On  the  effect  of  a  director  of  one  corporation  being  a  stockholder 
in  another  corporation  cf.  Transvaal  Lands  Co.  v.  Neiv  Belgium  Co., 
[1914]  2  Ch.  488,  with  Pierce  v.  Old  Dominion  Copper  Co.,  67  N.J. 
Eq.  399. 


E.  Purchases  of  Corporate  Property  or  Obligations. 


JANNEY  V.  MINNEAPOLIS  INDUSTRIAL  EXPOSITION. 

79  Minn.  488.     1900. 

Start,  C.J.  The  defendant  the  Minneapolis  Industrial  Exposition 
is  and  has  been  a  corporation  since  November  5,  1885.  The  manage- 
ment of  its  affairs  was  vested  in  a  board  of  twenty-five  directors. 
The  plaintiffs  Janney  and  Nelson  have  been  such  directors  since  the 
organization  of  the  corporation  to  the  present  time;  the  plaintiff 
Swift  has  been  such  director  since  1890;  and  the  plaintiff  Donaldson 
was  such  director  from  1890  until  the  time  of  his  death,  in  1899. 
Several  of  the  appellants  were  also  directors  of  the  corporation  at  the 
time  of  the  sale  of  its  property  here  in  question.  The  corporation 
became  hopelessly  insolvent,  and  on  June  20,  1895,  duly  made  to 
the  Minneapolis  Trust  Company,  pursuant  to  the  insolvency  laws 
of  the  State,  an  assignment  for  the  benefit  of  its  creditors. 

Such  assignee  was  first,  by  order  of  court,  directed  to  advertise 
for  bids  for  the  property,  or  any  part  or  portion  thereof,  so  assigned 
to  it.  But  after  due  advertisement  and  effort  it  was  unable  to  effect 
any  sale  thereof,  except  as  to  two  certain  lots  of  land  which  it  was 
by  order  of  the  court  directed  to  convey.  As  to  the  main  part  of  the 
property  so  assigned,  it  was  unable  to  and  did  not  receive  any  bids. 


794         JANNEY   V.  MINNEAPOLIS    INDUSTRIAL    EXPOSITION.      [CHAP.  I. 

Subsequently,  by  the  order  of  the  court,  the  assignee  was  authorized 
to  advertise  and  sell  the  remaining  assets  and  property  so  assigned 
to  it  at  public  vendue  to  the  highest  bidder.  Accordingly  the  a.ssignce 
duly  advertised  and  held  such  sale,  but  there  were  no  bidders  for  the 
property  or  any  part  thereof,  except  the  plaintiff  Janney,  who  then 
was,  either  in  his  own  behalf  or  in  behalf  of  himself  and  the  (jther 
plaintiffs  herein,  a  bona  fide  creditor  of  the  corporation  to  an  amount 
exceeding  $54,948.82.  The  claim  of  Janney  as  such  creditor,  as  well 
as  the  entire  claim  of  the  plaintiffs,  amounting  in  the  aggregate  to 
the  further  sum  of  §2.5,905.32,  had  i)een,  prior  to  the  sale,  duly 
proven  in  the  insolvency  proceedings,  and  had  been  duly  allowed. 
The  plaintiff  Janney  at  such  sale,  in  order  to  protect  his  interests 
and  the  interests  of  the  plaintiffs,  did,  in  good  faith,  bid  for  the 
property  at  the  sale  the  sum  of  .S25,100,  which  sum  was  the  highest 
and  the  only  sum  bid  therefor.  The  assignee  duly  reported  the  sale 
to  the  court  for  confirmation  and  approval,  and  after  a  hearing 
thereon  it  was  duly  confirmed  by  the  court,  and  the  assignee  ordered 
to  convey  and  turn  over  to  Janney  the  property  so  sold  to  him, 
which  was  done,  he  paying  the  assignee  in  cash  the  sum  of  .'?25,ltK). 

The  sale  was  fairly  and  lawfully'  conducted,  and  the  amount 
realized  thereat  was  the  highest  sum  which  the  assignee  was  able 
to  obtain  for  the  property.  The  property  so  sold  to  the  plaintiffs 
was,  according  to  the  expert  testimony,  then  worth  the  sum  of 
$100,000.  The  answer  of  the  appellants  shows  that  they  had  notice 
of  the  sale  and  transfer  of  the  property  to  the  plaintiffs,  and  made 
no  objections  thereto,  because,  as  they  alleged,  the  plaintiffs  prom- 
ised that  after  they  acquired  the  property  they  would  organize 
a  new  corporation,  and  transfer  the  property  to  it,  so  as  to  li(iuidate 
the  debts  of  the  defendant  corporation.  There  was,  however,  no 
evidence  in  this  case  tending  to  show  that  any  such  agreement  was 
ever  made  by  any  of  the  plaintiffs;  but  Janney,  shortly  after  he  so 
purchased  the  property,  tendered  and  offered  the  stockholders  of 
the  defendant  corporation,  by  notice  duly  given  to  them,  that,  if 
they  desired  and  would  subscribe  for  stock  in  a  new  corporation  to 
be  formed  for  the  purpose  of  taking  the  property  so  purchased  by 
him  to  an  amount  necessary  to  liquidate  the  indebtedness  against 
the  corporation,  he  would  cause  the  corporation  to  be  organized, 
and  transfer  to  it  the  property  so  purchased  by  him.  Only  an  insig- 
nificant number  of  the  defendant  stockholders  herein  expressed  any 
willingness  to  subscribe  to  the  stock  or  to  avail  themselves  of  the 
proposition,  and  stock  in  the  proposed  corporation  to  the  amount 
of  about  $12,000  and  no  more  was  subscribed. 

It  was  nearly  a  year  after  the  sale  of  the  property  to  the  plaintiffs 
that  the  appellants  first  objected  to  the  sale,  when  they  did  so  in 
their  answer  herein,  and  asked  that  the  plaintiffs  be  charged  with, 
and  be  required  to  account  for,  the  difference  between  the  purchase 


CHAP.  I.]     JANNEY   V.  MINNEAPOLIS   INDUSTRIAL   EXPOSITION.         795 

price  paid  by  the  plaintiffs  for  the  property  and  its  value.  Their 
answer  also  prayed  for  general  relief.  The  trial  court  did  not  find 
that  if  a  resale  of  the  property  was  ordered  it  would  bring  an  in- 
creased price,  or  that  there  was  any  reasonable  probability  that  such 
would  be  the  case,  other  than  may  be  inferred,  if  at  all,  from  the 
value  of  the  property  as  found  by  the  court.  .  .  . 

The  appellants  further  claim  that  the  trial  court  erred  in  its 
conclusions  of  law,  for  the  reason  that  the  court,  upon  the  facts 
found,  ought  to  have  ordered  a  resale  of  the  property  at  an  upward 
bid  above  the  amount  paid  by  the  plaintiffs,  or  applied  pro  tanto 
upon  their  debts  against  the  corporation  the  difference  between  the 
amount  they  paid  for  the  property  and  its  value  as  found  by  the 
court.  This  conclusion  rests  upon  the  assumption  that  in  purchas- 
ing the  property  at  the  assignee's  sale,  pursuant  to  the  order  of  the 
court,  the  plaintiffs  violated  their  duties  as  directors.  If  the  premises 
are  correct,  the  conclusion  would  seem  to  follow  that  the  stock- 
holders are  entitled  to  some  relief  if  not  guilty  of  laches.  But  are 
the  premises  correct?  This  question  must  be  answered  from  a  con- 
sideration of  the  special  facts  of  this  case  with  reference  to  the  gen- 
eral principles  of  law  applicable  to  the  rights,  duties,  and  disabilities 
of  directors  of  a  corporation. 

The  relation  between  a  corporation  and  its  directors  is  that  of 
principal  and  managing  agents.  They  are  not  trustees  in  the  sense 
of  holding  the  legal  title  to  any  of  its  property  for  its  benefit,  or 
that  of  its  stockholders  or  its  creditors.  Still,  the  relation  is  essen- 
tially a  fiduciary  one,  and  upon  sound  principles  of  public  policy 
directors  are  inhibited,  as  a  general  rule,  from  purchasing  for  their 
own  benefit  the  property  of  the  corporation,  very  much  as  a  trustee 
is  disqualified  from  purchasing  for  his  own  advantage  the  property 
of  his  cestui  que  trust.  This  proposition,  upon  principle  and  author- 
ity, is  unquestionably  the  law.  Beach  v.  Miller,  130  111.  162,  17  Am. 
St.  Rep.  291,  298,  notes;  3  Thompson,  Corp.  §  4071 ;  2  Cook,  Stockh. 
§  653.  It  is,  however,  equally  clear  upon  principle  that  where  the 
legal  title  and  control  of  all  of  the  property  of  a  corporation  is  vested 
in  an  assignee  or  receiver,  in  trust  for  the  benefit  of  its  creditors, 
and  the  court  orders  the  property  sold  for  the  purposes  of  the  trust, 
a  director-creditor,  having  interests  to  protect,  may  in  good  faith 
purchase  the  property  at  such  sale,  and  acquire  thereby  the  absolute 
title  thereto.  Especially  is  this  so  where  there  are  other  active  direc- 
tors, and  the  sale  is  made  subject  to  confirmation  by  the  court,  and 
is  approved  by  it.  But  in  all  such  cases  the  director  must  act  in  the 
utmost  good  faith,  for  the  transaction  will  be  jealously  scrutinized. 
1  Morawetz,  Priv.  Corp.  §  527;  3  Thompson,  Corp.  §§  4068,  4074; 
Barber  v.  Bowen,  47  Minn.  118,  49  N.W.  684;  Twin-Lick  Oil  Co.  v. 
Marbury,  91  U.S.  587;  Appeal  of  Lusk,  108  Pa.  St.  152. 

The  facts  of  this  case  bring  it  within  the  exception  to  the  general 


796  SE^-MOUR   V.  SPRING    FOREST    CEMETERY    ASS'n.  [cHAP.  1. 

rule  that  directors  cannot  purchase  the  property  of  the  corporation 
for  their  own  benefit.  The  title,  possession,  and  control  of  the 
property  were  in  the  hands  of  an  officer  of  the  court  (the  assignee), 
and  had  been  for  nearly  a  year  prior  to  the  sale.  The  sale  was  made 
by  direction  of  the  court,  and  subject  to  its  confirmation.  The  plain- 
tiffs had  no  control  over  the  property  or  the  assignee,  who  was  the 
representative  of  the  corporation,  its  creditors,  and  its  stockholders. 
They  had  no  power  to  prevent  or  control  the  sale,  which  was  a 
judicial  one,  brought  about  by  the  court  through  its  officer.  They 
had  material  interests  to  protect  by  bidding  at  the  sale.  Thoy  pur- 
chased in  good  faith,  at  the  best  price  ol)tainable.  The  appellants 
had  notice  of  the  sale,  and  did  not  object  thereto  until  long  after- 
wards. See  Pinkus  v.  Minneapolis  Linen  Mills,  65  Minn.  40,  67 
N.W.  643.  The  sale  was  fairly  conducted,  and  was  confirmed  by 
the  court.  There  were  twenty-one  directors  at  the  time  besides  the 
plaintiffs.  These  facts  justify  the  conclusion  of  the  trial  court  to 
the  effect  that  the  plaintiffs,  in  purchasing  the  property  to  protect 
their  own  interests,  did  not  violate  their  duties  to  the  corporation. 
The  facts  found  by  the  court  justify  its  conclusions  of  law. 

Order  affirmed. 

Note.  —  Nowak  v.  National  Car  Coupler  Co.,  260  111.  260.  A 
director  of  a  solvent  corporation  which  is  about  to  wind  up  its  affairs 
because  its  charter  has  expired  is  not  disaljled  from  purchasing  the 
property  for  himself  or  for  a  new  corporation  which  has  been  organ- 
ized, provided  he  acts  with  the  utmost  fairness,  so  that  the  property 
shall  bring  its  full  value. 


SEYMOUR  V.  SPRING  FOREST  CEMETERY  ASSOCIATION. 

144  N.Y.  333.     1895. 

Finch,  J.  .  .  .  But  the  further  claim  is  made  that,  because  Ilotch- 
kiss  and  Seymour  were  officers  of  the  corporation,  holding  a  fiduciary 
relation  as  trustees  or  directors,  they  could  not  lawfully  buy  the  valid 
and  outstanding  obligations  of  the  company  at  less  than  par  and  en- 
force them  for  the  full  amount  against  the  debtors.  If  that  be  sound 
doctrine,  as  is  stoutly  maintained,  if  directors  cannot  in  any  case 
invest  in  the  bonds  of  their  own  companies  except  at  the  peril  of  a 
constructive  fraud,  if  they  cannot  safely  buy  such  bonds  below  par, 
because  they  deem  them  unduly  depressed,  if  titles  to  corporate  obli- 
gations passing  through  their  hands  become  tainted  by  their  touch,  it 
is  quite  time  that  the  courts  should  give,  what  they  have  not  given, 
a  very  definite  and  distinct  warning.  Some  citations  of  _seeming 
authority  are  pressed  upon  us  and  others  exist.   The  broad  rule  is 


CHAP.  I.]        SEYMOUR    V.  SPRING    FOREST    CEMETERY    ASS'n.  797 

stated  in  Perry  on  Trusts  (§  428),  that  "a  trustee,  executor  or  as- 
signee cannot  buy  up  a  debt  or  incumbrance  to  which  the  trust  estate 
is  hable  for  less  than  is  actually  due  thereon,  and  make  a  profit  to 
himself,"  and  that  is  the  doctrine  invoked  in  this  case  as  applicable 
to  a  director  regarded  as  a  trustee  of  the  corporation.  But  the  state- 
ment, however  correct  in  its  application  to  specific  instances,  must  be 
taken  with  the  limitations  which  belong  to  it.  Its  foundation  is  that 
a  fiduciary  agent,  owing  a  duty  to  his  principal,  cannot  make  a  con- 
tract for  his  own  benefit  which  is  or  may  be  inconsistent  with  that 
duty,  and  the  cases  generally  are  of  two  kinds.  The  trustee  buys  in 
the  property  of  his  principal  at  a  sacrifice  for  his  own  benefit,  when, 
if  he  bought  it  at  all,  it  was  his  duty  to  do  it  for  his  principal,  or  he 
makes  a  contract  in  behalf  of  his  principal  with  himself  directly  or 
indirectly  as  the  other  party  to  the  agreement.  The  first  class  of 
cases  is  illustrated  by  Slade  v.  Van  Vechten,  11  Paige,  26,  where  the 
assignee  bought  in  assigned  property  at  a  sheriff's  sale  and  claimed 
the  personal  benefit  of  his  bargain;  and  the  second  class  by  Munson 
V.  S.  G.  &  C.  R.R.  Co.,  103  N.Y.  58,  in  which  the  directors  con- 
tracting had  a  private  and  personal  interest,  possibly  adverse  to  their 
fiduciary  duty.  Almost,  if  not  quite  all,  of  the  cases  cited  by  the 
learned  counsel  for  the  appellant  belong  to  one  or  the  other  of  these 
two  classes.  But  they  do  not  decide  this  case,  for  Hotchkiss  and 
Seymour  neither  bought  in  any  property  of  the  company  nor  dealt 
with  the  corporation  in  any  respect.  They  made  their  contract,  not 
with  it,  but  with  third  persons  capable  of  protecting  their  own  rights, 
and  bought  nothing  which  the  corporation  owned  or  to  which  it  had  a 
right.  We  must  go  to  still  other  cases,  founded  it  may  be  to  some 
extent  upon  similar  ideas  of  fiduciary  duty,  to  discover  even  an  ap- 
proximate authority.  There  are  cases  of  co-partnership  in  which  the 
general  rules  pertaining  to  that  specific  relation  might  prove  to  be 
broad  enough  to  cover  the  purchase  of  the  debt  owing  by  the  firm 
{Am.  Bk.  Note  Co.  v.  Edson,  56  Barb.  89),  and  other  cases  in  which 
the  duties  flowing  from  a  liquidation  conducted  by  the  trustee,  and  as 
to  which  he  owes  a  specific  trust  duty,  forbid  a  purchase  by  the  trus- 
tee for  his  own  benefit  at  a  discount.  But  in  every  class  of  cases  the 
rule  is  founded  upon  the  unwillingness  of  the  law  to  uphold  contracts 
which  bring  into  collision  the  trust  duty  and  the  personal  interest, 
and  it  is  because  of  that  collision,  and  the  temptations  which  surround 
it,  that  it  declares  the  contract  voidable  at  the  election  of  the  bene- 
ficiary without  investigating  the  good  or  bad  faith  of  the  trustee. 
The  entire  basis  of  the  rule  consists  in  this  collision  between  trust 
duty  and  personal  interest,  and  the  equitable  prohibition  has  no 
application  where  there  is  no  such  possible  inconsistency.  There  is 
no  such  conflict  in  the  ordinary  case  of  the  purchase  by  a  director  in  a 
going  corporation  of  its  outstanding  obligations.  There  is  no  present 
duty  resting  upon  him  to  extinguish  them.  The  time  for  that  has  not 


798  CROWELL    V.  JACKSON.  [CIIAP.  I. 

come,  the  duty  has  not  arisen,  may  never  arise,  the  corporation  is  not 
prepared  to  pay,  docs  not  contemplate  paung,  but  intends  and  ex- 
pects to  await  the  full  maturity  of  the  debt.  Unless  some  special 
fund  has  been  provided,  or  some  special  liquidation  has  been  ordered, 
the  director  owes  no  duty  to  his  company  to  discharge  or  buy  in  the 
outstanding  bonds,  and  may  purchase  for  himself  because  no  incon- 
sistent trust  duty  has  arisen.  Why  should  he  not?  While  the  bonds 
are  running  to  their  maturity,  and  the  corporation  is  not  able  to 
extinguish  them,  is  not  bound  to  do  so,  does  not  even  wish  or  .seek  to 
do  so,  what  does  it  matter  who  h(jkls  the  secmities  or  on  what  terms 
they  pa.ss  from  hand  to  liand?  It  seems  to  me  that  we  are  asked  to 
crowd  the  rule  almost  to  the  verge  of  an  absurdity,  and  to  inflict  a 
vital  injury  upon  business  interests  by  tainting  with  invalidity  the 
holding  by  a  director  of  the  unmatured  obligations  of  the  cor[Kjration 
bought  by  him  in  the  open  market  and  not  put  in  liciuidation  or 
sought  to  be  extinguished.  There  must  at  least  be  some  fact  or  cir- 
cumstance which  charges  the  trustee  with  a  present  duty  to  act  for 
his  company  in  respect  to  the  })onds,  which  duty  is  or  may  be  incon- 
sistent with  a  personal  purcha.se.  No  such  duty  rested  upon  Hotch- 
kiss  and  Seymour,  and  they  had  a  right  to  buy  and  hold  for  their 
own  benefit. 

Indeed,  there  is  a  further  and  equally  conclusive  answer.  If  the 
doctrine  invoked  applied  to  this  case  it  would  make  the  purchase  not 
void  but  voidable  at  the  election  of  the  corporation,  and  that  election 
must  be  made  promptly  and  upon  sufficient  knowledge  of  the  facts. 
The  beneficiary  cannot  wait  and  speculate  upon  the  chances  of  delay, 
but  must  act.  Here  the  purchase  was  made  before  1873,  and  in  18S0 
the  corporation  is  found  recognizing  and  ratifying  the  title  of  the 
vendees  or  their  successors,  making  payments  to  them,  and  providing 
for  future  payments,  and  it  is  only  after  a  delay  of  fifteen  years  that 
an  attempt  to  repudiate  the  purchase  is  made. 


F.  Relation  to  Stockholders. 


CROWELL  V.  JACKSON. 

53  N.J.L.  656.     1891. 

The  action  was  for  deceit  in  the  purchase  of  certain  shares  of  the 
capital  stock  of  the  Holbrook  Printing  Company  by  the  defendant 
from  the  plaintiff.  The  declaration  alleges  that  the  plaintiff  was  a 
shareholder  of  the  Holbrook  Printing  Company,  and  that  the  de- 
fendant was  a  director  and  the  treasurer  of  that  company;  that  the 
company  had  made  a  favorable  sale  of  property  which  enhanced  the 


CHAP.  I.]  CROWELL   V.  JACKSON.  799 

value  of  its  stock;  that  the  sale  was  known  only  to  the  directors  and 
officers  of  the  company;  that  the  plaintiff  had  no  knowledge  of  it  and 
no  knowledge  of  facts  which  put  him  on  inquiry  with  reference 
to  it;  that  the  defendant  knew  of  it,  and  knew  that  it  enhanced  the 
value  of  the  stock,  and  that  the  plaintiff  was  ignorant  of  it;  that, 
possessing  this  knowledge,  he  bought  the  plaintiff's  shares  of  stock 
at  a  price  for  which  the  plaintiff,  in  his  ignorance  of  the  advantageous 
sale  by  the  corporation,  was  willing  to  sell  them,  which  was  much 
below  the  real  value  of  the  stock  purchased. 

The  opinion  of  the  court  was  delivered  by 

The  Chancellor.  We  are  of  opinion  that,  in  contemplation  of 
law,  there  can  be  no  fraud  without  moral  delinquency;  in  other 
words,  that  there  is  no  actual  fraud  which  is  not  also  moral  fraud.  In 
purchase  or  sale,  if  there  be  no  designed  misrepresentation  by  words 
or  deeds  and  no  active  intentional  concealment,  and  no  intentional 
silence  where  there  is  a  duty  to  speak,  an  action  for  deceit  will  not 
lie.  A  director,  or  the  treasurer,  of  a  corporation,  is  not,  because  of 
his  office,  in  duty  bound  to  disclose  to  an  individual  stockholder, 
before  purchasing  his  stock,  that  which  he  may  know  as  to  the  real 
condition  of  the  corporation  affecting  the  value  of  that  stock.  He  is, 
to  some  extent,  trustee  for  the  stockholders,  as  a  body,  in  respect 
to  the  property  and  business  of  the  corporation,  but  does  not  sustain 
that  relation  to  individual  stockholders  with  respect  to  their  several 
holdings  of  stock  over  which  he  has  no  control. 

Note.  —  In  Hooker  v.  Midland  Steel  Co.,  215  111.  444,  the  director 
opened  negotiations.  The  court  said  (p.  450) :  "  It  is  contended  that 
Beatty,  being  the  president  and  director  of  the  Midland  Steel 
Company,  was  a  trustee  for  the  complainant  as  a  stockholder,  and 
was  therefore  in  a  fiduciary  and  confidential  relation  requiring  him 
to  disclose  all  such  facts  within  his  knowledge,  and  that  he  could  not 
retain  a  benefit  acquired  by  a  breach  of  that  duty  or  use  knowledge 
in  his  possession  to  obtain  a  bargain  from  the  complainant.  The 
management  of  the  business  and  property  of  a  corporation  is  en- 
trusted to  its  officers,  and  they  are  empowered  to  act  for  the  whole 
body  of  stockholders.  They  therefore  occupy  the  position  of  trustees 
for  the  stockholders  as  a  body  in  respect  to  such  business  and  prop- 
erty, and  cannot  have  or  acquire  any  personal  or  pecuniary  interest 
in  conflict  with  their  duty  as  such  trustees.  A  director,  however, 
does  not  sustain  that  relation  to  an  individual  stockholder  with 
respect  to  his  stock,  over  which  he  has  no  control  whatever,  but  he 
may  deal  with  an  individual  stockholder  and  purchase  his  stock 
practically  on  the  same  terms  as  a  stranger.  In  the  absence  of  actual 
fraud  such  a  purchase  will  not  be  set  aside  for  a  mere  failure  to  dis- 
close any  information  the  director  may  have  affecting  the  value  of 
the  stock." 


800  STRONG    V.  REPIDE.  [cHAP.   I. 

Other  cases  in  which  a  director,  purchasing  stock  from  a  stock- 
holder, was  held  not  to  be  under  a  fitluciury's  duty  to  disclose  are 
Tippecanoe  County  v.  Reynolds,  44  Intl.  509;  Bawden  v.  Taylor ^ 
254  111.  464;  Walsh  v.  Goulden,  130  Mich.  531 ;  Carpenter  v.  Danforth, 
52  Barb.  (N.Y.)  581;  Deaderick  v.  Wilson,  8  Baxter  (Tenn.)  108; 
Haarstick  v.  Fox,  9  Utah,  110;  O'Neile  v.  Ternes,  32  Wash.  528; 
Perdval  v.  Wright,  [1902]  2  Ch.  421. 


STRONG  V.  REPIDE. 

213  U.S.  419.     1909. 

Action  brought  by  the  plaintiff,  as  the  owner  of  eight  hundred 
shares  of  the  capital  stock  of  the  Philippine  Sugar  Estates  Develop- 
ment Company,  Limited,  to  recover  such  shares  from  the  defendant. 
The  defendant  owned  30,400  of  the  42,300  shares  issued  by  the  com- 
pany, was  one  of  the  five  directors  of  the  company,  and  had  been 
elected  by  the  board  of  directors  as  the  agent  and  administrator 
general  of  such  company  "with  exclusive  intervention  in  the  man- 
agement" of  its  general  business. 

Mr.  Justice  Peckiiam.  In  1902  it  was  thought  important  for  the 
Government  of  the  United  States  to  secure  title,  if  reasonably  pos- 
sible, to  what  were  called  the  friar  lands  in  the  Philippine  Islands. 
To  that  end  various  inquiries  were  made  on  tiic  part  of  the  Govern- 
ment from  time  to  time  as  to  the  possibility'  of  obtaining  title  to  all 
those  lands  and  what  would  be  the  probable  expense.  The  lands 
were  not  owned  by  the  same  people,  but  were  divided  among  differ- 
ent and  separate  owners.  The  Philippine  Sugar  Estates  Devel- 
opment Company,  Limited,  owned  of  these  lands  what  are  more 
particularly  described  as  the  Dominican  lands,  and  they  were 
regarded  as  nearly  one-half  the  value  of  all  the  friar  lands. 

On  July  5,  1903,  the  governor  of  the  Philippine  Islands,  on  behalf 
of  the  Philippine  Government,  made  an  offer  of  purchase  for  the 
total  sum  of  $6,043,219.47  in  gold  for  all  the  friar  lands,  though 
owned  by  different  owners.  This  offer,  so  far  as  concerned  that 
portion  of  the  lands  owned  by  defendant's  company,  was  rejected  by 
defendant  in  his  capacity  as  maj£)rit3^  shareholder,  without  any  con- 
sultation with  the  other  shareholders.  The  representatives  of  all 
the  different  owners  of  all  the  lands,  including  defendant's  company, 
in  answer  to  the  above  offer,  then  fixed  their  selling  price  at  $13,700,- 
000  for  all  of  such  lands.  During  the  negotiations  consequent  upon 
these  different  offers,  which  lasted  for  some  time  after  the  first  offer 
was  made,  an  offer  was  finally,  and  towards  the  end  of  October,  1903, 
made  by  the  governor  of  $7,535,000.  All  the  owners  of  all  these  friar 
lands,  with  the  exception  of  the  defendant  who  represented  his  com- 


CHAP.  I.]  STRONG    V.  REPIDE.  801 

pany,  were  willing  and  anxious  to  accept  this  offer  and  to  convey 
the  lands  to  the  Government  at  that  price.  He  alone  held  out  for  a 
better  offer  while  all  the  other  owners  were  endeavoring  to  persuade 
him  to  accept  the  offer  of  the  Government.  The  defendant  continued 
his  refusal  to  accept  until  the  other  owners  consented  to  pay  to  his 
company  $335,000  of  the  purchase  price  for  their  land  and  until  the 
Government  consented  that  a  thousand  hectares  should  be  excluded 
from  the  sale  to  it  of  the  land  of  defendant's  company.  This  being 
agreed  to  the  contract  for  the  sale  was  finally  signed  by  the  defend- 
ant as  attorney  in  fact  for  his  company,  December  21,  1903.  The 
defendant,  of  course,  as  the  negotiations  progressed  knew  that  the 
decision  of  the  question  lay  with  him,  and  that  if  he  should  decide 
to  accept  the  last  offer  of  the  Government  his  decision  would  be  the 
decision  of  his  company,  as  he  owned  three-fourths  of  its  shares, 
and  the  negotiations  would  then  go  through  as  all  the  owners  of  the 
balance  of  the  land  desired  it.  If  the  sale  should  not  be  consum- 
mated and  things  should  remain  as  they  were,  the  defendant  also 
knew  that  the  value  of  the  lands  and  of  the  shares  in  the  company 
would  be  almost  nothing.  He  himself  says,  in  speaking  of  these 
lands  owned  by  his  company,  that  had  the  Government  "given  the 
haciendas  the  protection  w^hich  they  ought  to  have  received  they 
would  have  been  worth  $6,000,000  gold;  but,  considering  the  abnor- 
mal condition  in  which  they  were  on  account  of  the  failure  of  the 
Government  to  protect  these  haciendas,  it  is  impossible  to  fix  any 
value;  they  were  worth  nothing;  they  were  a  charge."  Also,  the  com- 
pany had  paid  no  dividends,  and  only  lived  on  its  credit,  and  could 
not  even  pay  taxes.  The  company  had  no  other  property  of  any  sub- 
stantial value  than  these  lands.   They  were  its  one  valuable  asset. 

While  this  state  of  things  existed,  and  before  the  final  ^er  had 
been  made  by  the  governor,  the  defendant,  although  still  holding 
out  for  a  higher  price  for  the  lands,  took  steps,  about  the  middle  or 
latter  part  of  September,  1903,  to  purchase  the  800  shares  of  stock 
in  his  company  owned  by  Mrs.  Strong,  which  he  knew  were  in  the 
possession  of  F.  Stuart  Jones,  as  her  agent.  The  defendant,  having 
decided  to  obtain  these  shares,  instead  of  seeing  Jones,  who  had  an 
office  next  door,  employed  one  Kaujffman,  a  connection  of  his  by 
marriage,  and  Kauffman  employed  a  Mr.  Sloan,  a  broker,  who  had 
an  office  some  distance  away,  to  purchase  the  stock  for  him,  and  told 
Sloan  that  the  stock  was  for  a  member  of  his  wife's  family.  Sloan 
communicated  with  the  husband  of  Mrs.  Strong  and  asked  if  she 
desired  to  sell  her  stock.  The  husband  referred  him  to  Mr.  Jones  for 
consultation,  who  had  the  stock  in  his  possession.  Sloan  did  not 
know  who  wanted  to  buy  the  shares,  nor  did  Jones  when  he  was 
spoken  to.  Jones  would  not  have  sold  at  the  price  he  did  had  he 
known  it  was  the  defendant  who  was  purchasing,  because,  as  he  said, 
it  would  show  increased  value,  as  the  defendant  would  not  be  likely 


802  STRONG    V.  IlEPIDE.  [cHAP.  I. 

to  purchase  more  stock  unless  the  price  was  going  up.  As  the  articles 
of  incorporation,  by  suhtlivision  twenty,  requireil  a  resolution  of  the 
general  meeting  of  stockholders  for  the  purpose  of  selling  more  than 
one  hacienda,  and  as  no  such  general  meeting  had  Ix-en  culled  at 
the  time  of  the  sale  of  the  stock,  Mr.  Jones  might  well  have  supposed 
there  was  no  immediate  prospect  of  a  sale  of  the  lands  Ix'ing  made, 
while  at  the  same  time  defendant  had  knowledge  of  the  probahilities 
thereof,  which  he  had  acquired  by  his  conduct  of  the  negotiations 
for  their  sale,  as  agent  of  all  the  shareholders,  and  while  acting  spe- 
cially for  them  and  himself. 

The  result  of  the  negotiations  was  that  Jones,  on  (^r  about  October 
10,  1903,  assuming  that  he  had  the  power,  and  without  consulting 
Mrs.  Strong,  sold  the  800  shares  of  stock  for  SlO.tHK),  Mexican 
currency,  delivering  the  stock  to  KaulTman  in  Sloan's  office,  who 
paid  for  it  with  the  check  of  Hueda  Ilrrmanos  for  .SIS, (MM),  the  sur- 
plus S2,000  being  arranged  for,  and  KaufTman  being  paid  $1,800  by 
defendant  for  his  services.  The  tlefcndant  thus  obtained  the  800 
shares  for  about  one-tenth  of  the  amount  they  became  worth  by  the 
sale  of  the  lands  between  two  and  three  months  thereafter.  In  all 
the  negotiations  in  regard  to  the  purchase  of  the  stock  from  Mrs. 
Strong,  through  her  agent  Jones,  not  one  word  of  the  facts  affecting 
the  value  of  this  stock  was  made  known  to  plaintiff's  agent  by  defend- 
ant but,  on  the  contrary,  perfect  silence  was  kept.  The  real  state  of 
the  negotiations  with  the  Government  was  not  mentioned,  nor  was 
the  fact  stated  that  it  rested  chiefly  with  the  defendant  to  complete 
the  sale.  The  probable  value  of  the  shares  in  the  very  near  future 
was  thus  unknown  to  any  one  but  defendant,  while  the  ag<'nt  of  the 
plaintiff  had  no  knowledge  or  suspicion  that  defendant  was  the  one 
seeking  te  purchase  the  shares.  The  agent  sold  because,  as  he  testi- 
fied, he  wanted  to  invest  the  money  in  some  kind  of  property  that 
would  pay  dividends,  and  he  was  expecting  nothing  from  this  com- 
pany, as  negotiations  for  the  .sale  of  the  lands  had  gone  on  so  long, 
and  there  appeared  no  prospect  of  any  sale  being  made,  at  any  rate 
not  for  a  very  long  time. 

It  is  undeniable  that  during  all  this  time  the  subject  of  the  sale  of 
the  friar  lands  was  frequently  mooted  and  its  probainlities  publicly 
discussed  in  a  general  way.  Such  discussion  was  founded  upon  rumor 
and  gossip  as  to  the  condition  of  the  negotiations.  The  public  press 
referred  to  it  not  infrequently,  but  the  actual  state  of  the  negotia- 
tions, the  actual  probabilities  of  the  sale  being  consummated,  and 
the  particular  position  of  power  and  influence  which  the  defendant - 
occupied  in  such  negotiations,  prior  to  the  time  of  the  purchase  of 
plaintiff's  stock,  were  not  accurately  known  by  plaintiff's  agent  or  by 
any  one  else  outside  those  interested  in  the  matter  as  negotiators. 

The  question  in  this  case,  therefore,  is  whether,  under  the  circum- 
stances above  set  forth,  it  was  the  duty  of  the  defendant,  acting  in 


CHAP.  I.]  STRONG   V.  REPIDE.  803 

good  faith,  to  disclose  to  the  agent  of  the  plaintiff  the  facts  bearing 
upon  or  which  might  affect  the  value  of  the  stock. 

If  it  were  conceded,  for  the  purpose  of  the  argument,  that  the 
ordinary  relations  between  directors  and  shareholders  in  a  business 
corporation  are  not  of  such  a  fiduciary  nature  as  to  make  it  the  duty 
of  a  director  to  disclose  to  a  shareholder  the  general  knowledge 
which  he  may  possess  regarding  the  value  of  the  shares  of  the  com- 
pany before  he  purchases  any  from  a  shareholder,  yet  there  are  cases 
where,  by  reason  of  the  special  facts,  such  duty  exists.  The  supreme 
courts  of  Kansas  and  of  Georgia  have  held  the  relationship  existed 
in  the  cases  before  those  courts  because  of  the  special  facts  which 
took  them  out  of  the  general  rule,  and  that  under  those  facts  the 
director  could  not  purchase  from  the  shareholder  his  shares  without 
informing  him  of  the  facts  which  affected  their  value.  Stewart  v, 
Harris,  69  Kansas,  498;  s.c,  77  Pac.  Rep.  277;  Oliver  v.  Oliver,  118 
Georgia,  362;  s.c,  45  S.E.  Rep.  232.  The  case  before  us  is  of  the 
same  general  character.  On  the  other  hand,  there  is  the  case  of 
Board  of  Commissioners  v.  Reynolds,  44  Indiana,  509-515,  where  it 
was  held  (after  referring  to  cases)  that  no  relationship  of  a  fiduciary 
nature  exists  between  a  director  and  a  shareholder  in  a  business 
corporation.  Other  cases  are  cited  to  that  effect  by  counsel  for 
defendant  in  error.  These  cases  involved  only  the  bare  relationship 
between  director  and  shareholder.  It  is  here  sought  to  make  defend- 
ant responsible  for  his  actions,  not  alone  and  simply  in  his  character 
as  a  director,  but  because,  in  consideration  of  all  the  existing  cir- 
cumstances above  detailed,  it  became  the  duty  of  the  defendant, 
acting  in  good  faith,  to  state  the  facts  before  making  the  purchase. 
That  the  defendant  was  a  director  of  the  corporation  is  but  one  of 
the  facts  upon  which  the  liability  is  asserted,  the  existence  of  all  the 
others  in  addition  making  such  a  combination  as  rendered  it  the 
plain  duty  of  the  defendant  to  speak.  He  was  not  only  a  director, 
but  he  owned  three-fourths  of  the  shares  of  its  stock,  and  was,  at  the 
time  of  the  purchase  of  the  stock,  administrator  general  of  the 
company,  with  large  powers,  and  engaged  in  the  negotiations  which 
finally  led  to  the  sale  of  the  company's  lands  (together  with  all  the 
other  friar  lands)  to  the  Government  at  a  price  which  very,  greatly 
enhanced  the  value  of  the  stock.  He  was  the  chief  negotiator  for 
the  sale  of  all  the  lands,  and  was  acting  substantially  as  the  agent 
of  the  shareholders  of  his  company  by  reason  of  his  ownership  of  the 
shares  of  stock  in  the  corporation  and  by  the  acquiescence  of  all 
the  other  shareholders,  and  the  negotiations  were  for  the  sale  of  the 
whole  of  the  property  of  the  company.  By  reason  of  such  ownership 
and  agency,  and  his  participation  as  such  owner  and  agent  in  the 
negotiations  then  going  on,  no  one  knew  as  well  as  he  the  exact 
condition  of  such  negotiations.  No  one  knew  as  well  as  he  the  prob- 
ability of  the  sale  of  the  lands  to  the  Government.  No  one  knew  as 


804  STRONG    t'.  REPIDE.  [cUAP.  I. 

well  as  he  the  probable  price  that  might  be  obtained  on  such  sale. 
The  lands  were  the  only  valuable  asset  owned  by  the  company. 
Under  these  circumstances  and  before  the  negotiations  for  the  sale 
were  completed  tlie  defendant  employs  an  agent  to  purchase  the 
stock,  and  conceals  from  the  phiintitY's  agent  his  own  identity  and 
his  knowledge  of  the  state  of  the  negotiations  and  their  pnibable 
result,  with  which  he  was  familiar  as  the  agent  of  the  shareholders 
and  much  of  which  knowledge  he  obtained  while  acting  as  such 
agent  and  by  reason  thereof.  The  inference  is  inevitable  that  at  this 
time  he  had  concluded  to  press  the  negotiations  for  a  sale  of  the 
lands  to  a  successful  conclusion,  else  why  would  he  desire  to  purciiase 
more  shares  which,  if  no  sale  went  through,  were,  in  his  opinion, 
worthless,  because  of  tiie  failure  of  the  (lovernment  to  properly 
protect  the  lands  in  the  hands  of  their  then  owners?  The  agent  of 
the  plaintiff  was  ignorant  in  regard  to  the  state  of  the  negotiations 
for  the  sale  of  the  land,  which  negotiations  and  their  probai)le  result 
were  a  most  material  fact  afl'ecting  the  value  of  the  shares  of  stock 
of  the  company,  ami  he  would  not  have  sold  them  at  the  price  he 
did  had  he  known  the  actual  state  of  the  negotiations  as  to  the 
lands  and  that  it  was  the  defendant  who  was  seeking  to  purchase 
the  stock.  Concealing  iiis  identity  when  procuring  the  purchase  of 
the  stock,  by  his  agent,  was  in  itself  strong  evidence  of  frauil  on  the 
part  of  the  defendant.  Why  did  he  not  ask  Jones,  who  occupied  an 
adjoining  office,  if  he  would  sell?  But  by  concealing  his  identity  he 
could  by  such  means  the  more  easily  avoid  any  questions  relative 
to  the  negotiations  for  the  sale  of  the  lands  and  their  probable  result, 
and  coukl  also  avoid  any  actual  misreiM-esentations  on  that  subject, 
which  he  evidently  thought  were  necessary  in  his  case  to  constitute 
a  fraud.  He  kept  up  the  concealment  as  long  as  he  could,  by  giving 
the  check  of  a  third  person  for  the  purchase  money.  Evidence  that 
he  did  so  was  objectetl  to  on  the  ground  that  it  could  not  possibly 
even  tend  to  prove  that  the  prior  con.scnt  to  sell  had  been  procured 
by  the  subsequent  check  given  in  payment.  That  was  not  its  pur- 
pose. Of  course,  the  giving  of  the  check  could  not  have  induced 
the  prior  consent,  but  it  was  proper  evidence  as  tending  to  show  that 
the  concealment  of  identity  was  not  a  mere  inadvertent  omission, 
an  omission  without  any  fraudulent  or  deceitful  intent,  but  was  a 
studied  and  intentional  omission  to  be  characterized  as  part  of  the 
deceitful  machinations  to  obtain  the  purchase  without  giving  any 
information  whatever  as  to  the  state  and  prolwble  result  of  the 
negotiations,  to  the  vendor  of  the  stock,  and  to  in  that  way  obtain 
the  same  at  a  lower  price.  After  the  purchase  of  the  stock  he  contin- 
ued his  negotiations  for  the  sale  of  the  lands,  and  finally,  he  says, 
as  administrator  general  of  the  company,  under  the  special  authority 
of  the  shareholders,  and  as  attorney  in  fact  he  entered  into  the  con- 
tract of  sale  December  21,  1903.  The  whole  transaction  gives  con- 


CHAP.  I.]  SMITH    V.  HURD.  805 

elusive  evidence  of  the  overwhelming  influence  defendant  had  in 
the  course  of  the  negotiations  as  owner  of  a  majority  of  the  stock 
and  as  agent  for  the  other  owners,  and  it  is  clear  that  the  final  con- 
summation was  in  his  hands  at  all  times.  If  under  all  these  facts  he 
purchased  the  stock  from  the  plaintiff,  the  law  would  indeed  be 
impotent  if  the  sale  could  not  be  set  aside  or  the  defendant  cast  in 
damages  for  his  fraud. 

The  Supreme  Court  of  the  islands,  in  holding  that  there  was  no 
fraud  in  the  purchase,  said  that  the  responsibility  of  the  directors 
of  a  corporation  to  the  individual  stockholders  did  not  extend 
beyond  the  corporate  property  actually  under  the  control  of  the 
directors ;  that  they  did  not  owe  any  duty  to  the  members  in  respect 
to  their  individual  stock,  which  would  prevent  them  from  purchasing 
the  same  in  the  usual  manner.  While  this  may  in  general  be  true, 
we  think  it  is  not  an  accurate  statement  of  the  case,  regard  being 
had  to  the  facts  above  mentioned. 

It  is  said  that  by  the  code  of  commerce  of  the  Philippine  Islands 
the  directors  are  declared  to  be  mandatories  of  the  society,  and  that 
by  article  1459  of  the  Spanish  Civil  Code  they  are  prohibited  from 
acquiring  by  purchase,  even  at  public  or  judicial  auction,  the  prop- 
erty the  administration  or  sale  of  which  may  have  been  entrusted 
to  them,  and  that  this  is  the  extent  of  the  prohibition.  This  provi- 
sion has  no  reference  to  the  purchase  for  himself,  under  such  facts 
as  existed  here,  by  an  officer  of  a  corporation,  of  stock  in  the  corpora- 
tion owned  by  another.  The  case  before  us  seems  a  plain  one  for 
holding  that,  under  the  circumstances  detailed,  there  was  a  legal 
obligation  on  the  part  of  the  defendant  to  make  these  disclosures. 

Note.  —  Other  cases  in  which  a  director,  purchasing  stock  from  a 
stockholder,  was  held  to  be  under  a  fiduciary's  duty  to  disclose  are 
Oliver  v.  Oliver,  118  Ga.  362;  Stewart  v.  Harris,  69  Kan.  498;  Com- 
monwealth Trust  Co.  V.  Seltzer,  227  Pa.  410  (but  note  the  remarks  of 
the  court  on  p.  418);  Fisher  v.  Budlong,  10  R.I.  525. 

Von  An  v.  Magenheimer,  126  N.Y.  App.  Div.  257  (aff'd,  196  N.Y. 
510).  Directors  may  not  abuse  their  power  by  actually  or  appar- 
ently depressing  the  value  of  stock  for  the  purpose  of  acquiring  it 
from  a  stockholder  at  an  undervaluation. 


SMITH  V.  HURD. 

12  Met.  (Mass.)  371.     1847. 

This  was  a  special  action  on  the  case,  by  a  stockholder  of  the 
Phcenix  Bank  against  the  directors.  There  were  two  counts;  one 
founded  in  non-feasance  of  official  duty,  the  other  in  misfeasance. 


806  SMITH    V.  HURD.  [cHAP.   I. 

The  first  count  alleged  (inkr  alia)  that  it  wfus  the  duty  of  the  direc- 
tors to  direct  and  sui)erintend  the  proceedings  of  the  officers,  and  to 
exercise  reasonable  vigilance  in  seeing  that  the  pro{x;rty  of  the  bank 
was  not  lost,  wasted,  or  misused;  but  that  the  directors  disregarding 
their  duty,  and  contriving  together  to  injure  ami  deceive  the  plaintilT 
therein,  neglected  to  give  reasonal)le  |)ersonal  attention  to  the  busi- 
ness of  the  bank;  and  negligently  |X'rniitteil  the  whole  business  to 
1)0  managed  by  the  president,  Wyman,  who  loaned  its  monies  on 
insufficient  se(;urities,  used  certain  sums  himself,  and  made  loans  to 
individual  directors  exceeding  the  limits  of  the  law;  whereby  the 
bank  capital  became  wholly  lost,  and  plaintiff  was  made  liable, 
under  the  law,  for  his  proportion  of  the  capital  lost  by  the  ofhcial 
mismanagement  of  the  directors,  and  further  liable  to  pay  large 
sums  for  the  redemption  of  the  bills  of  the  bank. 

The  second  count  alleged  {inter  alia)  that  the  directors,  disregard- 
ing their  duties,  and  contriving  together  to  injure  and  deceive  the 
plaintiff  therein,  concurred  with  each  other  that  the  whole  business 
should  be  managed  i>y  the  president.  Wyman,  as  he  should  see  fit; 
and  that  defenilants  themselves  declannl  dividends  when  there  were 
no  profits,  and  caused  false  returns  to  be  made  to  the  state  authori- 
ties, by  which  means  plaintiff  was  misled  and  intluced  to  rely  on  the 
security  of  iiis  investment.  And.  generally,  tlie  second  count  charged 
as  acts  of  the  defendants  (done  through  Wyman)  the  matters  which, 
in  the  first  count,  were  charged  as  negligences  and  permissions,  and 
deduced  therefrom  in  like  manner  the  failure  of  the  bank,  and  the 
special  damage  to  the  plaintiff.  The  count  concluded  with  an  aver- 
ment that  dcfentlants,  by  "misconducting  the  i)usine.ss  of  said  bank, 
as  aforesaid,  so  wilfully,  deceitfully  and  fraudulently  mismanaged 
the  business  and  property  of  the  said  bank,  that  the  whole  capital 
thereof  was  utterly  lost  and  wasted." 

Defendants  denmrred  to  the  declaration. 

Shaw,  C.J.  This  is  certainly  a  case  of  first  impression.  We  are 
not  aware  that  any  similar  action  has  Ix^en  sustained  in  England,  or 
in  any  of  the  courts  of  this  country.  It  is  founded  on  no  statute.  It 
is  an  action  on  the  case,  at  common  law,  brought  i)y  an  individual 
.holder  of  shares  in  an  incorjiorated  bank,  against  the  directors,  not 
including  the  president,  setting  forth  various  acts  of  negligence  and 
malfeasance,  through  a  series  of  years,  in  con.sequence  of  which,  as 
the  declaration  alleges,  the  whole  capital  of  the  bank  was  wasted  and 
lost,  and  the  shares  of  the  plaintiff  became  of  no  value.  The  circum- 
stance that  no  such  action  has  lieen  maintained,  would  certainly  be 
no  decisive  objection,  if  it  could  be  shown  to  be  maintainable  on 
principle.  But  the  fact,  that  similar  grievances  have  existed  to  a 
great  extent,  and  in  numberless  instances,  where  such  an  action 
would  have  presented  an  obvious  and  effective  remedy,  affords 
strong  proof,  that  in  the  \'iew  of  all  such  suffering  parties,  and  their 


CHAP.  I.]  SMITH   V.  HURD.  807 

legal  advisers  and  guides,  there  was  no  principle  on  which  such  an 
action  can  be  maintained. 

If  an  action  can  be  brought  by  one  stockholder,  it  may  be  brought 
by  the  holder  of  a  single  share;  so  that  for  one  and  the  same  default  of 
these  directors,  thirty-five  hundred  actions  might  be  brought.  If  it 
may  be  sustained  by  proof  of  an  act,  or  series  of  acts,  of  carelessness, 
neglect,  and  breach  of  duty,  in  managing  the  affairs  of  the  bank,  by 
which  the  whole  value  of  the  stock  is  destroyed,  it  may,  on  the  same 
principle,  be  maintained  on  any  act  or  instance  of  such  negligence, 
by  which  the  shares  are  diminished  in  value  fifty,  ten,  five,  or  one 
per  cent.  Still,  notwithstanding  these  consequences,  if  the  plaintiff 
has  a  good  right  of  action,  upon  recognized  and  sound  legal  princi- 
ples, his  action  ought  to  be  sustained. 

But  the  court  are  of  opinion  that  the  action  cannot  be  maintained; 
and  that  on  several  grounds,  a  few  of  the  more  prominent  of  which 
may  be  alluded  to. 

1.  There  is  no  legal  privity,  relation,  or  immediate  connexion,  be- 
tween the  holders  of  shares  in  a  bank,  in  their  individual  capacity,  on 
the  one  side,  and  the  directors  of  the  bank  on  the  other.  The  directors 
are  not  the  bailees,  the  factors,  agents  or  trustees  of  such  individual 
stockholders.  The  bank  is  a  corporation  and  body  politic,  having 
a  separate  existence  as  a  distinct  person  in  law,  in  whom  the  whole 
stock  and  property  of  the  bank  are  vested,  and  to  whom  all  agents, 
debtors,  officers  and  servants  are  responsible  for  all  contracts,  express 
or  implied,  made  in  reference  to  such  capital,  and  for  all  torts  and 
injuries  diminishing  or  impairing  it.  The  very  purpose  of  incorpora- 
tion is,  to  create  such  legal  and  ideal  person  in  law,  distinct  from  all 
the  persons  composing  it,  in  order  to  avoid  the  extreme  difficulty,  and 
perhaps  it  is  not  too  much  to  say  the  utter  impracticability,  of  such  a 
number  of  persons  acting  together  in  their  individual  capacities.  The 
practical  difficulty  would  be  nearly  as  great,  whether  it  were  held  that 
all  must  join  in  an  action  to  recover  damage  for  an  injury  to  the  com- 
mon property,  or  that  each  might  sue  separately. 

The  stockholders  do,  indeed,  ordinarily  elect  the  directors;  but  it  is 
as  parts  and  members  of  the  corporation,  in  their  corporate  capacity, 
in  modes  pointed  out  by  the  charter  and  by-laws,  so  that  the  directors 
are  the  appointees  of  the  corporation,  not  of  the  individuals.  Indeed, 
I  believe  there  is  a  provision  in  the  bank  charters  —  there  certainly 
was  formerly  —  which  is  equally  to  the  present  purpose;  namely, 
that  the  Commonwealth  shall  be  at  liberty  to  add  a  certain  amount 
to  the  capital  of  various  banks,  and  appoint  a  proportional  number 
of  directors.  Such  directors,  so  appointed,  pursuant  to  the  charter 
regulating  the  legal  organization  of  the  body,  would  stand  in  all 
respects  on  the  footing  of  directors  chosen  by  the  stockholders.  If 
these  were  liable  to  the  action  of  individual  stockholders,  those 
would  be,  in  like  manner. 


808  SMITH    V.  HURD.  [CHAP.  I. 

2.  The  individual  members  of  the  corporation,  whether  they  should 
all  join,  or  each  act  severally,  have  no  right  or  power  to  intermeddle 
with  the  property  or  concerns  of  the  bank,  or  call  any  officer,  agent  or 
servant  to  account,  or  discharge  them  from  any  liability.  Should  all 
the  stockholders  join  in  a  power  of  attorney  to  any  one,  he  could  not 
take  possession  of  any  real  or  personal  estate,  any  security  or  chose  in 
action;  could  not  collect  a  debt,  or  discharge  a  claim,  or  release  dam- 
age arising  from  any  default;  simply  because  they  are  not  the  legal 
owners  of  the  property,  and  damage  done  to  such  pro[)erty  is  not  an 
injury  to  them.  Their  rights  and  their  powers  are  limited  antl  well 
defined.  They  are  members  of  an  organizetl  i)ody,  and  exercise  such 
powers  as  the  organization  of  the  institution  gives  them.  Stockhold- 
ers in  banks  have  a  separate  right  to  dividends,  when  declared,  and 
to  a  distributive  share  of  the  cajiital  stock,  if  any  remains  when  the 
charter  of  the  bank  is  at  an  end,  and  its  deists  paid. 

3.  But  another  important  consideration  is,  that  the  injury  done 
to  the  capital  stock  by  wasting,  impairing,  and  diminishing  its  value, 
is  not,  in  the  first  instance,  nor  necessarily,  a  damage  to  the  stock- 
holders. All  sums  which  could,  in  any  form,  be  recovered  on  that 
ground,  would  be  assets  of  the  corporation,  and  when  collected  and 
received  by  directors,  receivers,  or  any  other  persons  entitled  to 
receive  the  same,  they  would  be  held  in  trust,  first  to  redeem  the 
bills  and  pay  the  debts  of  the  bank;  and  it  would  be  only  after  these 
debts  were  paid,  and  in  case  any  surplus  should  remain,  that  the 
stockholders  would  be  entitled  to  receive  any  thing.  It  is,  therefore, 
an  indirect,  contingent  and  subordinate  interest,  which  each  stock- 
holder has,  in  damages  so  to  be  recovered  against  directors.  If.  upon 
such  indirect,  contingent,  and  remote  interest,  individual  stock- 
holders could  recover  for  the  defaults  of  directors,  and  especially, 
as  is  alleged  in  this  case,  where  these  defaults  have  been  so  great  as 
to  sink  the  capital,  a  fortiori  would  the  creditors  of  the  bank  individ- 
ually have  a  right  to  maintain  similar  actions;  because  their  claim 
upon  the  funds,  being  prior  to  that  of  stockholders,  would  be  some- 
what more  immediate  and  direct. 

In  the  same  connexion,  it  is  obvious  to  remark,  that  a  judgment  in 
favor  of  one  stockholder  would  be  no  bar  to  an  action  by  a  creditor, 
nor  a  judgment  by  both,  to  an  action  by  the  corporation. 

4.  But  it  is  said,  that  although  the  real  and  personal  estate,  the 
securities  and  capital  stock,  are,  in  legal  contemplation,  vested  in  the 
corporation,  yet  the  individual  has  a  separate  and  distinct  property 
and  interest  in  his  particular  shares,  by  any  injury  to  which  he  may 
have  a  separate  damage.  To  some  extent,  it  is  true  that  he  has  a  sev- 
eral interest  in  his  shares ;  but  it  is  to  be  taken  with  some  qualifica- 
tions. Strictly  speaking,  shares  in  a  bank  do  not  constitute  a  legal 
estate  and  property;  it  is  rather  a  limited  and  qualified  right  which 
the  stockholder  has  to  participate,  in  a  certain  proportion,  in  the 


CHAP.  I.]        GENERAL  RUBBER  CO.  V.   BENEDICT.  809 

benefits  of  a  common  fund,  vested  in  a  corporation  for  the  common 
use;  it  is  a  qualified  and  equitable  interest,  a  valuable  interest,  mani- 
fested usually  by  a  certificate,  which  is  transferable.  To  the  extent 
of  this  separate  and  peculiar  interest,  a  stockholder,  no  doubt,  might 
maintain  his  separate  and  special  action,  according  to  the  nature  of 
the  wrong  done  to  him  in  respect  to  it;  as  trover  or  trespass,  for  the 
conversion  or  tortious  taking  of  his  certificate;  trespass  on  the  case 
for  refusing  to  make  a' transfer  on  a  proper  occasion;  assumpsit  for  a 
dividend  declared,  and  the  like.  But  an  injury  done  to  the  stock  and 
capital,  by  neghgence,  or  misfeasance,  is  not  an  injury  to  such  sepa- 
rate interest,  but  to  the  whole  body  of  stockholders  in  common.  It 
is  like  the  case  of  a  common  nuisance,  where  one  who  suffers  a  special 
damage,  peculiar  to  himself,  and  distinguishable  in  kind  from  that 
which  he  shares  in  the  common  injury,  may  maintain  a  special  action. 
Otherwise,  he  cannot.  Co.  Lit.  56  a.  3  Steph.  N.  P.  2372.  Lansing 
v.  Smith,  8  Cow.  146. 

But  we  are  pressed  with  the  argument,  that  for  every  damage 
which  one  sustains,  which  is  caused  by  the  wrongful  act  of  another, 
he  ought  to  have  a  remedy.  This  is  far  from  being  universally  true. 
Another  maxim  in  regard  to  claims  for  damage  is,  causa  proxima,  non 
remota,  spedatur.  Thousands  of  instances  occur,  in  which  one  sus- 
tains consequential  and  incidental  damage  from  the  misconduct  of 
another,  without  a  remedy  at  law.  By  the  misconduct  of  the  officers 
or  agents  of  a  parish,  town,  county,  or  even  of  the  State  or  the 
Union,  defalcations  may  take  place,  treasure  be  squandered  and 
wasted,  and  all  the  members  of  the  respective  aggregate  bodies  suffer 
damage,  for  which  the  law,  from  the  nature  of  the  case,  can  afford 
no  direct  remedy.  But  the  true  answer  to  the  objection  is,  that  stock- 
holders have  a  remedy,  a  theoretic  one  indeed,  and  perhaps  often 
inadequate,  in  the  power  of  the  corporation,  in  its  corporate  capac- 
ity, to  obtain  redress  for  injuries  done  to  the  common  property,  by 
the  recovery  of  damages;  and  each  individual  stockholder  has  his 
remedy,  through  the  powers  thus  vested  in  the  corporation,  for  the 
common  benefit. 

On  the  whole,  the  court  are  of  opinion  that  the  demurrer  is  well 
taken,  and  that  the  action  cannot  be  maintained. 


GENERAL  RUBBER  CO.  v.   BENEDICT. 

215  N.Y.  18.     1915. 

Cardozo,  J.  This  case  comes  here  on  a  demurrer  to  a  complaint. 
The  plaintiff  is  a  corporation.  It  is  organized  under  the  laws  of  New 
Jersey.  The  defendant  is  one  of  its  directors.  There  is  another 
corporation,  organized  in  the  same  State,  known  as  General  Rubber 


810  GENERAL  RUBBER  CO.  V.   BENEDICT.        (cHAP.  I. 

Company  of  Brazil.  The  capital  stock  of  the  latter  company  is  made 
up  of  three  thou.sand  shares;  and  all  the  shares,  with  the  exception  of 
eighteen,  are  held  and  owned  by  the  plaintitT.  For  convenience,  we 
shall  refer  to  the  plaintiff  as  the  holding,  and  the  (ieneral  Rubber 
Company  of  Brazil  as  the  subsidiary  company.  The  general  man- 
ager of  the  subsidiary  company  at  Para,  Brazil,  was  one  Arnold  J. 
Hutter.  While  acting  as  manager  for  that  company,  he  became  the 
manager  of  a  rival  business.  This  business  was  conducted  at  first 
under  the  name  of  E.  Levy,  and  later,  after  a  corporation  had  l^een 
organized,  under  the  name  of  the  Moju  Company.  The  defendant 
was  the  owner  of  more  than  one-fourth  of  the  stock.  He  wm;  also 
its  vice-president.  The  Moju  Company  met  with  reverses,  and  fin- 
ally became  insolvent.  To  relieve  its  embarrassments,  Hutter,  ac- 
cording to  the  allegations  of  the  complaint,  took  the  moneys  of  the 
General  Ru])bcr  Company  of  Brazil  and  gave  them  from  time  to 
time  to  the  Moju  Company.  The  defalcations  extended  over  a  i)eriod 
of  more  than  a  year,  and  caused  a  lo.ss  of  S185,()()0.  The  charge  is 
made  that  the  defendant  knew  of  this  misuse  of  moneys,  and  that 
he  acquiesced  in  it  and  approved  of  it.  He  neglected,  it  is  said,  to 
inform  the  plaintiff  of  Hutter's  wrongdoing;  he  withheld  and  con- 
cealed the  truth,  so  it  is  charged,  intentionally  and  for  his  own 
profit;  and  the  averment  is  that  if  such  information  had  been  given, 
the  plaintiff  could  and  would  have  prevented  the  misapplication  and 
the  loss.  Because  of  this  violation  of  his  duty,  the  value  of  the  i)lain- 
tiff's  shares  in  the  subsidiary  company  is  saitl  to  have  been  lessened, 
and  the  plaintiff  to  have  been  otherwise  damaged,  in  a  sum  exceeding 
$185,000.  For  the  amount  of  this  loss  with  interest,  judgment  is 
demanded. 

The  foregoing  summary  states  in  briefest  outline  the  averments  of 
a  voluminous  complaint.  It  suffices,  however,  to  indicate  the  prob- 
lem of  law  which  is  involved.  We  are  to  determine  whether  the 
defendant  is  liable  to  the  holding  company  for  the  diminished  value 
of  its  shares  resulting  from  the  waste  of  the  assets  of  the  subsidiary 
company. 

The  defendant  was  not  a  director  of  the  su])sidiary  company.  He 
icas  a  director  of  the  plaintiff.  Because  of  that  relation  he  owed  to 
the  plaintiff  the  duty  of  good  faith  and  vigilance  in  the  preservation 
of  its  property.  The  duty  and  the  breach,  coupled,  it  is  here  alleged, 
with  damage,  make  out  a  cause  of  action.  Ashby  v.  White,  3  Ld, 
Raym.  320.  Such  cases  as  Smith  v.  Hurd,  12  Mete.  375,  and  Niles  v. 
N.Y.C.  &  H.R.  R.R.  Co.,  176  N.Y.  119,  are  pressed  upon  us  by  the 
defendant.  They  are  inapplicable  here.  The  distinction  was  well 
put  by  Taft,  J.,  writing  for  the  Circuit  Court  of  Appeals  in  Ritchie  v. 
McMullen,  79  Fed.  Rep.  522,  533:  "It  is  undoubtedly  true,  as  the 
Circuit  Court  held,  that  a  stockholder,  merely  as  such,  cannot  have 
an  action  in  his  own  behalf  against  one  who  has  injured  the  corpora- 


CHAP.  I.]        GENERAL  RUBBER  CO.  V.   BENEDICT.  811 

tion,  however  much  the  wrongful  acts  have  depreciated  the  value  of 
his  shares  (citing  Smith  v.  Hurd,  supra,  and  other  cases).  But  we  are 
of  opinion  that  this  principle  has  no  application  where  the  wrongful 
acts  are  not  only  wrongs  against  the  corporation,  but  are  also  viola- 
tions by  the  wrongdoer  of  a  duty  arising  from  contract  or  otherwise, 
and  owing  directly  by  him  to  the  stockholders."  The  stockholder  in 
those  cases  did  not  sue  his  own  agent.  He  sued  another's  agents, 
i.e.,  the  directors  of  a  company,  and  sued  them  for  the  waste  of  the 
company's  property.  In  his  own  right,  and  not  in  a  derivative  action, 
he  attempted  to  recover  his  own  damages,  which  he  measured  by  the 
diminution  in  the  value  of  his  shares.  The  decision  was  that  the 
delinquent  directors  were  the  agents  of  the  company;  that  they 
owed  a  duty  to  the  company  and  not  to  the  individual  stockholders; 
and  that  if  there  had  been  any  breach  of  that  duty  the  company 
must  redress  the  wrong.  But  here  the  situation  is  a  different  one. 
Here  the  stockholder  is  not  suing  the  agent  of  another  company;  it  is 
suing  its  own  agent.  The  stockholder  happens  to  be  itself  a  corpora- 
tion; the  defendant  happens  to  be  a  director;  but  the  legal  problem 
would  be  the  same  if  the  plaintiff  were  a  natural  person,  and  the 
defendant  an  executor  or  trustee.  It  would  also  be  the  same  if  the 
plaintiff,  instead  of  being  substantially  the  sole  stockholder,  were  one 
stockholder  among  many.  If  the  trustee  of  an  estate,  holding  shares 
in  a  bank,  should  learn  that  the  cashier  was  looting  it,  and  with  that 
knowledge  should  keep  silent,  the  defendant  would  have  us  say  that 
the  beneficiaries  under  the  will  would  have  no  remedy  for  the  ensuing 
loss.  A  trustee  in  the  case  supposed  would  owe  no  duty  of  active 
vigilance  to  the  bank  whose  property  was  stolen.  If  not  liable  to 
those  interested  in  the  estate,  he  would  not  be  liable  to  anj^  one. 
Yet  his  duty  to  preserve  the  estate,  the  breach  of  that  duty,  and  the 
resulting  damage,  would  seem  to  call  for  the  application  of  the  prin- 
ciple that  there  is  no  wrong  without  a  remedy.  The  case  supposed 
does  not  differ  in  its  essence  from  the  case  presented.  The  defendant, 
as  a  director  of  a  corporation  should  have  taken  the  same  care  of  its 
property  that  men  of  average  prudence  take  of  their  own  property. 
Hun  V.  Gary,  82  N.Y.  65;  Latimer  v.  Veader,  20  App.  Div.  418,  428; 
Bosworth  V.  Allen,  168  N.Y.  157.  A  jury  might  not  unreasonably 
find  that  the  care  exacted  by  that  rule  would  involve  at  least  a 
warning  that  the  subsidiary  company  was  in  the  management  of  a 
thief,  and  that  the  value  of  the  shares  was  vanishing.  It  is  argued 
that  even  if  the  warning  had  been  given,  the  plaintiff  was  only  a 
stockholder  in  the  subsidiary  company,  and  hence  was  not  in  a  posi- 
tion to  stop  the  waste.  The  allegation  is,  however,  that  it  could  and 
would  have  done  so;  and  we  must  hold  this  sufficient  on  demurrer. 
There  are  many  things  it  could  have  done.  It  could  at  least  have 
sounded  an  alarm  that  might  have  led  to  Hutter's  removal.  The 
trial  will  show  whether  its  intervention  would  or  would  not  have 


812  GENERAL  RUBBER  CO.  V.   BENEDICT.       [cHAP.  I. 

been  efficient.  In  any  event,  we  cannot  say,  and  least  of  all  as  a 
matter  of  law,  that  the  opportunity  to  intervene  was  valueless. 
Leather  Mfrs.  Bank  v.  Morgan,  117  U.S.  90,  llo;  Continental  Nat. 
Bank  v.  Nat.  Bank  of  Commonwealth,  50  N.Y.  575;  Voorhis  v.  (Jim- 
stead,  66  N.Y.  113,  118;  Rothschild  v.  Title  Guarantee  &  Trust  Co., 
204  N.Y.  458;  Cassidy  v.  Uhlmann,  170  N.Y.  505,  518,  521. 

It  is  strongly  argued,  however,  that  the  defentlant  is  answerable 
for  the  same  wrong  to  the  subsidiary  company,  and  is  thus  exposed 
to  the  risk  of  a  double  liability.  We  think  the  wrong  to  the  plaintiff 
does  not  cease  to  be  remediable  because  it  may  also  be  a  wrong  to 
some  one  else.  If  the  defendant  has  violated  any  duty  to  the  sub- 
sidiary company,  it  is  not  the  same  duty  that  he  owes  to  the  plain- 
tiff. He  is  not  liable  to  the  subsidiary  company  qua  director.  He 
is  not  liable  to  that  company  for  mere  neglect.  He  is  liable  to  it,  if  at 
all,  only  as  a  stranger  might  be  liable.  If  he  has  joined  in  a  conspiracy 
to  plunder  it,  he  must,  like  any  other  tort  feasor,  make  compensation 
for  the  plunder.  There  are  allegations  in  the  complaint  which  are 
broad  enough  to  be  construed  as  charging  that  he  was  a  party  to  such 
a  conspiracy.  We  cannot  know  whether  they  will  be  proved.  If  they 
are  proved  in  all  their  fullness,  the}'  will  show  that  the  subsidiary 
company  as  well  as  the  plaint  if!  has  been  wronged.  Le.ss,  however, 
may  be  proved;  the  defendant  may  not  have  counseled  or  ratified 
Hutter's  acts,  or  otherwise  made  himself  a  party  to  them;  and  still 
if  he  knew  of  them,  and  was  silent,  he  may  have  failed  in  the  stricter 
duty  that  he  owes  to  the  plaintiff.  It  is  not  for  us  at  this  time  to 
say  to  what  extent  the  duties  are  coterminous.  It  is  enough  that 
they  have  a  different  origin,  a  different  standard,  and  a  different 
measure. 

The  argument  is  made,  however,  that  since  the  duties  overlap,  a 
double  liability  is  threatened.  To-day  the  defendant  is  called  upon 
to  make  good  the  diminished  value  of  the  plaintiff's  shares.  To- 
morrow he  may  be  called  upon  at  the  suit  of  the  subsidiary  company 
to  replenish  its  wasted  treasury.  We  think  the  argument  confuses 
the  cause  of  action  with  the  damages.  If  the  defendant  is  solvent, 
and  has  so  made  himself  a  party  to  the  conspiracy  that  he  is  liable 
as  a  tort  feasor  to  the  subsidiary  corporation,  the  existence  of  such 
a  cause  of  action  will  be  reflected,  like  the  ownership  of  any  other 
asset,  in  the  value  of  the  shares.  The  diminution  in  value  will  be  one 
thing  if  the  subsidiary  corporation  is  without  a  remedy  against  any 
one.  It  will  be  another  thing  if  there  is  a  remedy  against  a  solvent 
wrongdoer.  It  will  be  one  thing  if  the  cause  of  action  in  favor  of  the 
companj'^  is  conceded  or  certain.  It  will  be  another  thing  if  the  cause 
of  action  is  contested  or  doubtful.  A  contested  claim  is  rarely 
appraised  at  its  face  value.  The  expenses  of  litigation,  its  delays,  its 
uncertainties,  these  and  like  elements  may  make  the  shares  less  val- 
uable, even  though  a  remedy  at  the  suit  of  the  company  exists,  than 


CHAP.  I.]        GENERAL  RUBBER  CO.  V.   BENEDICT.  813 

they  would  be  if  the  wasted  moneys  were  back  in  the  treasury.  The 
extent  of  the  reduction  in  value  is  to  be  measured  by  the  jury.  We 
must  keep  in  mind  steadfastly  the  essential  nature  of  the  cause  of 
action.  It  is  not  an  action  to  restore  to  the  subsidiary  company  the 
money  that  has  been  abstracted.  It  is  an  action  to  restore  to  the 
holding  company  the  diminished  value  of  its  shares.  If  the  subsidiary 
company  were  suing  the  defendant  for  a  conversion  of  its  assets,  it 
would,  of  course,  be  no  answer  for  him  to  say  that  there  was  a  remedy 
also  against  Hutter.  He  would  be  bound  to  restore  what  he  had 
taken,  or  permitted  others  to  take.  It  is  possible  that  if  his  offense 
was  merely  one  of  negligence,  he  might  through  subrogation  have  a 
remedy  over  against  the  principal  offender.  Steele  v.  Leopold,  135 
App.  Div.  247,  256,  257;  aff'd.,  201  N.Y.  518;  Chillingivorth  v.  Cham- 
bers, L.R.  [1896]  1  Ch.  685;  Moxhani  v.  Grant,  L.R.  [1900]  1  Q.B.  88. 
But  in  this  action  he  is  under  a  very  different  duty.  Nothing  has 
been  taken  directly  from  the  plaintiff.  What  has  been  taken  belongs 
to  the  subsidiary  company.  The  defendant  is  not  sued  for  a  wrong- 
ful taking.  He  is  sued  for  the  wrongful  failure  to  preserve  the  value 
of  the  plaintiff's  shares.  Only  to  the  extent  that  the  taking  has  made 
the  individual  shares  less  valual^le,  has  a  liability  arisen.  In  such 
circumstances  there  is  no  right  of  action  in  favor  of  the  plaintiff 
against  the  primary  wrongdoer  to  which  the  defendant  can  be  sub- 
rogated. The  ultimate  devolution  of  the  burden  must,  therefore,  be 
determined,  not  in  some  other  action,  but  here  and  now.  In  these 
conditions,  it  becomes  our  duty,  through  a  sound  definition  of  the 
measure  of  damages,  to  work  out  a  result  which  will  be  just  alike 
to  plaintiff  and  to  defendant. 

The  existence  of  a  cause  of  action  does  not  depend,  however,  upon 
the  extent  of  the  recovery.  If  the  subsidiary  company  has  no  remedy 
that  will  enable  it  to  make  good  the  loss,  the  reduction  in  the  value 
of  the  shares  may  be  equal  to  the  fund  converted.  If  it  has  a  plain 
and  certain  remedy  either  against  the  defendant  or  against  some 
other  solvent  party  to  the  wrong,  the  reduction  in  the  value  of  the 
shares  may  be  less  than  the  converted  fund,  or,  it  may  be,  almost 
nominal.  We  can  imagine  a  case  where  a  director  has  borrowed 
money  illegally,  and  may,  therefore,  be  required  to  repay  it.  The 
corporation  in  such  circumstances  has  a  cause  of  action  to  compel 
the  money  to  be  restored,  yet  the  value  of  the  shares  in  the  hands  of 
the  stockholders  niay  not  be  reduced  at  all.  Whatever  difficulty 
there  is  in  determining  the  measure  of  the  loss  is  inherent  in  the  very 
nature  of  these  problems  of  appraisal.  To  determine  the  value  of 
the  shares,  every  asset  of  the  subsidiary  company  must  be  reckoned, 
and  the  defendant's  liability  to  that  company,  if  it  exists,  must  be 
included  like  any  other. 

We  think,  for  these  reasons,  that  the  menace  of  a  double  liability 
is  illusory.   The  defendant  owes  a  duty  to  the  plaintiff;  if  the  com- 


814  GENEIt^L    RUBBER    CO.  V.  BENEDICT.  (CIIAP.  1. 

plaint  speaks  truly,  he  has  violatetl  that  duty;  and  to  the  extent  of 
the  resulting  damage  he  must  answer  for  the  wrong. 

Collin,  J.  (tn.s.senting).  The  facts  alleged  as  constituting  a  caunc 
of  action  at  law  in  favor  of  the  plaintiff  against  the  defrtidant,  a<le- 
quatcly  .stated  for  the  pur[)()S(>s  of  this  discussion,  an*:  The  plaintiff, 
a  New  Jersey  corporation,  owned,  as  an  as.set,  all  the  three  thousand 
shares  of  the  capital  stock  of  another  corfxjration  hereinafter  de- 
nominated the  Brazil  company,  except  eighteen.  The  defendant  was 
a  director  of  the  plaintiff.  He  wjis  not  a  director  of  or  connected  with 
the  lirazii  »'orM[)any.  An  ag«*nt  of  the  Brazil  company,  wrongfully 
and  without  the  knowledge  of  it  or  the  plaintiff  and  with  the  knowl- 
edge, ac(|uiescence  and  approval  of  the  defendant,  ahstracteii  from 
time  to  time,  through  the  jM'iiod  of  ahout  one  year,  from  its  treasury 
and  delivered  to  a  third  corporation,  the  Moju  Company,  moneys 
aggregating  .SlvS.'),(M)(),  no  i)art  of  which  him  Invn  repaid  to  the  Brazil 
company.  The  defendant  owned  al>out  one-fjuarter  of  the  issued 
shares  of  the  capital  stock,  ami  wjis  the  vice-president  of  the  Moju 
Company.  The  defendant  <li<l  not  inform  the  plaint ilT,  which  re- 
mained ignorant,  while  it  progressed,  of  the  misaf)plication  of  tho 
morieys  of  the  Brazil  company.  The  plaintiff,  had  it  known  of  tlie 
misu.se,  "could  and  would  have  taken  such  action  as  would  have 
caused  tiie  funds  and  moneys  (of  the  Brazil  com|)any)  theretofore  so 
mis;q)i)lie(l  to  have  Ix'cn  recoverecl  and  as  would  have  prevented  the 
said  further  misapplication  of  .saiil  funds  and  moneys  to  such  wrong- 
ful uses."  The  Moju  Company  is  insolvent.  The  misappropriations 
by  the  agent  of  the  Brazil  c()m|)any  of  its  moneys  hav«»  lessene(|  the 
value  of  the  a.ssets  of  the  plaintilT,  to  wit,  the  shares  of  stock  of  the 
Brazil  company  in  a  sum  exceeding  $iS."),(MK).  Judgment  for  the  said 
sum  of  S1S.'),(MK)  with  interest  is  prayed  for. 

Certain  facts  are  clear.  This  is  an  action  at  law.  The  Brazil 
company  was  an  independent  legal  Ix-ing  or  entity,  and  its  status 
was  unaffected  hy  the  ownership  of  the  plaintiff  of  its  capital  stock. 
BiiJlJalo  Loan,  T.  S:  N.  D.  Co.  v.  Medina  Gas  &  E.  L.  Co.,  102  N.Y.  67, 
7G;  Saranac  ci'  L.  P.  R.R.  Co.  v.  Arnold,  107  N.Y.  308.  The  Brazil 
company  owner!  exclusively  the  abstracted  moneys.  The  plaintiff 
did  not  at  law  have  right,  title  or  interest  in  or  to  them,  the  whole 
title  of  which  was  in  the  despoiled  corporation.  United  tStates  liadi' 
ator  Corp.  v.  State  of  Xcic  York,  208  N.Y.  144.  The  plaintiff,  hy 
virtue  of  its  shares  of  the  capital  stock  of  the  Brazil  company,  had 
merely  the  right  to  partake,  proportionately,  of  the  surplus  profits 
or  fund  of  the  company  as  declared  or  distributed  by  its  directors. 
Burrall  v.  Bushmck  R.R.  Co.,  75  N.Y.  211 ;  Plimpton  v.  Bigelaw,  93 
N.Y.  502,  599;  United  States  Radiator  Corp.  v.  State  of  X err  York,  208 
N.Y.  144.  The  action  is  not  derivative,  that  is,  it  is  not  brought  in 
behalf  of  the  Brazil  company.  The  pith  of  the  alleged  cause  of  action 


CHAP.  I.]       GENERAL  RUBBER  CO.  V.   BENEDICT.  815 

is,  the  abstraction  of  the  moneys  and  the  neglect  of  the  defendant  to 
inform  the  plaintiff  of  it. 

The  injury  to  the  assets  of  the  plaintiff  was  not  direct,  and  came 
from  and  through  the  injury  to  those  of  the  Brazil  company.  Those 
assets  were  not  taken  or  directly  injured  or  interfered  with.  They, 
as  it  is  alleged,  were  depreciated  in  value  by  the  "  wrongful  misappro- 
priation" of  the  funds  of  the  Brazil  company,  no  part  of  which  the 
plaintiff  then  owned  or  had  a  right  to  possess  or  control  or  has  now 
the  right  to  recover.  The  Brazil  company  owned  them  and  was 
entitled  to  possess  and  dispose  of  them  and  it  alone  has  the  right  to 
recover  them.  Whenever  recovery  or  restitution  of  them  is  made  to 
it,  the  alleged  injury  to  the  plaintiff  will  be  obliterated.  The  subse- 
quent disposition  of  them  will  be  wholly  within  the  authority  of  the 
Brazil  company  and  it  may  naturally  and  lawfully  result,  through 
the  hazards  of  business,  that  the  plaintiff  will  not  receive  directly 
or  indirectly  any  advantage  from  them.  If  at  the  commencement  of 
this  action  the  Moju  Company  or  Hutter,  the  general  manager  and 
despoiler  of  the  Brazil  company,  or  this  defendant  had  paid  that 
company  the  sum  abstracted,  the  plaintiff  would  not  have  had  the 
alleged  cause  of  action,  because  the  plaintiff  has  no  right  to  those 
moneys  and  upon  their  return  to  their  owner,  the  Brazil  company, 
it  is  not  under  any  damages.  If  the  defendant  should  pay  the  sum 
of  them  or  any  part  to  this  plaintiff,  he,  under  the  allegations  of  the 
complaint,  which  permit  proof  that  the  defendant  conspired  with 
the  agent  of  the  Brazil  company,  would  remain  liable  to  the  Brazil 
company  for  them,  because  they  were  taken  from  and  belong  to  the 
Brazil  company,  but  if  he  paid  them  to  the  Brazil  company,  he  would 
not  thereafter  be  liable  to  the  plaintiff,  because  it  had  no  right  to 
them  and  its  damage  or  loss  would  have  been  wholly  remedied. 
There  was  but  a  single  loss,  although  that  loss  may  indirectly  and 
collaterally  affect  the  creditors  and  stockholders  of  the  one  loser,  to 
wit,  the  Brazil  company.  A  single  recovery  by  the  Brazil  company 
would  afford  complete  indemnity  to  the  plaintiff  and  all  interested 
parties.  Each  of  the  Brazil  company  and  the  plaintiff  has  not  the 
right  to  recover  the  one  hundred  and  eighty-five  thousand  dollars. 
The  general  rule  of  the  law  is,  that  an  action  must  be  brought  by 
the  person  having  the  title  to  the  damages  which  are  sought  to  be 
recovered  for  the  injury  and  not  the  person  or  persons  who  are 
indirectly  damaged  by  it. 

If  the  defendant  at  his  first  knowledge  of  the  spoliation  during  its 
progress  had  informed  the  plaintiff  of  it,  the  plaintiff  would  not  have 
had  the  right  to  any  of  those  moneys  or  any  damages,  a  fact  which 
the  complaint  recognizes  in  the  averment  that  if  he  had  done  so 
"the  plaintiff  could  and  would  have  taken  such  action  as  would  have 
caused  the  funds  and  moneys  (of  Brazil  company)  theretofore  so 
misapplied  to  have  been  recovered  and  as  would  have  prevented  the 


816  GENER.\L    RUBBER    CO.  f.   BENEDICT.  (cifAP.  I. 

said  further  misapplication  of  said  funds  and  moneys  to  such  wron^o 
ful  uses."    The  ((uotcd  alK'Hiition  is  a  condusi..  i 

the  ownership  by  the  phiintiff  of  nearly  all  «if  til' 
Brazil  company,  but  treating  it  as  an  allegation  of  fact,  there  remains 
the  truth  that  the  plaintiff  ha.s  not  In'cn  injureii  by  the  neglect  of  the 
defendant.  The  power  and  authority  which  it  then  luui  U>  cauH4'  the 
Brazil  company  to  recover  the  mi.sapi)lied  funds,  it  still  has.  While 
the  Moju  Company  is  inst>lvent,  Hutter,  the  agent  of  the  Brazil 
company,  and  this  defendant,  presumptively,  are  solvent.  Solvency 
of  the  individual,  no  refuting  circumstance  apiM>aring,  is  pn'sumed. 
First  Xationdl  Hunk  of  Middrillf  v.  Fourth  \alional  Hank,  .V.J'.  CUy^ 
77  N.Y.  320;  Potter  v.  Merchants  Hank  of  Albany,  28  N.Y.  Ml. 
The  plaintilT  in  |)roving  the  allegtMl  cau.se  of  action  would  prove  a 
cause  of  action  in  favor  of  the  Brazil  company  against  flutter  and 
this  defendant,  ;us  tort  feasors,  through  which  that  comiKiny  could 
recover  the  full  amount  of  the  funtls  ap|)ro[)riate<|  by  them  with 
interest  —  a  result  the  equivalent  of  that  obtainable  under  full  and 
immediate  information  of  the  misappropriation  to  the  plaintifT 
by  the  deft'iulant.  The  plaintilT  is  s<'eking  to  recover,  through  the 
alleged  wrong  of  the  defendant,  a  sum  which  it  never  had,  and  would 
not  have  had  if  the  ilefendant  had  told  it  all  that  he  knew,  which  is 
recoverable  by  the  Brazil  company,  and  the  recovery  of  which  by 
that  company  will  make  whole  the  value  of  the  plaintiff's  shares  of 
its  stock.    The  law  d<M's  not  [XTmit  such  a  result. 

In  Wells  v.  Dane,  101  Me.  07,  the  plaintifT  was  a  shareholder  in 
the  corporation,  and  brought  the  action  against  the  defendants, 
officers  of  the  corporation,  to  recover  damages,  alleging  that  the 
wick(Ml  and  wrongful  acts  were  with  the  sjM-cific  int<'nt  an<l  malicious 
and  fraudulent  design  of  injuring  the  plaintifT.  The  court  heM  that 
the  plaintiff  did  not  have  a  cause  of  action,  and  for  reasons  which  I 
think  determine  the  question  here  in  accord  with  complete  and  final 
justice.  It  .said:  "There  may  Ix'  cjises  of  injuries  to  the  individual 
rights  of  the  shareholder  where  he  and  not  the  corporatif)n  nmst 
seek  redress,  such  for  instance  as  the  levying  of  an  unlawful  tax  on 
shares  held  by  the  indivitlual  stockholder,  mutilation  or  destruction 
of  his  certificate,  or  circulating  fal.s<«  and  scandalous  reports  or  i.s- 
suing  spurious  certificates  thus  creating  uncertainty  as  to  the  title 
or  validity  of  existing  shares.  In  all  such  cases,  however,  the 
wrongful  act  affects  the  shares  directly.  They  are  readily  distin- 
guished from  the  case  at  bar,  where  the  plaintiff  claims  his  shares 
were  depreciated  by  wrongful  acts  making  po.ssible  the  i.ssuc  of  six 
hundred  shares  of  stock  without  payment  therefor.  Such  a  wrong 
being  prima^rily  against  the  corporation,  the  redress  for  it  must  be 
sought  by  the  corporation.  .  .  .  Whatever  injury-  befell  him  he  suf- 
fered as  a  stockholder;  and  in  a  ca.se  like  this,  where  the  direct  in- 
jury was  to  corporate  rights  and  interests,  the  right  to  share  in  the 


CHAP.  I.]       GENERAL  RUBBER  CO.  V.   BENEDICT.  817 

compensation  which  the  corporation  may  recover  passes  to  the 
transferee  of  the  plaintiff's  shares.  Winsor  v.  Bailey,  55  N.H.  218. 
Neither  does  it  matter  that  the  misconduct  is  charged  against  the 
defendants  as  individuals  and  not  as  officers.  By  whomsoever  the 
wrongful  acts  were  committed  and  in  whatsoever  capacity  the 
wrongful  doers  acted,  their  acts  directly  injured  the  corporate 
body.  Redress  must  be  sought  by  the  party  injured.  The  plaintiff 
was  injured  only  indirectly  and  collaterally.  When  the  corporation 
is  indemnified  the  plaintiff  ceases  to  be  a  loser.  It  is  for  this  rea- 
son, viz.,  that  the  plaintiff  sustained  no  loss  in  addition  to  the  loss 
to  the  corporation,  that  the  action  cannot  be  maintained  notwith- 
standing the  allegation  that  the  wrongful  acts  were  done  with  the 
specific  intent  and  malicious  and  fraudulent  design  of  injuring  the 
plaintiff.  If  the  plaintiff  had  suffered  any  loss  in  addition  to  that 
suffered  by  the  corporation  such  an  allegation  would  be  sufficient 
although  the  injury  suffered  was  indirect  and  consequential.  Greg- 
ory V.  Brooks,  35  Conn.  437;  St.  J.  &  L.  C^R.  Co.  v.  Hunt,  55  Vt. 
570.  In  those  cases  a  wrongful  act  was  done  to  one  with  an  unlaw- 
ful intent  and  design  to  indirectly  injure  another,  and  both  were 
injured.  Here  there  is  but  one  loser  and  one  injury.  When  the 
injury  is  to  the  collective  rights  of  the  shareholders  and  the  corpo- 
rate property  is  made  good,  the  plaintiff,  who  has  suffered  only  in 
these,  will  be  fully  indemnified.  There  is  therefore  nothing  for 
which  he  can  maintain  a  separate  suit.  Where  there  is  but  one  loss 
and  one  loser  there  can  be  but  one  suit,  and  that  mmst  be  by  the  party 
who  has  suffered  the  loss."  See,  also,  Allen  v.  Curtis,  26  Conn.  456; 
Niles  V.  N.Y.  C.  &  H.  R.  R.R.  Co.,  176  N.Y.  119. 

The  gist  of  the  wrong  in  any  aspect  is  the  abstraction  of  the 
moneys  which  were  those  of  the  Brazil  company,  and  that  company's 
ownership  of  the  damages  resulting  from  it.  It  is  true  that  in  the 
present  case  the  defendant  was  a  director  of  the  shareholder,  and  it 
is  alleged  that  such  relation  gave  an  additional  element  to  his  wrong- 
doing, making  him  liable  to  the  plaintiff.  But  the  fundamental 
facts  exist  that  the  direct  and  primary  injury  and  single  loss  is  to  the 
Brazil  company ;  that  the  loss  to  the  plaintiff  was  simply  an  indirect 
consequence  of  that  loss  and  not  additional  to  or  independent  of  it; 
that  the  Brazil  company  can  recover  its  loss  and  that  being  done  the 
plaintiff  will  be  fully  indemnified.  The  fact  that  the  despoilers  of 
the  Brazil  company  were  not  its  directors  does  not  affect  the  natural 
results  of  their  acts  and  is  immaterial.  Wells  v.  Dane,  101  Me.  67; 
Converse  v.  United  Shoe  Mach.  Co.,  185  Mass.  422. 

The  case  of  Ritchie  v.  McMullen,  79  Fed.  Rep.  522,  does  not  con- 
flict with  the  foregoing  reasoning  and  conclusions.  There  the  defend- 
ant directors  of  the  corporation  were  pledgees  of  the  plaintiff's  shares 
of  its  capital  stock,  and  combined  together  and  wrongfully  reduced 
the  value  and  income  of  the  pledged  shares  with  the  intention  of 


818  yccLURE  V.  LAW.  [chap.  i. 

defaulting  the  pledgor,  forcing  the  shares  to  a  public  Kule,  depriving 
the  plaiiititTof  the  rneiins  of  re<l«'en»ing  them  or  l^uyin^?  them  in.  of 
buying  them  in  at  li-s8  than  their  value,  and  of  thu«  intn:i>ing  their 
hoidingH  and  causing  the  plaintiff  to  ceiw**  to  lie  a  Ht«Mkhold«-r  and 
lose  the  U'nefits  from  his  «levelopment  of  the  prtJpt'rtii-H.  The  imn'tn 
of  the  decision  there  vvaw  that  the  |)le<lgeeH  u«eil  their  pfJHitionii  an 
majority  directors  and  their  vott'S  as  stm-khol  '  to 

depreciate  the  stock  of  their  pUnlgorwith  the  .1  .        -  an 

mentioned.  Clearly,  the  injury  to  the  plaintiff  was  direct  and  fiecu- 
liar.  The  case,  in  this  asfx>ct.  iK'Kmgs  to  the  class  «if  which  is  St.  J.  <t 
L.  C.  H.  Co.  V.  Hunt,  55  Vt.  570.  For  the  reasons  state<l,  I  vote  for 
reversal. 

Chahe,  Mii.lkr  and  Skahiuy,  JJ..  concur  with  C'audozo,  J.; 
Collin,  J.,  rea<ls  di.ssenting  opinion,  and  Hircock,  J.,  concurs; 
WiLLAiiD  Bartlett,  Ch.J.,  aljficnt. 

Oriier  ajfirmcd. 


G.  Dealings  tcilh  Third  Persons. 


McCLUUE  r.   LAW. 

101  N.Y.  7S.     IHW. 

Haight,  J.  This  action  was  brought  to  recover  of  the  defendant, 
a  former  presi.Unt  and  director  of  the  Life  I'nion,  the  sum  of  $.J,000, 
which  tlie  plaint  ill  claims  was  profits  made  by  the  ilefen«lant  out 
of  his  trust  relationshii)  with  the  company.  The  facts  estfiiili.shed 
by  the  evidence  arc,  in  substance,  as  follows:  An  agriKMuent  waa 
entered  into  on  the  28th  day  of  Decemlxr,  IHOl,  Iwtween  one 
Horace  Moody,  party  of  the  first  part,  and  Lucius  ().  RoU'rtson  and 
Lewis  P.  Levy,  parties  of  the  s<Mond  part,  by  which  the  party  of  the 
first  part  undertook  to  deliver  to  the  parties  of  the  second  part  the 
absolute  control  and  management  of  the  Life  Union  A.«»s<)ciation  in 
consideration  of  the  sum  of  .S15,(M)0.  This  was  to  l)e  accom|>lished  by 
the  resignation,  from  time  to  time,  of  one  or  more  din'ctors  of  the 
corporation  and  the  election  of  the  parties  of  the  second  part,  or  the 
persons  that  they  should  designate,  as  directors.  This  agreement 
was  entered  into  by  Moody  under  the  directions  of  the  defendant, 
for  whom  he  was  acting  as  agent  and  attorney.  It  was  mo<lified  on 
the  5th  day  of  February,  1S92,  with  reference  to  details  in  payments, 
etc.,  but  not  in  any  respect  affecting  the  cjuestion  here  presented. 
These  agreements  were  subsequently  executed.  Mr.  Levy  was 
elected  a  director  to  fill  a  vacancy  theretofore  existing,  and  then  the 
defendant  resigned  as  president  and  had  Mr.  Le\'y  elected  in  his 
place.  Subsequently,  the  defendant,  with  other  directors  from  time 


CHAP.  I.]  MCCLURE   V.  LAW.  819 

to  time  resigned,  and  their  places  were  filled  by  persons  designated 
by  Levy.  The  money  was  paid  over  to  a  person  designated  by  the 
defendant  and  then  was  distributed  among  the  directors,  the  de- 
fendant receiving  $3,000.  His  excuse  for  this  proceeding  was  that 
this  transfer  was  made  for  the  purpose  of  reimbursing  himself  and 
other  directors  for  moneys  that  they  had  theretofore  invested  in  the 
purchase  of  promissory  notes  which  had  been  issued  by  the  corpo- 
ration for  the  purpose  of  purchasing  the  property  and  assets  of  the 
Flour  City  Life  Association  of  Rochester.  The  notes,  however,  were, 
by  their  terms,  paj'^able  out  of  the  expense  funds  to  be  derived  from 
the  transfer  membership  of  the  Flour  City  Association,  and  inas- 
much as  the  transfer  was  never  effected,  the  notes  were  not  collec- 
tible from  the  Life  Union.  McClure  v.  Levy,  147  N.Y.  215.  The 
defendant  held  three  of  these  notes  of  SI, 000  each,  but  they  cannot 
be  accepted  as  a  justification  of  the  transaction,  or  be  received  as  a 
defense  to  this  action.  The  question  is,  therefore,  presented,  whether 
the  defendant  is  bound  to  account  for  the  money  received  from  Levy 
for  the  transfer  to  him  and  his  associates  of  the  management  and 
control  of  the  Life  Union,  together  with  its  property  and  effects. 
The  learned  Appellate  Division  has  treated  this  transaction  as  a 
bribe  paid  to  the  directors  of  the  Life  Union  by  Ley>%  and  reached 
the  conclusion  that  the  money  did  not  belong  to  the  corporation. 
We  think,  however,  that  the  law  does  not  permit  the  defendant  to 
avail  himself  of  his  own  wrong  as  a  defense  to  this  action.  As  presi- 
dent and  director  of  the  Life  Union  he  was  bound  to  account  to  that 
association  for  all  moneys  that  came  into  his  hands  by  virtue  of  his 
official  acts,  and  he  cannot  be  permitted  to  shield  himself  from  such 
liability  under  the  claim  that  his  acts  were  illegal  and  unauthorized. 
As  an  officer  he  had  the  right  to  resign,  but  the  money  was  not  paid 
to  him  for  his  resignation.  It  was  paid  over  upon  condition  that  he 
procure  Levy  and  his  friends  to  be  elected  directors  and  given  the 
control  and  management,  together  with  the  property  and  effects  of 
the  corporation.  The  election  of  directors  and  the  transfer  of  the 
management  and  property  of  the  corporation  were  official  acts,  and 
whatever  money  he  received  from  such  official  acts  were  moneys 
derived  by  virtue  of  his  office  for  which  we  think  he  should  account. 

In  Sugden  v.  Crossland,  3  Sm.  &  Gif.  192,  Horsefield  was  a  trustee 
under  a  will.  Crossland  paid  him  seventy-five  pounds  to  withdraw 
from  the  trust  and  have  Crossland  appointed  in  his  place.  It  was 
held  that  the  seventy-five  pounds  belonged  to  the  estate. 

Perry  on  Trusts,  at  §  427,  says:  "Trustees  hold  a  position  of 
trust  and  confidence,  the  legal  title  to  the  trust  property  is  in  them, 
and  generally  its  whole  management  and  control  is  in  their  hands. 
.  .  .  They  cannot  use  the  trust  property  nor  their  relation  to  it  for 
their  own  personal  advantage.  All  the  power  and  the  influence 
which  the  possession  of  the  trust  fund  gives  must  be  used  for  the 


820  MCCLURE    V.  L.\W.  (cHAP.  I. 

advantage  and  profit  of  the  honeficial  owners  and  not  for  the  [kt- 
sonal  f^ain  and  emoluments  of  the  trustees.  .  .  .  So,  where  a  trustee 
retired  from  the  office  in  consideration  that  his  successor  paid  him 
a  sum  of  money,  it  was  lieUI  tliat  the  money  so  paid  nmst  Ik*  treated 
as  a  part  of  the  trust  estate,  an(i  that  the  trustee  must  account  for  it 
as  he  could  make  no  i)rofit  directly  or  indirectly  from  the  trust 
property  or  from  the  position  or  office  of  trustee." 

In  Cook  on  Corporations,  §  (».')(),  it  is  .said:  "  It  is  a  welU'stahlished 
principle  of  law  that  a  director  commits  a  breach  of  trust  in  accept- 
ing a  secret  gift  or  secret  pay  from  a  person  who  is  contracting  or  has 
contracted  with  the  corporation,  and  that  the  cor[)oration  may  com- 
pel the  director  to  turn  over  to  it  all  the  money  or  property  so  re- 
ceived by  him."  See,  also,  Chandler  v.  Baam,  30  Fed.  Hep.  538; 
Rutland  EL  L.  Co.  v.  Bates,  08  Vt.  579;  Farmers  &  Merchants'  Bank 
V.  Downey,  53  Cal.  400;  Sheridan  v.  Sheridan  El.  Light  Co.,  38  Hun, 
390. 

The  order  of  the  Appellate  Division  should  l)e  reversed  and  judg- 
ment entered  on  the  verdict  affirmed,  with  costs  in  all  courts. 

All  concur,  except  Pauker,  Ch.J.,  not  sitting,  and  Bakti.ett,  J., 
dissenting. 

Order  reversed,  etc. 

Note.  —  Landes  v.  Hart,  131  N.Y.  App.  Div.  G.  A  contract  by  a 
director  of  X  with  A,  unfler  the  terms  of  which  \  is  to  pay  the  di- 
rector a  sum  of  money  for  procuring  a  contract  U't  ween  X  and  A,  is 
illegal,  even  if  the  other  directors  know  the  facts.  Sec  also  Billings 
V.  Shaw,  209  N.Y.  205. 

Pearson's  Case,  L.R.  5  Ch.D.  336.  A  director  of  a  company  re- 
ceived from  one  of  the  promoters  a  number  of  paid-up  shares 
sufficient  to  qualify  him  as  a  director,  ami  then  took  an  active  part 
in  carrying  out  a  conditional  contract  for  the  purchase  l)y  the  com- 
pany of  a  collierj' belonging  to  the  promoters.  Jessel,  M.Il.,  held  that 
he  must  account  to  the  company  for  the  value  of  the  shares,  saying 
(p.  340):  "That  being  the  position  of  Sir  Edwin  Pearson,  can  he 
be  allowed  to  say  in  a  Court  of  Equity  that  he,  having  received  a 
present  of  part  of  the  purchase  money,  and  being  knowingly  in  the 
position  of  agent  and  trustee  for  the  purchasers,  can  retain  that  pres- 
ent as  against  the  actual  purchasers?  It  appears  to  me  that,  upon 
the  plainest  principles  of  equity  and  good  conscience,  he  cannot. 
Whether  the  purchase  was  or  was  not  an  advantageous  one  for  the 
company,  whether  the  property  which  they  purcha.«ied  at  this  large 
profit  was  or  was  not  worth  the  increased  price  that  they  paid  for  it, 
is  a  question  wholly  immaterial  for  us  to  consider;  he  cannot,  in  the 
fiduciary  position  he  occupied,  retain  for  himself  any  benefit  or 
advantage  that  he  obtained  under  such  circumstances.  He  must  be 
deemed  to  have  obtained  it  under  circumstances  which  made  him 


CHAP.  I.]  JACOBUS   V.  JAMESTOWN   MANTEL    CO.  821 

liable,  at  the  option  of  the  cestuis  que  trust,  to  account  either  for  the 
value  at  the  time  of  the  present  he  was  receiving,  or  to  account 
for  the  thing  itself  and  its  proceeds  if  it  had  increased  in  value.  The 
company  elect  on  the  present  occasion  to  ask  to  charge  him  with  the 
value  of  the  twenty-five  share  warrants  at  the  time  of  their  delivery." 

In  re  London  &  South  Western  Canal,  Limited,  [1911]  1  Ch.  346. 
Directors  who  accept  and  hold  their  qualification  shares  in  trust  for 
and  at  the  will  of  the  promoter,  to  whom  they  hand  blank  transfers^ 
are  guilty  of  misfeasance,  and  the  measure  of  damages  is  the  highest 
value  of  the  shares  during  their  holding. 

In  Godley  v.  Crandall  &  Godley  Co.,  212  N.Y.  121,  the  court  said 
(p.  131):  "There  is  authority  and  sound  reason  in  support  of  the 
proposition  that,  in  the  absence  or  some  provision  of  statute,  by-law 
or  charter,  the  directors  have  no  authority  to  vote  salaries  to  each 
other  as  mere  incidents  of  their  office." 


H.  Executive  Officers. 


JACOBUS  V.  JAMESTOWN  MANTEL  CO. 

211  N.Y.  154.     1914. 

Chase,  J.  This  action  is  brought  on  a  promissory  note,  of  which 
the  following  is  a  copy: 
"$2,500.00  New  York,  Oct.  8,  1909. 

"Six  months  after  date  we  promise  to  pay  to  the  order  of  our- 
selves. Two  thousand  five  hundred  &  00/ 100  dollars  at  Newton 
Trust  Co.,  Newton,  N.J.,  value  received. 

"Jamestown  Mantel  Co. 

"Geo.  M.  Turner,  Treas.'' 

Said  note  was  indorsed  "Jamestown  Mantel  Co.,  Geo.  M.  Turner, 
Treas.,"  and  it  was  thereafter  delivered  to  and  discounted  by  the 
Newton  Trust  Company,  the  assignor  of  the  plaintiff.  It  is  the  last 
one  of  a  series  of  like  notes,  the  original  of  w^hich  was  given  in  Au- 
gust, 1907.  At  the  times  herein  mentioned  the  trust  company  had  an 
investment  committee  consisting  of  Hough,  its  president,  Searing, 
its  vice-president,  and  George,  a  director.  Searing  and  George  were 
partners  doing  business  in  New  York  city.  In  August,  1907,  Searing 
was  the  president  of  the  Delaware  and  Eastern  Railroad  Company. 
One  Welch,  an  attorney  at  law,  had  done  business  as  such  for  said 
railroad  company  and  for  Searing  individually.  Welch  asserted  that 
the  railroad  company  and  Searing  owed  him  considerable  money 
for  services;  he  told  Searing  that  he  needed  money  for  his  immediate 
use,  and  Searing  said  to  him  that  the  company  was  not  in  a  position 


822  JACOBUS    V.  JAMESTOWN    MANTEL    CO.  [CHAP.  I, 

to  pay  him  at  that  time,  hut  that  if  he  would  Ixjrrow  a  note  from 
somebody  for  a  short  time,  he,  Searing,  would  have  it  diHCounted  at 
one  of  his  trust  companies.  Welch  went  to  Turner  and  told  him 
that  he  wanted  to  borrow  a  not4?  of  tlie  Jamestown  Mant«'l  ( "ompany 
for  $2,.")U0  to  have  it  discounted,  and  that  if  he,  Turner,  would 
furnish  him  with  such  a  note  he  would  take  care  of  it  when  it 
was  due. 

Turner  in  the  name  of  tiie  mantel  com[)any,  and  in  the  form 
shown,  made  anil  indorsi-d  a  note  for  S2, .')()(),  and  gave  it  to  \N Clch. 
Welch  delivered  it  to  Searing,  who  sent  it  to  the  trust  comi)any,  and 
received  in  return  for  it  a  tlraft  of  $2,42.'),  being  the  amount  of  the 
note  less  the  discount  thereon.  Searing  retained  the  proceeds  of  the 
draft  and  told  Welch  that  his  trust  companies  were  not  in  funds  t<» 
discount  the  note.  Before  the  note  IxH-ame  due,  however,  S<'aring 
told  Welch  that  the  note  had  l>een  actually  tliscounted  and  that  he 
had  u.sed  the  money.  It  was  thereafter  renewed  from  time  to  time 
until  the  note  now  in  suit  became  due  when  further  renewals  were 
refused  by  the  mantel  company  and  it  also  refused  to  pay  the  note. 

The  defendant  was  in  no  way  tlirectly  or  indirectly  interested  in 
the  transaction.  The  note  was  given  in  its  name  wholly  without 
authority.  If  Searing  was  acting  for  and  on  Ix-half  of  the  trust 
company,  it  is  of  course  chargeable  with  his  knowIe<|ge  that  the  note 
was  borrowed  for  discount  to  accommodate  Welch  and  Searing  and 
the  defentlant  is  not  liable  thereon.  If  he  wius  not  acting  for  and  on 
behalf  of  the  trust  company  then  he  was  acting  indeinndently  of  it 
and  the  trust  company  is  in  no  way  chargeable  with  his  knowledge 
or  information. 

The  first  question  for  consideration  on  this  appeal  is  whether  the 
knowledge  of  Searing,  under  the  circumstances  disclosed,  is  attrib- 
utal)lc  to  the  trust  company.   We  think  not. 

Searing  conceivetl  the  idea  of  obtaining  money  from  the  trust 
company  on  a  note  to  i)c  borrowed  for  the  i)urpose,  and  he  was  the 
one  actively  engaged  in  carr\'ing  out  the  plan.  In  carrying  it  out  he 
was  reckless  of  the  conse(|uences  to  the  trust  company.  In  all  the 
transaction  he  acted  for  himself  individually  or  in  his  capacity  as 
president  of  the  Delaware  and  Eastern  Ilailroad  Company.  There 
was  no  meeting  of  the  investment  committee  of  the  trust  company 
and  no  action  thereon  by  it  as  a  committee.  Searing  acted  at  his 
place  of  business  and  not  at  the  place  of  business  of  the  trust  com- 
pan}^  and  wholly  independent  of  his  official  relation  to  it.  His  knowl- 
edge was  intentionalh'  concealed  from  the  trust  company  with  the 
fraudulent  purpose  probably  formed  at  the  time  the  note  was  first 
suggested  of  retaining  the  proceeds  thereof  for  himself.  If  we  admit, 
that  the  evidence  is  insufficient  to  justify  the  conclusion  that  Searing 
intended  to  keep  the  proceeds  of  the  note  for  his  personal  use  when 
he  first  suggested  to  Welch  that  he  borrow  a  note  to  be  discounted. 


CHAP.  I.]  JACOBUS   V.  JAMESTOWN   MANTEL   CO.  823 

it  must  at  least  be  conceded  that  he  either  intended  at  that  time  to 
obtain  the  money  for  his  personal  use  or  to  use  it  for  the  benefit  of 
the  corporation  of  which  he  was  president.  Searing  is  a  lawyer,  and 
he  must  have  known  that  the  note  being  entirely  apart  from  the 
business  of  the  corporation  was  not  a  binding  obligation  upon  it.  In 
any  event  the  concealment  of  his  knowledge  from  the  trust  com- 
pany was  necessary  to  enable  him  to  obtain  from  it  the  proceeds  of 
a  note  which  he  knew  had  been  executed  without  authority,  and 
which  would  at  least  be  of  doubtful  value  in  the  hands  of  the  trust 
company.  The  trust  company  should  not  be  held  cognizant  of  his 
knowledge.  Brooklyn  Distilling  Co.  v.  Standard  Dis.  &  Dist.  Co., 
193  N.Y.  551. 

There  are  other  objections  to  the  plaintiff's  recovery  upon  the 
note  that  are  fatal  to  his  contention.  The  defendant  is  a  domestic 
manufacturing  corporation.  A  corporation  is  an  artificial  entity 
having  only  such  powers  as  are  given  to  it  by  law  and  such  implied 
powers  as  are  necessary  to  the  exercise  of  the  powers  expressly  given 
to  it.  The  defendant  was  organized  to  "manufacture  wood  mantels, 
interior  finish,  bank,  office  and  bar  fixtures  and  generally  to  carry  on 
any  manufacturing  business  which  can  conveniently  be  carried  on 
in  conjunction  with  any  of  the  matters  aforesaid."  The  treasurer 
of  the  defendant  corporation  had  no  express  authority  by  its  by- 
laws or  otherwise  to  sign  or  indorse  a  promissory  note.  The  presi- 
dent of  the  trust  company  had  never  had  a  transaction  with  the 
defendant  corporation  and  did  not  know  its  treasurer.  He  does  not 
remember  that  Searing  said  anything  to  him  whatever  at  the  time 
the  note  was  sent  to  him  for  discount.  It  was  taken  by  him  on 
behalf  of  the  trust  company  without  inquiry  either  as  to  the  respon- 
sibility of  the  corporation  or  as  to  the  authority  of  its  treasurer  to 
make  a  promissory  note  even  in  the  usual  course  of  its  business. 
It  affirmatively  appears  as  we  have  seen  that  the  treasurer  had  no 
express  authority  to  make  a  promissory  note,  and  that  the  note  as 
made  was  not  made  in  the  regular  transaction  of  the  business  of  the 
corporation,  but  wholly  as  an  accommodation  to  a  friend  of  such 
treasurer. 

A  manufacturing  corporation  has  no  power  to  make  or  indorse 
notes  for  the  accommodation  of  others.  National  Park  Bank  of 
N.Y.  V.  Ger.  Am.  M.  W.  &  S.  Co.,  116  N.Y.  281;  Fox  v.  Rural  Home 
Co.,  90  Hun,  365;  affd.  on  opinion  below,  157  N.Y.  684.  One  who 
deals  with  the  officers  or  agents  of  a  corporation  is  bound  to  know 
their  powers  and  the  extent  of  their  authority.  Alexander  v.  Cauld- 
well,  83  N.Y.  480.  Notwithstanding  the  general  rule  stated,  a  cor- 
poration is  bound  if  it  makes  or  indorses  commercial  paper  for  the 
accommodation  of  another  in  respect  to  a  bona  fide  holder  who  dis- 
counts it  before  maturity  on  the  faith  of  its  being  business  paper. 
Mechanics'  Banking  Association  v.  N.Y.  &  S.  White  Lead  Co.,  35 


824  JACOBUS    V.  JAMESTOWN    MANTEL    CO.  [CIIAP.  1, 

N.Y.  505.  The  decision  in  the  White  Lead  Co.  Case,  supra,  and  other 
similar  decisions  are  based  upon  the  assumption  that  the  officers 
making  or  indorsing  a  promissory  note  had  authority  from  the  cor- 
poration to  make  and  indorse  such  notes  in  the  ordinary  course  of 
its  business.  Such  decisions  do  not  apply  to  a  case  where  the  officers 
purporting  to  act  for  a  corporation  do  not  have  authority  to  sign 
commercial  paper  in  the  ordinary  course  of  its  business.  A  treasurer 
of  a  manufacturing  corporation  has  no  power  to  make  promissory 
notes  in  its  name  unless  such  power  is  expressly  given  to  such  officer 
by  the  by-laws  of  the  corporation  or  by  resolution  of  its  board  of 
directors.  Thompson  on  Corporations  (2d  ed.),  §  1564;  Daniels  on 
Negotiable  Instruments  (5th  ed.),  vol.  1,  §  394;  Edwards  on  Bills, 
§  65;  Beach  on  Private  Corporations  (2d  ed.),  vol.  2,  §  804;  McCul- 
lough  v.  Moss,  5  Denio,  567;  National  Bank  of  Newport  v.  Snyder 
Mfg.  Co.,  107  App.  Div.  95;  Niagara  Falls  Susp.  Bridge  Co.  v.  Bach- 
man,  66  N.Y.  261 ;  Dabneij  v.  Stevens,  40  How.  Pr.  341 ;  Marine  Bank 
V.  Clements,  3  Bosw.  600;  National  Bank  of  the  Republic  v.  Navassa 
Phosphate  Co.,  56  Hun,  136;  People's  Bank  v.  ,S7.  Anthoni/s  R.  C. 
Church,  109  N.Y.  512.  No  presumption  existed  that  the  defendant's 
treasurer  had  power  to  make  or  indorse  business  paper.  It  was 
necessary,  therefore,  for  the  plaintiff  to  show  that  the  treasurer  had 
authority  to  execute  promissory  notes  in  the  name  of  the  corporation 
in  the  ordinary  course  of  its  business,  or  that  the  defendant  was 
estopped  from  denjdng  such  authority. 

It  is  urged  that  there  is  some  evidence  that  the  treasurer  of  the 
defendant  had  on  one  or  more  occasions  signed  a  promissory  note 
in  its  name  in  the  regular  course  of  defendant's  business,  and  that 
such  note  or  notes  had  thereafter  been  paid  by  the  corporation.  It 
does  not  appear  that  said  treasurer  had  ever  signed  such  a  note  prior 
to  the  execution  of  the  note  which  w^as  given  in  August,  1907. 
Whether  he  had  done  so  or  not  is  of  little  importance  for  the  purpose 
of  creating  an  estoppel  against  the  defendant  because  it  affirmatively 
appears  that  the  trust  company  did  not  know  of  any  of  the  acts 
claimed  to  have  been  done  by  the  defendant's  treasurer  in  its  name. 

If  the  defendant  had,  prior  to  August,  1907,  in  the  usual  course  of 
its  business  permitted  its  treasurer  from  time  to  time  to  make  pro- 
missory notes  in  its  name  which  it  ratified  and  approved  by  paying 
them,  and  knowledge  of  such  acts  had  come  to  the  trust  comjiany, 
and  it  had  relied  upon  such  acts  as  showing  authority  in  the  defend- 
ant's treasurer  to  make  promissory  notes  in  its  name  in  taking  the 
note  in  controversy,  a  question  of  estoppel  would  have  arisen  as 
against  the  defendant  in  this  action. 

It  is  essential  for  one  claiming  that  another  is  equitably  estopped 
from  denying  liability  because  of  his  previous  acts  and  conduct  to 
show  that  he  was  influenced  by  and  relied  upon  such  acts  and  con- 
duct on  making  the  promise  or  performing  the  act  upon  which  the 


CHAP.  I.]  JACOBUS   V.  JAMESTOWN    MANTEL    CO.  825 

liability  is  asserted.  Draper  v.  Oswego  Co.  Fire  R.  Assn.,  190  N.Y. 
12,  16.  The  defendant  is  not  estopped  from  denying  its  liability  in 
this  case.  If  the  president  of  the  trust  company  had  made  inquiry 
in  regard  to  the  practice  of  the  defendant  in  making  promissory 
notes  and  the  authority  of  its  treasurer  to  sign  its  name  to  such 
notes,  and  he  had  ascertained  all  the  facts  presented  by  the  record, 
there  would  have  remained  a  question  of  fact  as  to  whether  the 
inquiry  was  a  reasonable  one,  and  whether  the  facts  shown  were 
sufficient  to  warrant  the  action  of  the  trust  company  in  discounting 
the  note  in  question. 

It  may  also  be  assumed  that  the  record  presents  a  question  of  fact 
as  to  whether  Turner  as  the  treasurer  of  the  corporation  had  author- 
ity to  sign  promissory  notes  in  the  usual  course  of  defendant's  busi- 
ness by  reason  of  one  or  more  notes  having  been  signed  by  him  which 
were  thereafter  paid  by  the  corporation. 

The  plaintiff  at  the  trial  insisted  that  the  court  direct  a  verdict, 
and  it  having  directed  a  verdict  for  the  defendant  the  plaintiff  is 
bound  by  the  decision  of  the  court  upon  all  questions  of  fact  then 
open  for  its  determination. 

There  is  evidence  on  which  the  trial  court  was  authorized  to  make 
the  findings  necessary  on  which  to  base  its  direction  of  a  verdict  for 
the  defendant. 

The  judgment  should  be  affirmed,  with  costs. 

WiLLARD  Bartlett,  Ch.J.,  Werner,  Hiscock,  Collin,  Hogan 
and  Miller,  J  J.,  concur. 

Judgment  affirmed. 

Note.  —  By  the  weight  of  authority,  the  treasurer  of  a  corpora- 
tion has  not,  by  virtue  of  his  office,  authority  to  borrow  money  or 
issue  obligations  of  the  corporation.  As  to  the  law  of  Massachusetts, 
however,  see  Merchants'  Bank  v.  Citizens'  Gas  Light  Co.,  159  Mass. 
505. 

A  president  has  no  authority,  by  virtue  of  his  office,  to  execute  a 
mortgage  on  the  corporate  property.  Frederick  v.  Letieney,  214  Mass. 
46.  A  president  of  a  building  construction  company  has  no  authority, 
by  virtue  of  his  office,  to  award  subcontracts  on  construction  work 
for  which  his  company  has  the  main  contract.  Murphy  v.  W.  H.  & 
F.  W.  Cane,  Inc.,  80  N.J.L.  163. 

The  vice-president  of  a  trust  company  acting  as  trustee  under  a 
mortgage  has  no  authority,  by  virtue  of  his  office,  to  make  repre- 
sentations as  to  what  property  the  mortgage  covered.  Davidge  v. 
Guardian  Trust  Co.,  203  N.Y.  331,  339.  A  vice-president  of  a  cor- 
poration owning  and  operating  an  amusement  park  has  no  authority, 
by  virtue  of  his  office,  to  contract  for  the  purchase  of  the  corpora- 
tion's own  capital  stock  and  bonds.  Beach  v.  Palisade  Amusement 
Co.,  86  N.J.L.  238.   Cf.  Prairie  du  Rocher  v.  Milling  Co.,  248  111.  57. 


826  JACOBUS   V.  JAMESTOWN    MANTEL   CO.  [CHAP.  I. 

The  secretary  of  a  newspaper  corporation  has  no  authority,  by 
virtue  of  his  office,  to  make  a  certificate  of  publication  for  such 
corporation.  Chicago  v.  Stein,  252  111.  409.  The  secretary  of  a  cor- 
poration has  no  authority,  by  virtue  of  his  office,  to  alter  the  terms 
of  a  contract  made  by  the  corporation  with  a  third  person.  Scott  v. 
New  York  Filling  Co.,  79  N.J.L.  231. 

As  to  the  authority  of  a  fijeneral  passenger  agent,  see  Parrot  v. 
Mexican  Central  Railway,  207  Mass.  184.  As  to  the  authority  of  a 
superintendent,  see  Hall  v.  Passaic  Water  Co.,  83  N.J.L.  771. 

As  to  action  by  an  executive  committee  see  Young  v.  Canada  S.S. 
Co.,  Ltd.,  211  Mass.  453.  As  to  delegation  of  the  entire  management 
to  one  man,  see  Cumberland  Trust  Co.  v.  Ayars  &  Sons  Co.,  83  N.J. 
Eq.  479. 


SECT.  I.]  VARNEY  V.   BAKER.  827 


CHAPTER   II. 
STOCKHOLDERS. 


SECTION  1. 


RIGHTS  OF  A  STOCKHOLDER  EVEN  WHEN  HE  IS 
IN  THE  MINORITY. 


A.  To  inspect  the  Corporate  Books  and  Records. 


VARNEY  V.  BAKER. 

194  Mass.  239.     1907. 

Knowlton,  C.J.  This  is  a  petition  for  a  writ  of  mandamus  to 
obtain  an  examination  of  the  books  of  account  of  the  defendant 
corporation.  The  petitioner  is  the  owner  of  eighty  shares  of  the 
capital  stock  of  the  corporation,  the  whole  number  of  shares  being 
three  hundred  and  fifty.  The  respondent  Baker  admitted  that  he 
told  the  son  of  the  petitioner,  three  or  four  months  before  the  peti- 
tion was  filed,  that  the  company  had  lost  several  thousand  dollars. 
The  truth  of  the  statement  was  not  denied,  although  officers  of  the 
company  testified  that,  at  the  time  of  the  hearing,  the  company  was 
in  a  prosperous  condition. 

The  single  justice  who  heard  the  case  found  that  the  petitioner 
honestly  believes  that  the  company  is  being  mismanaged,  and  de- 
sires in  good  faith,  for  the  protection  of  his  interest  in  the  corpora- 
tion, to  examine  the  books  and  records  of  the  company  for  the  pur- 
pose of  ascertaining  its  condition  and  the  value  of  its  stock,  and  of 
determining  what  to  do  with  his  stock,  and  whether  there  has  been 
mismanagement  of  the  corporation,  and  if  so,  what  effect  it  has  had 
upon  the  assets  and  business  of  the  corporation,  in  order  that  he  may 
be  enabled  to  bring  a  bill  in  equity  for  the  appointment  of  a  receiver, 
or  to  take  other  proper  proceedings  for  the  benefit  of  the  corporation 
and  of  his  interest  therein.  He  also  found  that  an  examination  could 
be  conducted  without  interfering  unduly  with  the  business  of  the 
corporation.  It  was  not  proved  to  the  satisfaction  of  the  justice  that 
there  was  any  mismanagement  in  fact,  or  any  incapacity  on  the  part 
of  the  managing  officers.  The  justice  reserved  the  case  for  our  deter- 
mination, and  his  report  presents  the  question  of  law  whether,  on 


828  VARNEY    V.  BAKER.  (ciIAP.  11. 

these  facts,  the  petitioner  .should  have  an  opportunity  to  e.Kamine 
the  books  of  account  and  deposit  of  the  corporation,  and  if  so,  to 
what  extent. 

The  stockliolders  of  a  corporation  are  the  equitable  owners  of  its 
assets,  and  the  officers  act  in  a  fiduciary  rehition  as  agents  of  the 
corporation  and  of  the  stockholders.  They  should  be  ready  to 
account  to  the  stockholders  for  their  doings  at  all  reasonable  times, 
and  the  stockholders  have  a  rij^ht  to  insjK'ct  their  records  and  ac- 
counts, and  to  ascertain  whether  they  are  faithful,  honest  and  intel- 
ligent in  the  performance  of  their  iluties.  There  is  no  good  reason 
why  the  stockholders,  acting  in  good  faith  for  the  purpose  of  ad- 
vancing the  interest  of  the  corporation  and  protecting  their  rights  as 
owners,  should  not  be  permitted  to  e.xamine  the  corporate  projKTty, 
including  the  books  and  accounts. 

It  was  formerly  heUl  in  England  that  this  right  could  Ix?  exercised, 
against  the  will  of  the  managing  officers,  only  when  there  was  a 
specific  dispute  about  .some  c()r[)orate  matter,  Ix'tween  the  stock- 
holders and  the  officers.  Hex  v.  Merchant  Tailors  Co.,  2  B.  &  .Vd.  1 15. 
But  this  rule  has  been  modified  by  statute.  See  St.  8  &  9  Vict.  c.  IG, 
§§  117,  119,  and  St.  2.")  &  20  Vict.  c.  89,  Table  A  78.  The  doctrine 
has  not  been  adopted  in  America,  the  cases  which  go  furthest  in  that 
direction  holding  that  a  dispute  as  to  the  alleged  mismanagement  of 
the  corporation  is  enough  to  entitle  the  stockholder  to  an  examina- 
tion of  the  accounts  to  see  whether  there  is  a  ground  for  an  action. 
Commonwealth  v.  Phanix  Iron  Co.,  105  Penn.  St.  Ill;  Phoenix  Iron 
Co.  V.  Commonwealth.  113  Penn.  St.  5()3.  .Vccording  to  the  general 
rule  in  this  country,  it  is  not  necessary  that  there  should  be  any 
particular  dispute  to  entitle  the  stockholder  to  exerci.se  this  right. 
Nothing  more  is  required  than  that,  acting  in  good  faith  for  the  pro- 
tection of  the  interests  of  the  corjjoration  and  his  own  interests,  he 
desires  to  ascertain  the  condition  of  the  company's  business,  (iuthrie 
V.  Harkness,  199  U.S.  148;  In  re  Steinway,  159  N.Y.  250;  Huylar  v. 
Cragin  Cattle  Co.,  13  Stew.  (N.J.)  392;  State  v.  Pacific  Brewing  & 
Malting  Co.,  21  Wash.  451 ;  Cockburn  v.  Union  Hank  of  Loui.'<iana,  13 
La.  Ann.  289;  State  v.  Laughlin,  53  Mo.  App.  542;  Ilemimray  v. 
Heminway,  58  Conn.  443.  See  Union  Bank  v.  Knapp,  3  Pick.  96,  108. 

Of  course  the  right  at  common  law  is  not  absolute,  so  that  it  can 
be  exercised  for  mere  curiositv,  or  for  merely  speculative  purposes, 
or  vexatiously.  If  the  court  is  appealed  to  for  the  enforcement  of  the 
right,  a  sound  discretion  will  be  e.xerci.sed  to  determine  whether  the 
petitioner  is  acting  for  an  honest  purpose,  not  adverse  to  the  inter- 
ests of  the  corporation.  The  court  will  consider  whether  his  desire 
for  an  examination  is  reasonable,  having  reference  to  the  interests  of 
the  corporation  and  his  personal  interest  as  a  member  of  it.  Its  effect 
upon  the  corporation  in  reference  to  competitors  and  other  interests 
will  not  be  disregarded.   But  as  was  stated  in  Dunphy  v.  Traveller 


SECT.  I.]  HENRY    V.  BABCOCK    &    WILSON    CO.  829 

Newspaper  Association,  146  Mass.  495,  "Courts  of  equity  are  swift 
to  protect  helpless  minorities  of  stockholders  of  corporations  from 
the  oppression  and  fraud  of  majorities." 

In  the  present  case  the  findings  of  the  justice  show  that  the  peti- 
tioner should  be  permitted  to  examine  the  books  in  accordance  with 
his  request.  His  right  to  such  an  examination  includes  the  right  to 
have  the  assistance  of  an  expert,  or  other  person,  if  he  desires  to 
make  transcripts  from  the  books  for  subsequent  use. 

There  is  nothing  in  our  statutes  which  enlarges  or  diminishes  this 
right  as  it  exists  at  common  law.  The  provision  of  the  St.  1903,  c. 
437,  §  30,  relates  only  to  the  copies,  books  and  records  therein  re- 
ferred to,  and  is  not  applicable  to  the  present  case. 

Peremptory  writ  of  mandamus  to  issue. 

Note.  —  In  Huylar  v.  Cragin  Cattle  Co.,  40  N.J.  Eq.  392,  the  court 
said  (p.  398):  "They  are  entitled  to  such  inspection,  though  their 
only  object  is  to  ascertain  whether  their  affairs  have  been  properly 
conducted  by  the  directors  or  managers.  Such  a  right  is  necessary 
to  their  protection.  To  say  that  they  have  the  right,  but  that  it  can 
be  enforced  only  when  they  have  ascertained,  in  some  way  without 
the  books,  that  their  affairs  have  been  mismanaged,  or  that  their 
interests  are  in  danger,  is  practically  to  deny  the  right  in  the  majority 
of  cases.  Oftentimes  frauds  are  discoverable  only  by  examination  of 
the  books  by  an  expert  accountant."  See  also  Matter  of  Steinway, 
159  N.Y.  250,  263;  Neuhert  v.  Armstrong  Co.,  211  Pa.  582;  Guthrie 
v.  Harkness,  199  U.S.  148. 

Cf.  Lyon  v.  American  Screw  Co.,  16  R.I.  472. 


HENRY  V.  BABCOCK  &  WILSON  CO. 

196  N.Y.  302.     1909. 

WiLLARD  Bartlett,  J.  The  defendant  is  a  corporation  organized 
under  the  laws  of  New  Jersey,  having  its  main  office  for  the  trans- 
action of  business  in  this  state  at  No.  85  Liberty  street  in  the  borough 
of  Manhattan  in  the  city  of  New  York  where  it  keeps  its  stock  book. 
On  January  17,  1908,  during  the  usual  hours  of  business,  the  plain- 
tiff, being  a  resident  of  New  York  and  the  owner  of  one  share  of 
stock  in  said  corporation,  demanded  of  its  treasurer,  who  was  the 
officer  having  charge  of  the  stock  book,  "to  be  allowed  to  inspect  the 
said  stock  book  and  to  copy  therefrom  the  names  of  the  persons 
therein  set  down  as  stockholders  of  the  defendant  together  with 
their  places  of  residences  and  the  number  of  shares  of  stock  held  by 
them  respectively."  The  treasurer  asked  the  plaintiff  his  purpose  in 
making  the  request.  This  the  plaintiff  declined  to  state,  saying  that 


830  HENRY    V.  BABCOCK    A    WILSON    CO.  (CHAP.  II, 

he  understood  his  ri^ht  wa.s  absolute  under  the  law.  The  treasurer 
thereupon  said:  "If  you  will  tell  nie  your  purpose  and  if  Huch  pur- 
pose appears  to  ine  to  be  pro[)er  I  will  tlu-n  allow  you  to  insjK'ct  the 
stock  book  but  not  otherwise."  The  plaintitT  still  declined  to  dis- 
close his  purpose  whereupon  the  treasurer  finally  refused  the  desired 
inspection. 

This  controversy  was  then  stated  between  the  parties  and  duly 
submitted  to  the  Af)[K'llate  Division,  the  plaintiff  contending  that 
the  refusal  to  jxinnit  an  insiK'ction  of  tlu'  defeinlanl's  stock  Inxik 
entitled  him  to  recover  a  jn-nalty  of  $250  under  section  53  of  the 
Stock  CV)r[)oration  I^w.  The  Appellate  Di\'ision  has  rendered 
judgment  in  favor  of  the  d«'fen<huit  and  from  that  judgment  the 
plaintiff  now  appeals. 

Section  53  of  the  Stock  Corporation  Law,  as  in  force  at  the  time 
of  this  transaction  (now  section  33  of  chapter  59  of  the  Coasolidated 
Laws)  providecl  that  every  foreign  cori><)ration  having  an  ofh<'e  for 
the  tran.saction  of  busiriess  in  this  state  should  keoj)  a  stock  l)Ook 
containing  a  list  of  its  stockholders,  showing  their  places  of  residence, 
the  numl)er  of  shares  cf  stock  held  by  them  respectively,  etc.  It 
further  provided  jus  follows:  "Such  stock  l>ook  shall  l)C  open  daily, 
during  business  hours,  for  the  insfwction  of  its  stockholders.  .  .  .  For 
any  refusal  to  allow  such  b(M)k  to  In*  insjM'ctJMl,  such  coqioration  and 
the  officer  or  agent  so  refusing  shall  each  forfeit  the  sum  of  two  hun- 
dred and  fifty  dollars  ($2.')())  to  l)e  recovered  by  the  person  to  whom 
such  refusal  was  made."  I^ws  of  181)2,  ch.  (>88,  §  53,  lus  amended  by 
Laws  of  18'J7,  ch.  384. 

Referring  to  those  cases  in  which  it  has  been  held  that  the  courts 
in  the  exercise  of  their  discretion  may  properly  refuse  to  compel  by 
mandamus  the  jiroduction  of  the  books  of  a  corporation  for  inspec- 
tion by  a  stockhohler  where  it  does  not  ajiixar  that  the  inspection  is 
sought  for  a  legitimate  purpose,  the  learned  judge  who  wrote  the 
prevailing  opinion  Inflow  saw  no  reason  why  the  same  rule  should 
not  be  adopted  in  the  present  case.  He  thought  that  the  plaintiff's 
refusal  to  disclose  his  motive  authorizecl  the  inference  that  the  motive 
was  improper;  and  that  the  desired  ptTmi.ssion  to  insi)ect  and  copy 
was  rightfully  denied,  not  only  for  that  reason,  but  because  the 
statute  did  not  expressly  entitle  a  stockholder  to  copy  the  names  and 
addresses  of  the  other  holders  of  stock  from  the  stock  book. 

In  Matter  of  Steinivay,  loQ  N.V.  2.50,  the  question  certified  to  this 
court  for  decision  was:  "Has  the  Supreme  Court  the  power,  upon 
the  petition  of  a  stockholder,  to  compel  by  mandamus  the  corpora- 
tion to  exhibit  its  books  for  his  inspection?"  In  the  opinion  of  the 
court,  Judge  Vann  carefully  inquired  into  the  origin  and  extent  of 
the  authority  of  the  Supreme  Court  and  its  power  of  \nsitation  or  of 
examining  into  the  affairs  of  corporations  according  to  the  common 
law;  and  the  conclusion  was  reached  that  the  common-law  right  of 


SECT.  I.]  HENRY   V.  BABCOCK    &    WILSON    CO.  831 

a  stockholder  with  reference  to  the  inspection  of  the  books  of  his 
corporation  still  exists  unimpaired  by  legislation,  and  that  the 
Supreme  Court  has  power,  in  its  sound  discretion  upon  good  cause 
shown,  to  enforce  such  right.  That  decision,  so  far  as  it  goes,  tends 
to  sustain  the  position  of  the  appellant;  but  it  did  not  pass  upon  the 
force  and  effect  of  the  statute  whose  operation  is  invoked  in  the 
present  case. 

No  doubt  the  legislature  could  make  the  stockholder's  privilege  of 
inspection  dependent  upon  the  motive  or  purpose  with  which  it  is 
sought;  but  it  has  not  seen  fit  to  do  so.  The  language  of  the  statute  is 
plain  and  mandatory.  It  recognizes  an  absolute  right  in  the  stock- 
holder and  imposes  an  absolute  duty  upon  the  corporation  and  the 
custodian  of  the  stock  book.  The  law  requires  no  statement  or  proof 
of  any  particular  intent  upon  the  part  of  the  person  demanding  the 
inspection.  He  must  be  a  stockholder  and  must  prefer  his  request 
during  business  hours;  that  is  all.  If  it  appeared  in  good  faith  that 
the  book  was  then  in  actual  use  for  other  corporate  purposes,  he 
could,  of  course,  be  required  to  wait  a  reasonable  time  until  such  use 
terminated;  but  no  such  matter  of  defense  is  suggested  here.  The 
plaintiff  was  refused  any  inspection  at  all  in  the  absence  of  a  dis- 
closure of  his  purpose;  and  this  action  of  the  defendant  has  been 
sanctioned  by  the  judgment  of  the  Appellate  Division.  We  think 
that  judgment  is  based  upon  a  mistaken  construction  of  the  statute 
in  this  respect.  Nor  was  the  refusal  justified  on  the  ground  that  the 
law  confers  upon  the  stockholder  no  express  right  to  copy  from  the 
book.  The  right  to  inspect  the  book  includes  the  right  on  the  part 
of  the  stockholder  to  aid  his  memory  by  copjdng  therefrom  to  the 
extent  indicated  in  the  agreed  statement  of  facts  in  the  present  case. 
In  Cotheal  v.  Br'ouwer,  5  N.Y.  562,  it  was  held  that  the  custodian  of  a 
register  of  stockholders  which  the  stockholder  had  a  statutory  right 
to  examine  could  not  close  the  book  because  a  stockholder  desired  to 
make  a  memorandum  in  the  course  of  his  examination  in  order  to 
assist  his  recollection.  "Unless  the  stockholder  is  permitted  to  take 
memorandums  from  the  books,"  said  Paige,  J.,  "or  copies  of  the 
names  of  the  stockholders,  the  plain  object  of  the  statutory  provision 
would  be  defeated"  (p.  567). 

The  judgment  of  the  Appellate  Division  should  be  reversed  and 
judgment  directed  for  the  plaintiff  in  accordance  with  the  terms  of 
the  submission,  with  costs  in  both  courts. 

CuLLEN,  Ch.J.,  Vann,  Werner,  Hiscock  and  Chase,  JJ.,  con- 
cur; Gray,  J.,  not  voting. 

Judgment  reversed,  etc. 

Note.  —  See,  accord,  Cohh  v.  Lagarde,  129  Ala.  488;  Venner  v. 
Chicago  City  Ry.  Co.,  246  111.  170;  Kimhall  v.  Dern,  39  Utah,  181; 
Dames  v.  Gas  Light  Co.,  [1909]  1  Ch.  708. 


832  GOODNOW    V.  AMERICAN    WRITING    PAPER    CO.  [CIIAP.   II. 


B.  To  Dividends. 


GOODNOW  V.  AMERICAN  WRITING  PAPER  CO. 

73  N.J.  Eq.  092.     1907. 

SwAYZE,  J.  The  appellant  filed  his  bill  to  have  a  resolution  for  the 
payment  of  a  dividend  upon  the  preferred  stock  of  the  defendant 
declared  unlawful,  null  and  void,  and  to  restrain  payment  thereof. 
The  bill  charges  that  the  capital  stock  of  the  company  was  for  the 
most  part  issued  for  property  purchased,  which  included  trade-marks 
and  good  will  taken  at  a  gros.sly  excessive  valuation,  and  that  what- 
ever the  value  of  the  property  given  in  exchange  for  the  stock  may 
have  been  at  the  time  of  purchase,  it  now  falls  short  of  the  aggregate 
of  the  debts  and  the  par  value  of  the  stock;  that  the  operations  of 
the  company  have  been  successful,  and  to  some  extent  profitable,  a 
considerable  sum  of  money  having  been  earned  in  exce.'^s  of  the  in- 
terest upon  the  mortgage,  and  of  the  .SIOO.OOO  reriuired  annually  to 
be  set  aside  as  a  sinking  fund  for  the  mortgage  i)onds,  and  of  the 
cost  of  operating  the  company  and  keeping  up  its  manufacturing 
plant;  that  the  net  annual  gains  as  reported  by  the  directors  to  the 
stockholders  prior  to  1906  were  used  in  part  to  purcha.sc  the  com- 
pany's own  bonds  for  its  treasuiy  and  for  the  sinking  fund,  and  in 
part  were  set  aside  for  working  capital;  and  that  on  July  1st,  1906, 
the  balance  sheet  of  the  company  showed  accumulated  profits  to  an 
amount  several  times  the  amount  required  to  pay  the  proposed 
divitlend;  that  the  dividend  was  authorized  l)y  resolution  of  October 
2,  1906  (1905  in  the  printed  case  seems  to  be  a  clerical  error),  which 
directed  the  treasurer  to  pay  the  dividend  out  of  net  profits  on  April 
1,  1907.  The  gravamen  of  the  bill  is  that  the  payment  of  this  divi- 
dend would  constitute  a  division  and  withdrawal  and  payment  to 
the  holders  of  preferred  shares  of  a  part  of  the  capital  stock  of  the 
company,  and  would  constitute  an  unlawful  reduction  of  the  capital 
stock  in  violation  of  the  Corporation  Act. 

To  this  bill  the  defendant  demurred,  and  the  court  of  chancery 
allowed  the  demurrer. 

We  think  it  unnecessary  to  discuss  the  question  dealt  with  by  the 
learned  vice-chancellor  as  to  the  right  of  the  stockholders  to  raise 
this  question,  or  the  question  so  thoroughly  discussed  at  the  bar  as 
to  the  meaning  of  net  profits  under  our  Corporation  Act  as  it  stood 
prior  to  the  enactment  of  chapter  143  of  the  Laws  of  1904.  The 
question  seems  to  us  to  involve  only  the  construction  of  that  act, 
and  to  turn  upon  the  change  introduced  thereby.  Cases  cited  from 
other  jurisdictions  are  therefore  of  httle  assistance. 


SECT.  I.]         GOODNOW    V.  AMERICAN    WRITING    PAPER    CO.  833 

The  material  language  in  the  act  of  1896  (P.L.  1896,  p.  286)  is 
as  follows:  "No  corporation  shall  make  dividends,  except  from  the 
surplus  or  net  profits  arising  from  its  business,  nor  divide,  withdraw, 
or  in  any  way  pay  to  the  stockholders,  or  any  of  them,  any  part  of 
its  capital  stock,  or  reduce  its  capital  stock,  except  according  to  this 
act." 

In  the  act  of  1904  this  section  is  changed  so  as  to  read  as  follows: 
"The  directors  of  a  corporation  shall  not  make  dividends  except 
from  its  surplus,  or  from  the  net  profits  arising  from  the  business  of 
such  corporation,  nor  shall  it  divide,  withdraw,  or  in  any  way  pay 
to  the  stockholders,  or  any  of  them,  any  part  of  the  capital  stock  of 
such  corporation,  or  reduce  its  capital  stock  except  as  authorized 
by  law." 

Under  the  act  of  1896  there  was  room  to  contend  that  the  words 
"net  profits"  were  intended  to  be  synonymous  with  the  word  "sur- 
plus"; the  language  used  was  "from  the  surplus  or  net  profits." 
Under  the  act  of  1904,  this  contention  is  no  longer  possible;  the  lan- 
guage used  is  "from  its  surplus,  or  from  the  net  profits."  The  evident 
intent  of  the  change  is  to  point  out  two  funds  from  which  dividends 
may  be  made. 

Although  the  change  in  language  indicates  that  the  legislature 
made  a  distinction  between  surplus  and  net  profits,  it  does  not 
necessarily  follow  that  net  profits  mean  the  difference  between  gross 
earnings  and  what  may  be  called  operating  expenses.  Such  profits 
may  be  called  annual  profits,  and  it  may  be  that  by  net  profits  the 
legislature  meant  the  net  profits  upon  the  whole  of  the  company's 
business  from  its  organization.  If  either  of  these  meanings  is  adopted, 
the  declaration  of  the  present  dividend  is  justified.  There  was  an 
excess  of  gross  earnings  over  the  operating  expenses  of  the.  current 
year,  and  the  value  of  the  present  assets  exceeded  the  value  of  the 
actual  assets  with  which  the  company  began  business.  The  com- 
plainant contends,  however,  that  the  term  "net  profits"  is  used  in 
neither  of  these  senses,  but  in  the  sense  of  an  excess  of  the  value  of 
the  present  assets  over  the  par  value  .of  the  capital  stock  issued  and 
outstanding;  and  the  claim  is  that  since  that  stock  was  issued  for 
property  at  a  gross  overvaluation,  there  can  be  no  dividend  until 
the  difference  between  the  actual  value  of  the  property  and  the  value 
at  which  it  was  taken  over  is  made  up.  The  argument  is  that  the 
intent  of  §  30  is  to  prevent  the  capital  stock  being  distributed  in  the 
form  of  dividends,  and  the  words  "capital  stock"  are  supposed  to  be 
used  in  that  section  as  synonymous  with  "share  capital." 

The  ambiguity  in  the  term  "capital  stock"  was  noticed  by  this 
court  in  Wetherbee  v.  Baker,  35  N.J.  Eq.  (8  Stew.)  501.  It  may  mean 
either  the  capital  subscribed  (the  share  capital)  or  the  capital  paid 
in,  the  actual  assets  with  which  the  company  does  business.  It  seems 
to  be  used  in  both  senses  in  this  very  section.  When  the  legislature 


834  GOODNOW  r.  ameuican  whitixg  paper  CO.     [chap.  II. 

forbids  the  dividing;,  withdrawing  or  paying  to  the  stocklioldcrs  any 
part  of  the  capital  stock  it  means  the  capital  actually  invested;  when 
it  forbids  the  reduction  of  capital  stock  it  means  the  share  capital 
subscribed,  or  the  authorized  capital. 

We  are  led  to  the  conclusion  that  the  words  "capital  stock"  in 
the  first  instance  mean  capital  actually  invested,  by  the  fact  that 
it  is  only  actual  assets  that  can  be  divided,  withdrawn,  or  paid 
over.  These  words  are  not  a{)t  words  to  apply  to  nominal  or  share 
capital,  which  may  be  reduced,  but  can  hardly  be  withdrawn, 
divided,  or  paid  over.  This  capital  actually  invested  does  not  in- 
clude net  profits  arising  from  the  business  of  the  company,  for  the 
reasons  that  the  language  of  the  section  itself  makes  a  tlistinction 
between  the  declaration  of  dividends  and  of  profits  and  the  with- 
drawing of  capital;  that  another  method  of  securing  payment  of  the 
par  value  of  the  stock  is  provided  in  other  sections  of  the  act;  that 
the  policy  to  be  .served  by  the  prohibition  of  §  80  is  to  {)revent  the 
frittering  away  of  the  actual  assets  with  which  the  comjniny  is  to  do 
biLsiness,  not  the  nominal  assets  which  it  has  never  received  and  for 
which  it  still  has  a  claim  against  the  subscribers  for  unpaid  stock. 
The  section  distinguishes  between  surplus  and  net  profits;  but  if  the 
complainant  is  correct  in  his  contention  that  net  profits  mean  only 
the  excess  above  the  share  capital,  we  sec  no  ilislinctioii  in  fact,  but 
only  in  bookkeeping  entries. 

It  may  not  infreciuently  happen  that  stock  is  issued  on  which 
avowedly  only  a  partial  payment  is  made  of  the  amount  subscribed, 
which  is  therefore  subject  to  further  calls.  We  cannot  think  that  in 
such  a  case,  where  the  company  prospers,  there  are  no  net  profit.s 
available  for  dividends  until  the  earnings  accumulate  to  an  amount 
equal  to- the  par  value  of  the  shares.  The  complainant's  brief  con- 
cedes this,  anil  the  conce.'^sion  seems  quite  fatal  to  his  argument. 

The  language  of  §  47  supports  this  view.  It  requires  the  directors, 
after  reserving  over  and  above  its  capital  stock  paid  in  such  sum  as 
shall  have  been  fixed  as  a  working  capital,  to  declare  a  dividend  of 
the  whole  accumulated  profits.  Here  the  profits  are  clearly  to  be 
ascertained  by  reference  to  the  capital  stock  paid  in,  and  not  to  the 
nominal  share  capital.  It  would  be  quite  inconsistent  to  require  by 
§  47  a  dividend  out  of  profits  to  be  ascertained  with  reference  to 
capital  stock  paid  in,  and  to  forbid  by  §  ;30  a  dividend,  unlcsis  there 
were  net  profits  over  and  above  the  amount  of  the  nominal  share 
capital. 

Note. — In  Roberts  v.  Roberts-Wicks  Co.,  184  N.Y.  2.")7,  the  court 
said  (p.  266):  "Dividends,  as  the  rule,  are  not  payable  out  of  the 
capital  of  a  corporation,  but  only  from  the  surplus  profits  arising 
from  the  business  carried  on,  and  that  was  the  contract  here.  When 
the  property  of  a  corporation  has  accumulated  in  excess  of  its  char- 


SECT.  I.]  MCNAB    V.  McNAB    &    HARLIN    MFG.  CO.  835 

tered  capital,  the  excess  may  be  regarded  and  dealt  with  as  constitut- 
ing a  surplus  of  profits." 

If  assets  are  wasting  in  their  nature,  as  mines  or  patents,  a  sinking- 
fund  to  offset  the  waste  may  not  be  necessary.  See  Excelsior  Mining 
Co.  V.  Pierce,  90  Cal.  131;  Mellon  v.  Mississippi  Glass  Co.,  77  N.J. 
Eq.  498 ;  People  v.  Roberts  156  N.  Y.  585 ;  Lee  v.  Neuchatel  Asphalte  Co., 
L.R.  41  Ch.D.  1. 


McNAB  V.  McNAB  &  HARLIN  MFG.  CO. 

62  Hun  (N.Y.)  18.     1891. 

Daniels,  J.  The  defendant  was  incorporated  on  or  about  the  28th 
of  April,  1871,  under  the  laws  of  this  State  providing  for  the  incor- 
poration of  manufacturing  companies.  Its  business  was  declared  to 
be  that  of  manufacturing  brass  and  iron  goods  for  sale,  and  since  its 
incorporation  it  has  carried  on  that  business.  The  plaintiff  was  the 
owner  of  eight  shares  of  its  capital  stock,  which  consisted  of  one 
hundred  and  fifty  shares,  of  $1000  each,  and  the  other  defendants 
were  officers  and  shareholders  in  the  company.  After  its  formation, 
and  in  or  about  the  year  1877,  the  company  became  unable  to  pay 
its  debts,  and  a  proceeding  in  bankruptcy  was  instituted  to  discharge 
it  from  its  debts.  Soon  after  the  proceeding  was  commenced  the 
defendant  Harlin  became  the  president  of  the  company.  He  owned 
seventy-eight  shares  of  its  capital  stock,  and  compromised  the  debts 
owing  to  the  creditors  of  the  company.  The  agreement  for  the  com- 
promise was  to  pay  seventy-five  per  cent  within  the  period  of  three 
years.  After  he  took  charge  of  the  affairs  of  the  company  as  its 
president,  and  under  his  management,  the  business  became  prosper- 
ous, and  the  seventy-five  per  cent  was  paid  to  the  creditors,  and 
afterwards  they  were  paid  the  additional  sum  of  twenty-five  per 
cent,  making  payment  of  their  demands  in  full.  The  prosperitj^  of 
the  company  continued,  owing  to  the  judicious  management  of  the 
president,  and  for  eight  years  prior  to  the  time  of  the  trial,  which 
took  place  in  May,  1891,  its  net  profits  amounted  to  the  sum  of 
$100,000  a  year,  or  a  sum  slightly  in  advance  of  that  amount,  and 
from  the  year  1881  to  the  year  1891  it  made  and  paid  a  dividend  on 
its  shares  amounting  to  an  average  exceeding  the  sum  of  twenty-five 
per  cent;  and,  in  addition  to  the  dividends  made  in  this  manner,  it 
accumulated  a  large  surplus,  which  was  mainly  used  in  its  business, 
but  to  the  extent  of  about  one  hundred  thousand  dollars  was  in  its 
deposit  accounts.  And  it  was  stated  by  the  treasurer  in  his  evidence 
upon  the  trial  that  there  was  at  that  time  an  actual  surplus  owned  by 
the  company  amounting  to  the  sum  of  $152,209,  and  the  plaintiff, 
whose  action  was  brought  to  secure  the  distribution  of  the  surplus 
by  way  of  dividends,  alleged  and  claimed  that  a  still  larger  surplus 


836  MCNAB    V.  MCNAB    A    HARLIN    MFG.  CO.  [CHAP.  11. 

luul  been  earned  and  was  tnviieil  by  the  company;  and  it  wa.s  one  of 
the  principal  objects  of  the  action  to  secure  the  divi.sion  of  this  sur- 
plus by  way  of  dividends  among  the  shareholders.  But  it  was 
proved  in  the  course  of  the  trial  that  the  surplus  maintained  by  the 
company  was  profitai)ly  employetl  in  purchasing  the  material  u.sed 
by  it  in  the  course  of  its  manufactures,  and  that  it  was  consiiN-red  for 
the  best  interests  of  the  company  not  to  divide  this  surplus  among, 
the  shareholders.  The  directors,  in  restricting  the  dividends  as  they 
did,  seem  to  have  been  impres.sed  with  the  propriety  f)f  this  convic- 
tion, and  the  dividends  were  accordingly  limitetl  to  such  amounts 
from  year  to  year  as  did  not  intrench  upon  the  large  surplus  which 
had  been  earned  and  secured.  In  their  action  upon  this  subject  the 
trustees  appear  to  have  exercised  the  judgment  which  they  deemed 
to  be  most  consistent  with  the  prosperity  and  maintenance  of  the 
interests  of  the  company,  and  the  statute  under  which  the  incorpora- 
tion took  place  delegated  the  authority  of  the  trustees  to  manage  the 
stock,  property,  and  concerns  of  the  company  (2  Rev.  St.,  5th  ed., 
p.  503,  §  29);  and  to  what  amount  the  di\id(^n(ls  shall  be  made,  and 
the  extent  of  the  surplus  which  the  interests  of  the  company  may 
require  to  be  retained,  are  within  this  delegation  of  authority  con- 
fided to  the  trustees.  Antl  it  was  so  regarded  in  Williatns  v.  Telegraph 
Co.,  93  N.Y.  1G2,  where  it  was  .'^aid,  with  the  apjiarent  approval  of 
the  court,  that  "when  a  corporation  has  a  smplus,  whether  a  divi- 
dend shall  be  made,  and,  if  made,  iiow  much  it  shall  be,  and  when 
and  where  it  shall  be  payable,  rest  in  the  fair  and  honest  discretion 
of  the  directors,  uncontrollable  by  the  courts."  Id.  192.  And  no 
broader  principle  than  this  was  either  stated  or  sanctioned  in  >Vo//  v. 
Fire  Co.,  7  Paige,  198,  or  in  either  of  the  other  authorities  which 
have  been  brought  to  the  attention  of  the  court.  The  principle  to  be 
applied  is  that  which  shall  .secure  the  observance  of  gootl  faith  on  the 
part  of  the  directors,  and  this  principle  was  neither  denied  nor  in- 
trenched upon  in  Secley  v.  Bank,  8  Daly,  400,  which  was  affirmed  in 
78  N.Y.  608.  The  trustees  are  chosen  by  the  shareholders,  to  exer- 
cise their  best  judgment,  depending  upon  their  knowledge  of  the 
affairs  and  conflition  of  the  company;  and  when  that  has  been  done, 
the  courts  do  not  undertake  to  control  their  action,  although  they 
might  differ  in  their  views  of  the  proper  management  to  be  adopted 
and  followed.  No  reason  has  been  disclosed  by  the  case  for  doubting 
or  impeaching  the  good  faith  of  these  trustees.  Neither  can  it  be 
affirmed  justly,  in  view  of  the  large  business  carried  on  by  the  com- 
pany, that  they  acted  unreasonably  or  capriciously  in  declining  to 
order  a  larger  dividend  than  that  which  was  in  fact  paid  to  the 
shareholders. 

Note. —  In  Burland  v.  Earle,  [1902]  A.C.  83,  the  court  said 
(p.  95):  "Their  Lordships  are  not  aware  of  any   principle  which 


SECT.  I.]         FORD    V.  EASTHAMPTON    RUBBER    THREAD    CO.  837 

compels  a  joint-stock  company  while  a  going  concern  to  divide  the 
whole  of  its  profits  amongst  its  shareholders.  Whether  the  whole 
or  any  part  should  be  divided,  or  what  portion  should  be  divided 
and  what  portion  retained,  are  entirely  questions  of  internal  man- 
agement which  the  shareholders  must  decide  for  themselves,  and 
the  court  has  no  jurisdiction  to  control  or  review  their  decision,  or 
to  say  what  is  a  'fair'  or  'reasonable'  sum,  to  retain  undivided,  or 
what  reserve  fund  may  be  'properly'  required.  And  it  makes  no 
difference  whether  the  undivided  balance  is  retained  to  the  credit  of 
profit  and  loss  account,  or  carried  to  the  credit  of  a  rest  or  reserve 
fund,  or  appropriated  to  any  other  use  of  the  company.  These  are 
questions  for  the  shareholders  to  decide  subject  to  any  restrictions 
or  directions  contained  in  the  articles  of  association  or  by-laws  of  the 
company." 

In  the  United  States,  the  authorities  in  accord  with  the  reasoning 
and  result  of  the  principal  case  are  very  numerous.  But  the  courts 
have  jurisdiction  to  compel  the  declaration  of  a  dividend,  and  will 
do  so  in  a  proper  case.  See  Crichton  v.  Webb  Press  Co.,  113  La.  167; 
Cratty  v,  Peoria  Ass'n,  219  111.  516  (preferred  stock);  Blanchard  v. 
Prudential  Insurance  Co.,  78  N.J.  Eq.  471  (and  cases  cited);  Matter 
of  Rogers,  161  N.Y.  108,  112;  Morey  v.  Fish  Bros.  Wagon  Co.,  108 
Wis.  520. 

On  the  right  of  preferred  stockholders  to  dividends  see  Equitable 
Life  Assurance  Society  v.  Union  Pacific  R.R.  Co.,  212  N.Y.  360. 

On  the  mooted  question  as  to  whether,  in  a  suit  to  compel  the 
declaration  of  a  dividend,  the  directors  must  be  made  parties,  see 
Purchase  v.  Atlantic  Safe  Deposit  Co.,  81  N.J.  Eq.  344,  346  (as  a  cor- 
poration can  only  act  through  its  board  of  directors,  a  duty  of  the 
corporation  "  necessarily  belonged  to  the  board  and  to  each  mem- 
ber of  the  board  ");  Wilson  v.  United  States,  21  U.S.  361,  376  ("a 
command  to  the  corporation  is  in  effect  a  command  to  those  who 
are  officially  responsible  for  the  conduct  of  its  affairs"). 

It  is  idt7'a  vires  for  a  corporation  to  guarantee  dividends  on  its  own 
stock.  See  Strickland  v.  National  Salt  Co.,  79  N.J.  Eq.  182. 


FORD  V.   EASTHAMPTON  RUBBER  THREAD  CO. 

158  Mass.  84.     1893. 

Contract  for  money  had  and  received.  At  the  trial  in  the  Superior 
Court,  without  a  jury,  before  Aldrich,  J.,  there  was  evidence  tend- 
ing to  show  that  the  plaintiff  on  June  16,  1891,  owned  fifty-two  shares 
of  the  capital  stock  of  the  defendant  companj^,  of  the  par  value  of  one 
hundred  dollars  per  share ;  that  on  that  day  the  directors  passed  the 
following  vote,  namely,  "That  a  dividend  of  20  per  cent  be  paid  to 


838       FORD  V.   EASTHAMPTON  RUBBER  THREAD  CO.   [cHAI*.  11. 

stockholders  of  this  date,  payaljle  Tuc-sday,  June  23d,  1891 ";  thut  on 
said  June  lOth  the  annual  meeting  of  stockholders  of  the  company 
for  the  election  of  directors  was  hekl  immediately  after  the  meetinj? 
of  directors,  accordinj^  to  custom,  and  duly  elected  five  tlirectors,  tw 
provided  by  the  by-laws  of  the  company,  two  only  of  the  old  directors 
being  re-elected,  and  no  director  being  re-electeil  who  voted  for  the 
twenty  per  cent  dividend,  though  the  two  who  were  re-elected  were 
present  at  the  meeting  when  it  was  voted;  and  that  on  said  June  IGth, 
as^oon  as  the  stockholdei-s'  meeting  adjourned,  the  directors  elected 
and  re-elected  thereat  met,  cjualified,  organized  for  the  year,  and 
passed  the  following  votes:  "That  the  vote  passed  by  the  directors 
of  this  company  this  day  declaring  a  dividend  of  20  {n-r  cent  on  the 
capital  stock  of  the  company,  payable  Tuesday,  June  23d,  ISIU,  \)C 
rcconsitlered  anil  rescinded;  the  same  is  hereby  rescinded.  That  a 
dividend  of  six  per  cent,  payable  June  23d  instant  to  stockholders  of 
record  this  day,  be  declared  in  place  of  the  dividend  voted  at  earlier 
meeting  of  this  board  this  day."  It  also  appf'ared  that  no  money  was 
set  aside  or  provided  to  pay  said  dividend  of  twenty  {xt  cent,  but  the 
company  had  ample  means  antl  facilities  for  paying  the  twenty  i)cr 
cent  dividend;  that  always  before  money  had  Ik'cu  provided  to  pay  a 
dividend  before  it  was  declared;  that  money  to  pay  said  six  per  cent 
dividend  was  provided  after  the  meeting  arul  before  said  '2M\  of  June 
by  borrowing,  and  the  same  was  set  aside  and  deposited  in  bank 
therefor;  that  the  treasurer  sent  the  check  of  the  defendant  on  the 
bank  where  the  money  was  deposited  to  each  stockholder  of  record  of 
said  June  Kith  to  pay  the  dividend  on  his  stock  at  six  per  cent,  in- 
cluding the  plaintiff,  on  said  23d  June,  1891 ;  and  that  the  plaintilT  de- 
clined to  accept  the  check,  and  returned  the  money  to  the  treasurer. 
It  further  appeared  in  evidence  that  no  stockholder  of  the  defendant 
had  been  paid  the  twenty  per  cent  dividend  for  June,  1S91;  that  a 
majority  of  the  stockholdei's  had  accepted  the  dividend  of  six  per 
cent  paid  by  checks  iis  aforesaid  on  June  23,  1891,  in  full;  that  the 
plaintiff,  by  his  attorney,  by  letter  of  June  30,  1891,  (h>nianded  pay- 
ment of  the  twenty  per  cent  dividend  from  the  defendant;  and  that 
the  plaintiff  made  no  objection  to  the  check  of  the  defendant  sent 
him  to  pay  the  dividend  of  June  16,  1891,  except  that  it  was  for  a 
dividend  of  six  per  cent,  instead  of  twenty  per  cent. 

The  defendant  asked  the  court  to  rule  that  the  directors  elected  on 
June  16  had  a  right  on  that  day  to  rescind  the  vote  whcrel)y  the 
twenty  per  cent  dividend  was  declared  payable  at  a  future  day;  and 
that  the  plaintiff  could  not  recover.  The  judge  declined  so  to  rule, 
ordered  judgment  for  the  plaintifT,  and  reported  the  case  for  the 
determination  of  this  court.  If  the  refusal  to  rule  and  order  of  judg- 
ment were  correct,  judgment  was  to  be  affirmed;  otherwise,  judgment 
was  to  be  ordered  for  the  defendant. 

Field,  C.J.  It  seems  to  be  settled  that,  when  a  dividend  has  been 


SECT.  I.]         FORD    V.  EASTHAMPTON    RUBBER    THREAD    CO.  839 

fully  declared,  the  corporation  thereby  manifests  its  intention  that 
the  amount  of  the  dividend  should  be  considered  as  having  been 
separated  from  the  other  property  of  the  corporation,  and  as  having 
become  the  individual  property  of  the  stockholders,  and  that  there- 
fore, when  the  dividend  becomes  payable  according  to  the  terms  of 
the  vote  declaring  it,  each  stockholder  has  a  right  to  demand  pay- 
ment of  the  proportional  part  of  the  dividend  which  belongs  to  his 
shares  of  stock,  and  to  sue  the  corporation  for  it,  if  it  is  not  paid  on 
demand.  In  some  cases  money  or  other  property  equal  to  the  whole 
amount  of  the  dividend  declared  has  been  specifically  set  apart  as  a 
fund  appropriated  to  the  payment  of  the  dividend,  and  the  stock- 
holders have  been  regarded  as  the  cestuis  que  trust  of  this  fund,  each 
entitled  to  his  share.  In  other  cases,  the  corporation  has  credited 
the  stockholders  with  the  amount  of  their  shares  of  the  dividend, 
and  the  stockholders  have  assented  to  this,  and  the  amount  so 
credited  has  been  regarded  as  a  debt  of  the  corporation  to  the  stock- 
holders; or  the  corporation  has  paid  to  some  of  the  stockholders  their 
shares  of  the  dividend,  and  has  refused  to  pay  anything  to  the 
others,  and  it  has  been  held  that  the  corporation  must  pay  all  alike. 
See  Beers  v.  Bridgeport  Spring  Co.,  42  Conn.  17;  State  v.  Baltimore  & 
Ohio  Railroad,  6  Gill,  363;  King  v.  Pater  son  &  Hudson  River  Railroad, 
5  Dutch.  504;  Jermain  v.  Lake  Shore  &  Michigan  Southern  Railway, 
91  N.Y.  483;  Hopper  v.  Sage,  112  N.Y.  530;  Jackson  v.  Newark 
Plankroad  Co.,  2  Vroom,  277;  Wheeler  v.  Northwestern  Sleigh  Co.,  39 
Fed.  Rep.  347.  When  a  dividend  has  been  declared  payable  at  a 
definite  future  time,  but  no  fund  has  been  set  apart  for  the  payment 
of  the  dividend,  and  the  corporation  meanwhile  becomes  insolvent, 
whether  the  stockholders  to  the  extent  of  their  proportions  of  the 
dividend  should  share  ratably  with  the  creditors  of  the  corporation 
in  its  property  has  not,  so  far  as  we  know,  been  recently  considered, 
but  the  decision  in  Lowene  v.  American  Ins.  Co.,  6  Paige,  482,  is  that 
they  should.  The  setting  apart  of  a  fund  to  pay  a  dividend  has  been 
held  to  give  a  lien  upon  it  to  the  stockholders,  which  they  can  enforce 
to  the  exclusion  of  the  general  creditors  of  the  corporation.  In  re 
Le  Blanc,  14  Hun,  8,  and  75  N.Y.  598;  Le  Roij  v.  Globe  Ins.  Co.,  2 
Edw.  Ch.  657.  The  English  Companies'  Act,  1862  (25  &  26  Vict.  c. 
89,  §  38,  cl.  7),  provides  that  "no  sum  due  to  any  member  of  a  com- 
pany, in  his  character  of  a  member,  by  way  of  dividends,  profits,  or 
otherwise,  shall  be  deemed  to  be  a  debt  of  the  company,  paj'able  to 
such  member  in  a  case  of  competition  between  himself  and  any  other 
creditor  not  being  a  member  of  the  company;  but  any  such  sum  may 
be  taken  into  account,  for  the  purposes  of  the  final  adjustment  of 
the  rights  of  the  contributories  amongst  themselves."  Upon  these 
questions,  however,  we  desire  to  express  no  opinion. 

It  has  been  argued  that  there  is  no  consideration  for  the  promise  of 
a  corporation  to  pay  a  dividend  to  its  stockliolders,  but  we  think  that 


840  FORD    V.  EAftTIIAMPTON    RUBBER    THREAD    CO.       (cHAP.  II. 

the  doctrine  of  consideration  applicable  to  a  simple  contract  l)otwcen 
persons  luiviiiK  no  fiduciary  relations  to  each  otht-r  is  not  applicahle 
to  such  promise.  It  is  tlie  object  of  a  private  hubine&j  corjxjration  to 
make  money  for  its  stockholders,  and,  under  our  laws,  it  la  ordinarily 
the  duty  of  the  directors  from  time  to  time  to  tleclarc  dividends  out  of 
the  net  earninf^s,  if  there  arc  any,  ami  it  must  Im-  U-ft  hirp-ly  to  the 
discretion  of  the  directors  to  determine  when  and  for  how  much  such 
dividenils  shouUl  he  declared.  The  whole  property  of  the  corporation 
is  held  on  a  sort  of  trust  for  the  stockholders,  and  the  directors  are, 
in  a  general  sensr,  the  manan(Ms;  an<l  whrn  a  dividend  is  declan-d  by 
the  directors,  the  declaration  is  a  determination  by  a  Ixnly  authorized 
to  make  it  that  the  amount  of  the  dividend  should  tx?  taken  from  the 
])roperty  of  the  corporatioi»  anil  paid  over  to  the  stockholders.  The 
cause  of  action  of  each  stockholder  against  the  corporation  for  non- 
j)ayment  of  the  divideiul  does  not  arise  from  any  actual  contract 
between  the  corporation  and  its  stockholders,  but  from  the  nature  of 
the  organization,  and  the  relation  of  the  stockholders  to  the  corpo- 
ration and  its  property.  l'nle.»<s  the  rights  of  creditors  intersene,  or 
the  corporation  is  enjoinetl  from  paying  the  dividend,  on  the  ground 
that  the  dividend  hius  not  l)et>n  earned,  or  on  some  other  ground,  the 
amount  of  the  dividend,  after  it  has  l)oen  declared  and  has  U'come 
payal)le,  is  considered  as  i)rop<>rty  held  by  the  corporation  for  the 
use  of  the  stockholders  individually,  and  the  stockholders  may  re- 
cover their  shares  as  money  or  property  had  and  received  to  their  use. 
We  have  been  able  to  find  little  or  no  authority  on  the  precise  ques- 
tion involved  in  this  ca.sc>,  namely,  whether,  after  a  dividend  has  l)een 
duly  declared  by  a  vote  of  the  directors,  but  payable  at  a  future  time, 
the  vote  can  be  rescinded  at  a  subsequent  meeting  of  the  directors, 
held  before  the  time  at  which  the  dividentl  becomes  payable  accord- 
ing to  the  vote,  when  the  fact  that  a  dividend  has  been  declared  has 
not  been  matle  public,  or  in  any  manner  communicate<l  to  the  stock- 
holders, and  when  no  fund  has  been  set  apart  for  the  payment  of  the 
dividend.  On  principle,  we  do  not  see  why  the  directors  may  not 
rescind  such  a  vote,  under  the  circumstances  stated.  By  the  vote 
no  specific  property  passed  to  the  stockholders.  If  the  vote  l)C 
regarded  as  a  declaration  of  trust  in  favor  of  the  stockholders,  it 
could  be  revoked  l)efore  it  was  communicated  to  them  or  any  prop- 
erty was  identified  and  set  aside  for  them.  Indeed,  cases  may  easily 
be  supposed  of  such  a  change  in  the  affairs  of  a  corporation,  between 
the  time  when  a  dividend  is  declared  and  the  time  when  it  becomes 
payable,  as  to  make  the  exercise  of  such  a  power  by  the  directors 
useful,  if  not  nccessarj',  for  the  successful  continuance  of  the  business 
of  the  corporation.  It  appears  in  the  present  case  that  the  meeting 
of  the  new  directors  at  which  the  vote  was  rescinded  was  held  after 
the  annual  meeting  of  the  stockholders,  but  on  the  same  day  as  the 
meeting  of  the  directors  at  which  the  vote  was  passed,  which  was 


SECT.  I.]  BURROUGHS    V.  NORTH    CAROLINA    R.R.  CO.  841 

held  just  before  the  meeting  of  the  stockholders;  and  that  at  the 
meeting  of  the  stockholders  "the  president  did  not,  as  had  for  many 
years  been  the  custom,  announce  that  any  dividend  had  been  de- 
clared, or  promulgate  the  same  to  the  stockholders";  and  it  does  not 
appear  that  any  of  the  stockholders,  except  the  directors,  knew  of  the 
original  vote,  or  that  any  of  the  stockholders  had  made  any  con- 
tracts, incurred  any  liability,  or  done  anything  relying  on  the  vote. 
It  also  appears  that  no  fund  was  distinctly  set  apart  for  the  payment 
of  the  dividend  before  the  vote  was  rescinded.  As  the  passage  of  the 
vote  did  not  constitute  an  actual  contract  of  the  corporation  with  its 
stockholders,  but  was  merely  a  mode  of  dividing  the  earnings  of  the 
property  of  the  corporation  among  the  stockliolders,  we  are  of  opin- 
ion that  before  the  division  had  been  actually  made,  and  before  the 
position  of  the  stockholders  had  been  changed  in  reliance  on  the 
vote,  —  certainly  before  the  passage  of  the  vote  had  been  made 
public,  or  communicated  to  the  stockholders,  —  it  was  within  the 
power  of  the  directors,  at  a  meeting  subsequent  to  that  at  which  the 
vote  was  passed,  to  rescind  it.  In  this  action  at  law,  we  cannot 
supervise  the  exercise  of  this  power  by  the  directors. 

Judgment  for  the  defendant. 

Note.  —  Cf.  McLaran  v.  Planing  Mill  Co.,  117  Mo.  App.  40. 


BURROUGHS  v.  NORTH  CAROLINA  R.R.  CO. 

67  N.C.  376.     1872. 

Rodman,  J.  On  16th  February,  1870,  the  North  Carolina  Railroad 
Company  declared  a  dividend  by  the  following  resolution:  "The 
Board  of  Directors  of  the  North  Carolina  Railroad  Company  do  de- 
clare an  annual  dividend  of  six  per  cent  on  the  capital  stock  of  this 
company,  for  the  fiscal  year  ending  the  31st  of  May,  1870.  Three 
per  cent  to  be  paid  on  1st  April,  and  three  per  cent  payable  on  the 
first  day  of  July,  1870,  and  the  transfer  books  be  closed  from  first 
day  of  March  to  the  first  of  April,  and  from  the  first  day  of  June 
until  the  first  day  of  July." 

On  the  17th  February,  the  plaintiffs,  in  writing  in  the  usual  form, 
at  the  foot  of  their  certificate  far  thirty-four  shares  of  stock  in  the 
company,  transferred  the  same  to  Samuel  H.  Wiley  for  value,  and 
authorized  F.  A.  Stagg,  attorney,  to  transfer  the  same  on  the  books 
of  the  company.  The  transfer  was  accordingly  made  on  the  21st 
February.  The  certificate  of  stock  to  the  plaintiffs  was  cancelled, 
and  a  new  certificate  issued  to  Wiley.  On  the  same  day  plaintiffs 
notified  the  company  that  they  claimed  the  dividend  declared  on  16th 
February.  The  company,  nevertheless,  paid  the  same  to  Wiley,  and 


842  BURROUGHS  i-.  north  Carolina  r.r.  co.       [chap.  ii. 

this  action  is  brought  to  recover  it.  One  would  suppose,  that  in  a 
case  which  nuist  he  of  fre(iuent  occurrence,  there  would  l)e  i)roved 
some  estahlishcd  usage,  or  that  some  decidetl  cases  could  l>e  found 
fixing  the  rights  of  tlie  parties.  If  tiiere  Ih'  any  estahli.^iied  u.siige, 
either  general  or  special  to  this  corporation,  there  luis  Urn  no  evi- 
dence of  it  olTered  in  this  case.  And  the  learned  counsel  inform  us 
that  they  have  })een  al)le  to  find  no  authority  whatever  on  it.  The 
absence  of  authority  is  the  more  remarkable,  jus  the  rule  as  to  a  divi- 
dend following  the  stock  or  not,  under  the  pre.s<-nt  circumstances, 
would  seem  to  Ix*  of  a  general  nature,  not  conhned  to  sales,  but  cover- 
ing the  case  of  a  life  tenant  with  remaindtT,  when  the  life  tenant  dies 
after  the  dividend  is  declared,  and  i)efore  it  is  payable,  jmd  the  ca.sc 
of  a  will  bequeathing  stock.wlun  the  testator  dies  uniler  the  like  cir- 
cumstances. 

Before  proceeding  to  the  pai  licular  consideration  of  this  ca.se,  it  is 
neces.sary  to  ob.serve:  — 

1.  It  was  clearly  within  the  power  of  the  seller  and  purchaser  of 
the  stock  in  this  ciuse,  to  have  contracted  with  resiK>ct  to  the  divitlcnd 
declared  on  the  day  Ix^foro.  But, 

2.  If  we  a.ssume  for  the  moment,  that  the  efFect  of  the  resolution, 
declaring  the  dividend,  was  to  make  it  payal)le  to  whoever  should 
appear  by  the  books  of  the  company  to  \>c  the  owner  of  the  stock  on 
the  days  on  which  it  wa.s  payable,  then,  notwithstanding  any  dilTer- 
ent  contract  between  the  plaint ilTs  and  their  vendee,  the  company 
was  justifi(>d  in  paying  to  the  vendee,  and  the  redress  of  the  jjlaintifTs 
would  be  by  an  action  against  their  vendee  for  money  had  and  re- 
ceived. 

It  is  inijioitant  to  notice  that  the  fiuestion  is.  not  as  to  i  he  coiitrat-t 
between  |)laiiilitTs  and  Wiley,  but,  to  whom  did  tlu'  company  agree  to 
pay  the  dividend;  for  if  the  company  agree  to  pay  to  one  who  turned 
out  to  be  Wiley,  its  liability  cannot  Ix'  affected  by  any  collateral 
agreement  between  the  plaint ilTs  and  Wiley  (even  if  there  were 
express  proofs  of  such)  without  its  consent.  Without  adverting  to  the 
principle,  that  the  contract  U^tween  plaintiffs  and  Wiley  must  be 
supposed  to  have  Ix^en  made  in  reference  to  the  resolution  of  the  day 
before,  as  to  which  it  does  not  appear  that  either  party  had  any 
advantage  in  point  of  knowledge;  yet,  in  the  absence  of  a  contrary 
agreement,  the  .sale  must  necessarily  have  b(>en  of  the  subject-matter 
with  its  rights  and  incidents  at  the  date,  or  perhaps  when  the  transfer 
should  be  completed. 

So  that  the  true  question  is,  what  was  the  effect  and  meaning  of 
the  resolution?  Did  it  mean  that  the  dividend  should  be  payable  to 
those  who  held  the  stock  on  b5th  February,  or  to  tho.se  who  should 
hold  it  on  1st  April?  If  the  resolution  had  been  clear  and  explicit  in 
either  sense,  I  conceive  there  could  be  no  room  for  a  controversy. 
Being  of  uncertain  meaning,  the  courts  have  to  give  it  a  certain  one. 


SECT.  I.]  STOKES    t'.  CONTINENTAL   TRUST   CO.  843 

But  whatever  shall  be  determined  to  be  its  meaning  in  law,  that  must 
be  taken  to  be  as  plainly  its  meaning  as  if  it  had  been  expressly 
written  so. 

What  was  the  object  in  declaring  the  transfer  books  of  the  com- 
pany closed  from  1st  March  to  1st  April? 

If  the  dividend  was  intended  to  be  payable  to  any  one  who  was  the 
holder  on  16th  February,  there  could  be  no  sue  in  closing  the  books. 
In  any  case,  upon  a  demand  for  payment,  it  would  only  be  necessary 
to  see  from  the  books  who  was  the  holder  on  that  day.  But  if  the 
usage  be,  to  put  the  dividend  on.  the  books  of  the  company  to  the 
credit  of  the  holders  on  1st  March,  we  can  see  a  reason  for  closing 
the  books,  viz.,  to  give  time  for  the  company  to  make  out  its  accounts 
with  its  stockholders  on  that  day.  Suppose  an  assignment  of  stock 
between  1st  March  and  1st  April,  would  the  company  be  bound  to 
notice  it,  in  reference  to  a  dividend  payable  1st  April?  I  think  not. 

Note.  —  Cf.  Hopver  v.  Sage,  112  N.Y.  530. 

Nisbet  V.  Philp,  [1913]  2  Ch.  697.  Where  preference  shares  carry- 
ing a  fixed  cumulative  preferential  dividend  are  bequeathed  in  trust 
for  a  life  tenant  and  remaindermen,  and  no  dividend  is  declared  or 
paid  for  the  financial  years  including  the  life  tenancy,  the  life  ten- 
ant's executors  are  not  entitled  to  have  the  arrears  made  good  out  of 
future  preferential  dividends. 


C.  To  subscribe  to  New  Issues  of  Stock. 


STOKES  V.  CONTINENTAL  TRUST  CO. 

186  N.Y.  285.     1906. 

Appeal  from  an  order  of  the  Appellate  Division  of  the  Supreme 
Court  in  the  first  judicial  department,  entered  January  4,  1905,  re- 
versing a  judgment  in  favor  of  plaintiff  entered  upon  a  decision  of  the 
court  on  trial  at  Special  Term  and  granting  a  new  trial. 

This  action  was  brought  by  a  stockholder  to  compel  his  corporation 
to  issue  to  him  at  par  such  a  proportion  of  an  increase  made  in  its 
capital  stock  as  the  number  of  shares  held  by  him  before  such  increase 
bore  to  the  number  of  all  the  shares  originally  issued,  and  in  case  such 
additional  shares  could  not  be  delivered  to  him  for  his  damages  in  the 
premises. 

The  defendant  is  a  domestic  banking  corporation  in  the  city  of 
New  York,  organized  in  1890,  with  a  capital  stock  of  $500,000,  con- 
sisting of  5000  shares  of  the  par  value  of  $100  each.  The  plaintiff 
was  one  of  the  original  stockholders,  and  still  owns  all  the  stock 


844  STORES    I'.  CON'TINENTAL   TRUHT    CO.  [CHAP.  II. 

issued  to  him  at  the  date  of  orRanization,  together  with  onouRh  more 
acquired  since  to  make  221  shares  in  all.  On  the  29th  of  Januar>', 
1902,  the  defendant  liud  u  surplus  of  .'5I,()-IS,4.'jU.I)4,  whicli  made  the 
book  value  of  the  stock  at  that  time  $:U)9.r)0  jH'r  share.  On  the  2d  of 
January,  1902,  Blair  &  Company,  a  strong  and  influential  lirm  of 
private  hankers  in  the  city  of  New  York,  made  the  following  propo- 
sition to  the  defendant :  "  If  your  stockholdei-s  at  the  special  meeting 
to  be  called  for  January  29,  1902,  vote  to  increa.se  your  capital  stock 
from  $500,000  to  ,'$1,(K)0.(KK)  you  may  deliver  the  additional  stock  to 
us  as  soon  as  i.ssued  at  .S4r)0  per  share  (.$100  par  value)  for  ours<'lves 
and  our  associates,  it  being  understood  that  we  may  nominate  ten 
of  the  twenty-one  trustees  to  be  elected  at  the  adjourned  annual 
meeting  of  stockholders." 

The  directors  of  the  defendant  promptly  met  and  duly  authorized 
a  special  meeting  of  the  stockholdei*s  to  le  called  to  meet  on  Januar>' 
29,  1902,  for  the  |)uri)ose  of  voting  upon  the  propo.sed  increa.se  of 
stock  and  the  acceptance  of  the  offer  to  purcha.se  the  .same.  I'pon 
due  notice  a  meeting  of  the  stockholders  was  held  accordingly,  more 
than  a  majority  attending  either  in  person  or  by  proxy.  A  resolution 
to  increase  the  stock  was  adopted  by  the  vote  of  4197  shares,  .all  that 
were  cast.  Thereupon  the  plaintiiT  demandi'd  from  the  tlefentlant 
the  right  to  subscribe  for  221  shares  of  the  new  stock  at  par,  and 
offered  to  pay  immediately  for  the  same,  which  demand  was  refu.sed. 
A  resolution  directing  a  sale  to  Blair  &  Company  at  ."?4.')0  a  .share  was 
then  adopted  by  a  vote  of  8590  shares  to  241 .  The  plaintiff  votc^l  for 
the  first  resolution  but  again.st  the  last,  and  befuj-e  the  atloption  of 
the  latter  he  protested  against  the  proposed  sale  of  his  proportionate 
share  of  the  stock  and  again  demanded  the  right  to  subscribe  and 
pay  for  the  same,  but  the  dt^mand  was  refused. 

On  the  30th  of  January-,  1902,  the  stock  was  increased,  and  on  the 
same  day  was  sold  to  Blair  &  Company  at  the  price  named.  Although 
the  plaintiff  formally  renewed  his  demand  for  221  .shares  of  the  new 
stock  at  par  and  tenderetl  payment  therefor,  it  was  refu.sed  upon  the 
ground  tliat  the  stock  had  already  Ix^en  i.ssued  to  Blair  &  Company. 
Owing  in  part  to  the  offer  of  Blair  &  Company,  which  had  become 
known  to  the  public,  the  market  price  of  the  stock  had  increased  from 
$450  a  share  in  September,  1901,  to  $550  in  January,  1902,  and  at 
the  time  of  the  trial,  in  April,  1904,  it  was  worth  $700  per  share. 

Prior  to  the  special  meeting  of  the  stockholders,  by  authority  of 
the  board  of  directors  a  circular  letter  was  sent  to  each  stockholder, 
including  the  plaintiff,  giving  notice  of  the  proposition  made  by 
Blair  &:  Company  and  recommending  that  it  be  accepted.  There- 
upon the  plaintiff  notified  the  defendant  that  he  wished  to  suV)scribe 
for  his  proportionate  share  of  the  new  stock,  if  issued,  and  at  no  time 
did  he  waive  his  right  to  subscribe  for  the  same.  Before  the  special 
meeting,  he  had  not  been  definitely  notified  by  the  defendant  that  he 


SECT.  I.]  STOKES    V.   CONTINENTAL   TRUST    CO.  845 

could  not  receive  his  proportionate  part  of  the  increase,  but  was 
informed  that  his  proposition  would  "be  taken  under  consideration." 

After  finding  these  facts  in  substance,  the  trial  court  found,  as 
conclusions  of  law,  that  the  plaintiff  had  the  right  to  subscribe  for 
such  proportion  of  the  increase,  as  his  holdings  bore  to  all  the  stock 
before  the  increase  was  made;  that  the  stockholders,  directors,  and 
officers  of  the  defendant  had  no  power  to  deprive  him  of  that  right, 
and  that  he  was  entitled  to  recover  the  difference  between  the  mar- 
ket value  of  221  shares  on  the  30th  of  January,  1902,  and  the  par 
value  thereof,  or  the  sum  of  $99,450,  together  with  interest  from 
said  date.  The  judgment  entered  accordingly  was  reversed  by  the 
Appellate  Division,  and  the  plaintiff  appealed  to  this  court,  giving 
the  usual  stipulation  for  judgment  absolute  in  case  the  order  of 
reversal  should  be  affirmed. 

Vann,  J.  .  .  .  The  leading  authority  is  Gray  v.  Portland  Bank, 
decided  in  1807  and  reported  in  3  Mass.  364.  In  that  case  a  verdict 
was  found  for  the  plaintiff,  subject,  by  the  agreement  of  the  parties, 
to  the  opinion  of  the  court  upon  the  evidence  in  the  case  whether  the 
plaintiff  was  entitled  to  recover,  and,  if  so,  as  to  the  measure  of  dam- 
ages. The  court  held  that  stockholders  who  held  old  stock  had  a 
right  to  subscribe  for  and  take  new  stock  in  proportion  to  their 
respective  shares.  As  the  corporation  refused  this  right  to  the  plain- 
tiff he  was  permitted  to  recover  the  excess  of  the  market  value  above 
the  par  value,  with  interest.  In  the  course  of  its  argument  the  court 
said:  "A  share  in  the  stock  or  trust  when  only  the  least  sum  has 
been  paid  in  is  a  share  in  the  power  of  increasing  it  when  the  trustee 
determines  or  rather  when  the  cestuis  que  trustent  agree  upon  em- 
ploying a  greater  sum.  ...  A  vote  to  increase  the  capital  stock,  if  it 
was  not  the  creation  of  a  new  and  disjointed  capital,  was  in  its  nature 
an  agreement  among  the  stockholders  to  enlarge  their  shares  m  the 
amount  or  in  the  number  to  the  extent  required  to  effect  that  in- 
crease. ...  If  from  the  progress  of  the  institution  and  the  expense 
incurred  in  it  any  advance  upon  the  additional  shares  might  be 
obtained  in  the  market,  this  advance  upon  the  shares  relinquished 
belonged  to  the  whole,  and  was  not  to  be  disposed  of  at  the  will  of 
a  majority  of  the  stockholders  to  the  partial  benefit  of  some  and 
exclusion  of  others." 

This  decision  has  stood  unquestioned  for  neai'ly  a  hundred  years, 
and  has  been  followed  generally  by  courts  of  the  highest  standing. 
It  is  the  foundation  of  the  rule  upon  the  subject  that  prevails,  almost 
without  exception,  throughout  the  entire  country. 

[After  reviewing  the  authorities.]  If  the  right  claimed  by  the  plain- 
tiff was  a  right  of  property  belonging  to  him  as  a  stockholder  he  could 
not  be  deprived  of  it  by  the  joint  action  of  the  other  stockholders  and 
of  all  the  directors  and  officers  of  the  corporation. 

What  is  the  nature  of  the  right  acquired  by  a  stockholder  through 


846  STOKES    V.  CONTIXEN'TAL   TRUST    CO.  (cHAr.   II. 

the  ownership  of  shares  of  stock?  What  rights  can  he  assert  against 
the  will  of  a  majority  of  the  stockhoKiei-s  and  all  the  officers  and 
directors?  While  he  does  not  own  and  cannot  dis|)ose  of  any  sp<'cific 
property  of  the  corporation,  yet  he  and  his  associates  own  the  cori)<>- 
ration  itself,  its  charter,  franchises,  and  all  ri^^hts  conftTred  thereby, 
including  the  right  to  increase  the  stock.  He  has  an  inherent  right  to 
his  proportionate  share  of  any  dividend  declared,  or  of  any  surplus 
arising  ujK)n  dissolution,  and  he  can  prevent  waste  or  misappropria- 
tion of  the  proiM-rty  of  the  coriwjration  by  those  in  control.  Finally, 
he  has  the  right  to  vote  for  directors  and  uiH)n  all  propositions  sul)- 
jcct  by  law  to  the  control  of  the  stockholdei-s,  and  this  is  his  supreme 
right  and  main  protection.  Stockholders  have  no  direct  voice  in 
transacting  the  corporate  busine.'^s,  but  through  their  right  to  vote 
they  can  select  those  to  whom  the  law  intrusts  the  power  of  manage- 
ment and  control. 

A  corporation  is  somewhat  like  a  partnership,  if  one  were  possible, 
conducted  wholly  by  agents  where  the  co|)artners  have  jwiwer  to  ap- 
point the  agents,  but  are  not  respinisible  for  their  acts.  The  power  to 
manage  its  affairs  resides  in  the  ilirectors,  who  are  its  agents,  but  the 
power  to  elect  directors  resides  in  the  stockholders.  This  right  to  vote 
for  directors  and  upon  |)r()positions  to  increase  the  stock  or  mortgage 
the  assets,  is  al)()ut  all  the  power  the  stockholder  has.  So  long  as  the 
management  is  honest,  within  the  corporate  powers  and  involves 
no  waste,  the  stockholders  cannot  interfere,  even  if  the  administra- 
tion is  feeble  and  un.satisfactoiT,  but  must  correct  such  evils  through 
their  power  to  {>lect  other  directors.  Hence  the  power  of  the  indi- 
vidual stockholder  to  vote  in  proportion  to  the  number  of  his  shares 
is  vital,  and  cannot  be  cut  off  or  curtailed  by  the  action  of  all  the 
other  stockholders  even  with  the  cooperation  of  the  directors  and 
officers. 

In>he  case  before  us  the  new  stock  came  into  existence  through  the 
exercise  of  a  right  belonging  wholly  to  the  stockholders.  As  the  right 
to  increase  the  stock  belonged  to  them,  the  stock  when  increased  Imj- 
longed  to  them  also,  as  it  was  issue<l  for  money  and  not  for  property 
or  for  some  purpose  other  than  the  .'^ale  thereof  for  money.  By  the 
increase  of  stock  the  voting  power  of  the  plaintiff  was  reduced  one 
half,  and  while  he  consented  to  the  increa.se  he  did  not  consent  to  the 
disposition  of  the  new  stock  by  a  .sale  thereof  to  Blair  &  Company  at 
less  than  its  market  value,  nor  by  sale  to  any  person  in  any  way  ex- 
cept by  an  allotment  to  the  stockholders.  The  increase  and  sale  in- 
volved the  transfer  of  rights  belonging  to  the  stockholders  as  part  of 
their  investment.  The  issue  of  new  stock  and  the  sale  thereof  to 
Blair  &  Company  was  not  only  a  tran.sfer  to  them  of  one  half  the 
voting  powder  of  the  old  stockholders,  but  also  of  an  equitable  right 
to  one  half  the  surplus  which  belonged  to  them.  In  other  words,  it 
was  a  partial  di\dsion  of  the  property  of  the  old  stockholders.   The 


SECT.  I.]  STOKES    V.  CONTINENTAL   TRUST   CO.  847 

right  to  increase  stock  is  not  an  asset  of  the  corporation  any  more 
than  the  original  stock  when  it  was  issued  pursuant  to  subscription. 
The  ownership  of  stock  is  in  the  nature  of  an  inherent  but  indirect 
power  to  control  the  corporation.  The  stock  when  issued  ready  for 
delivery  does  not  belong  to  the  corporation  in  the  way  that  it  holds 
its  real  and  personal  property,  w^ith  power  to  sell  the  same,  but  is 
held  by  it  with  no  power  of  alienation  in  trust  for  the  stockliolders, 
who  are  the  beneficial  owners  and  become  the  legal  owners  upon 
paying  therefor.  The  corporation  has  no  rights  hostile  to  those  of 
the  stockholders,  but  is  the  trustee  for  all  including  the  minority. 
The  new  stock  issued  by  the  defendant  under  the  permission  of  the 
statute  did  not  belong  to  it,  but  was  held  by  it  the  same  as  the 
original  stock  when  first  issued  was  held  in  trust  for  the  stockliolders. 
It  has  the  same  voting  power  as  the  old,  share  for  share.  The  stock- 
holders decided  to  enlarge  their  holdings,  not  by  increasing  the 
amount  of  each  share,  but  by  increasing  the  number  of  shares.  The 
new  stock  belonged  to  the  stockholders  as  an  inherent  right  by  virtue 
of  their  being  stockholders,  to  be  shared  in  proportion  upon  paying 
its  par  value  or  the  value  per  share  fixed  by  vote  of  a  majority  of  the 
stockholders,  or  ascertained  by  a  sale  at  public  auction.  While  the 
corporation  could  not  compel  the  plaintiff  to  take  new  shares  at  any 
price,  since  they  were  issued  for  money  and  not  for  property,  it  could 
not  lawfully  dispose  of  those  shares  without  giving  him  a  chance  to 
get  his  proportion  at  the  same  price  that  outsiders  got  theirs.  He  had 
an  inchoate  right  to  one  share  of  the  new  stock  for  each  share  owned 
by  him  of  the  old  stock,  provided  he  was  ready  to  pay  the  price  fixed 
by  the  stockholders.  If  so  situated  that  he  could  not  take  it  himself, 
he  was  entitled  to  sell  the  right  to  one  who  could,  as  is  frequently 
done.  Even  this  gives  an  advantage  to  capital,  but  capital  neces- 
sarily has  some  advantage.  Of  course,  there  is  a  distinction  when  the 
new  stock  is  issued  in  payment  for  property,  but  that  is  not  this  case. 
The  stock  in  question  was  issued  to  be  sold  for  money,  and  was  sold 
for  money  only.  A  majority  of  the  stockholders,  as  part  of  their 
power  to  increase  the  stock,  may  attach  reasonable  conditions  to  the 
disposition  thereof,  such  as  the  requirement  that  every  old  stock- 
holder electing  to  take  new  stock  shall  pay  a  fixed  price  therefor,  not 
less  than  par,  however,  owing  to  the  limitation  of  the  statute.  They 
may  also  provide  for  a  sale  in  parcels  or  bulk  at  public  auction,  when 
every  stockholder  can  bid  the  same  as  strangers.  They  cannot,  how- 
ever, dispose  of  it  to  strangers  against  the  protest  of  any  stockliolder 
who  insists  that  he  has  a  right  to  his  proportion.  Otherwise  the  ma- 
jority could  deprive  the  minority  of  their  proportionate  power  in 
the  election  of  directors  and  of  their  proportionate  right  to  share  in 
the  surplus,  each  of  which  is  an  inherent,  preemptive,  and  vested 
right  of  property.  It  is  inviolable  and  can  neither  be  taken  away  nor 
lessened  without  consent,  or  a  waiver  impljdng  consent.  The  plain- 


g48  STOKES    V.  CoNTINKNTAL   TRUST    CO.  (cHAP.  II. 

tiff  had  power,  U'fore  the  increase  of  stoek,  to  vote  on  221  slmres  of 
Htock,  out  of  u  total  of  r>(K)0.  at  any  meeting  hekl  \>y  the  HtrnkhokkTU 
for  any  purpose,  liy  the  jictioii  of  the  majority,  taken  anuiiLst  hih  will 
and  protest,  he  now  haa  tmly  one  half  the  voting  jK^wcr  that  he  had 
before,  IxH-au.se  the  nuniU'r  of  shares  has  Ixhmi  doul)U<l  while  he 
still  owns  hut  "221.  This  touches  him  as  a  stockholder  in  such  a  way 
as  to  (le|)rive  him  of  a  ri^^ht  of  profH'rty.  lilair  Jk  ( 'ompany  acquired 
virtual  control,  while  he  and  the  otlu-r  stcxkhohU-rs  lost  it.  We  are 
not  discussing  e(iuitii»9,  but  legal  rights,  for  this  is  an  action  at  law, 
and  the  phiintiff  was  deprivtHl  of  a  strictly  legal  right.  If  the  n*sult 
gives  him  :ir»  advantage  over  other  stockholders,  it  is  U'cauw*  l;o 
stood  upon  his  legal  rights,  whiU'  th«>y  di<l  not.  The  ((in'stion  is  what 
were  his  legal  rights,  not  what  his  pn>fit  may  U*  uniler  the  wde  to 
Blair  &  C'onipany,  but  what  it  might  have  l>een  if  the  new  stock  had 
been  i.ssu«'d  to  him  in  pr()|)<>rti<)n  t«>  his  holding  of  the  old.  The  other 
stockholders  cDuld  give  their  prop<Ttv  to  iihiir  it  Company,  but  they 
could  not  give  his. 

A  share  of  stock  is  a  sliarr  in  ihf  pou.  i  lo  increase  the  stock,  and 
belongs  to  the  stockholders  the  .sana'  as  the  stock  it.s«'lf.  When  that 
power  is  rxercis*>i.l,  the  new  stock  Inlongs  to  the  old  stcwkholders  in 
proportion  to  their  holding  of  oUl  stock,  subject  to  compliance  with 
the  lawful  terms  ujxin  which  it  is  i.ssue<l.  When  the  new  stock  is 
issued  in  payment  for  pro|HTty  |)ur(ha.s4(l  by  the  cor|><)ration,  tl.e 
stocklioldei>>'  riglit  is  na  igcd  in  the  purcha.^',  and  they  have  an  ad- 
vantage in  the  increase  of  the  projx'rty  of  the  cor|X)ration  in  pn>|x)r- 
tion  to  the  increase  of  stock.  When  the  new  stock  is  i.ssutnl  for  mon«*y, 
while  the  stockholders  may  provide  that  it  U'  S4)ld  at  auction  or  fi.x 
the  price  at  which  it  is  to  Ih'  sold,  each  stockholder  is  entitled  to  his 
projxjrtion  of  the  proceeds  of  the  sale  at  auction,  after  he  hiLs  luul  a 
right  to  bid  at  the  sale,  or  to  his  projx)rtion  of  the  new  stock  at  the 
price  fixed  by  the  stockholders. 

We  are  thus  h'd  to  lay  down  the  rule  that  a  stockholder  has  an  in- 
herent right  to  a  projxirtionate  share  of  new  stock  issu«'d  for  nioney 
only  and  not  to  pur(has»>  profXTty  for  the  puriXKs<*j<  of  the  corjxiiation 
or  to  efTect  a  consolidation;  and  while  he  can  waive  that  right,  he  can- 
not be  deprived  of  it  without  his  con.«*nt  except  when  the  stock  is 
issued  at  a  lixed  price  not  le.ss  than  par  and  he  is  given  the  right  to 
take  at  that  price  in  proportion  to  his  holding,  or  in  some  other  equit- 
able way  that  will  enable  him  to  protect  his  interest  by  acting  on  his 
own  judgment  and  u.sing  his  own  n>sf)urces.  This  rule  is  just  to  all 
and  tends  to  prevent  the  tyranny  of  majorities  which  nw(\s  restraint, 
as  well  as  virtual  attempts  to  blackmail  by  small  minorities  which 
should  be  prevented. 

The  remaining  question  is  whether  the  plaintiff  waived  his  rights 
by  failing  to  do  what  he  ought  to  have  ilone,  or  by  doing  something 
he  ought  not  to  have  done.  He  demanded  his  share  of  the  new  stock 


SECT.  I.]  STOKES    V.  CONTINENTAL   TRUST    CO.  849 

at  par,  instead  of  at  the  price  fixed  by  the  stockholders,  for  the 
authorization  to  sell  at  $450  a  share  was  virtually  fixing  the  price  of 
the  stock.  He  did  more  than  this,  however,  for  he  not  only  voted 
against  the  proposition  to  sell  to  Blair  &  Company  at  $450,  but  as 
the  court  expressly  found,  he  "protested  against  the  proposed  sale 
of  his  proportionate  share  of  the  stock  and  again  demanded  the  right 
to  subscribe  and  pay  for  the  same,  which  demands  were  again  re- 
fused," and  "the  resolution  was  carried  notwithstanding  such  pro- 
test and  demands."  Thus  he  protested  against  the  sale  of  his  share 
before  the  price  was  fixed,  for  the  same  resolution  fixed  the  price 
and  directed  the  sale,  which  was  promptly  carried  into  effect.  If  he 
had  not  attended  the  meeting,  called  upon  clue  notice  to  do  precisely 
what  was  done,  perhaps  he  would  have  waived  his  rights;  but  he 
attended  the  meeting,  and  before  the  price  was  fixed  demanded  the 
right  to  subscribe  for  221  shares  at  par  and  offered  to  pay  for  the 
same  immediately.  It  is  true  that  after  the  price  was  fixed  he  did  not 
offer  to  take  his  share  at  that  price,  but  he  did  not  acquiesce  in  the 
sale  of  his  proportion  to  Blair  &  Company,  and  unless  he  acquiesced 
the  sale  as  to  him  was  without  right.  He  was  under  no  obligation  to 
put  the  corporation  in  default  by  making  a  demand.  The  ordinary 
doctrine  of  demand,  tender,  and  refusal  has  no  apphcation  to  this 
case.  The  plaintiff  had  made  no  contract.  He  had  not  promised  to 
do  anything.  No  duty  of  performance  rested  upon  him.  He  had  an 
absolute  right  to  the  new  stock  in  proportion  to  his  holding  of  the 
old,  and  he  gave  notice  that  he  wanted  it.  It  was  his  property,  and 
could  not  be  disposed  of  without  his  consent.  He  did  not  consent. 
He  protested  in  due  time,  and  the  sale  was  made  in  defiance  of  his 
protest.  While  in  connection  with  his  protest  he  demanded  the  right 
to  subscribe  at  par,  that  demand  was  entirely  proper  when  made, 
because  the  price  had  not  then  been  fixed.  After  the  price  was  fixed 
it  was  the  duty  of  the  defendant  to  offer  him  his  proportion  at  that 
price,  for  it  had  notice  that  he  had  not  acquiesced  in  the  proposed 
sale  of  his  share,  but  wanted  it  himself.  The  directors  were  under 
the  legal  obligation  to  give  him  an  opportunity  to  purchase  at  the 
price  fixed  before  they  could  sell  his  property  to  a  third  party,  even 
with  the  approval  of  a  large  majority  of  the  stockholders.  If  he  had 
remained  silent  and  had  made  no  request  or  protest  he  would  have 
waived  his  rights,  but  after  he  had  given  notice  that  he  wanted  his 
part  and  had  protested  against  the  sale  thereof,  the  defendant  w^as 
bound  to  offer  it  to  him  at  the  price  fixed  by  the  stockholders.  By 
selling  to  strangers  without  thus  offering  to  sell  to  him,  the  defendant 
wrongfully  deprived  him  of  his  property  and  is  liable  for  such  dam- 
ages as  he  actually  sustained. 

The  learned  trial  court,  however,  did  not  measure  the  damages 
according  to  law.  The  plaintiff  was  not  entitled  to  the  difference  be- 
tween the  par  value  of  the  new  stock  and  the  market  value  thereof, 


850  NATU8CH    r.  IRVIN'O.  [cHAP.  II. 

for  the  stockholders  had  the  right  to  fix  the  price  at  wliich  the  ittock 

shouUl  hv  sold.    Tliey  fixed  the  price  at  $4!"^)  uhI  for  the 

failure  of  the  defendant  to  offer  the  phiiiititT  In  .i  ilmt  i)ricc 

we  hold  it  liable  iit  dama}i;es.  His  actual  lews,  therefore,  in  $100  per 
share,  or  the  difference  U'twccn  $4'>0,  the  [)rice  that  he  would  have 
been  obliged  to  pay  had  he  Ihi'U  |H"rmittetl  to  purchiiM-,  and  the 
nuiiket  value  on  the  day  of  siile,  which  Wius  $,V>0.  Thin  conduition 
re(|uires  a  reversal  of  the  judgment  renderwl  by  the  Api)ellate 
Divi.sion  and  a  modification  of  that  renderetl  by  the  trial  court. 

The  onler  apiH'ale<l  from  should  lx»  n-ven^d  and  tlu*  judgment  of 
the  trial  court  modified  by  reducing  the  tlamag»-s  from  the  .sum  of 
SIMM')!),  with  interest  from  January  M),  1902,  to  the  sum  of  $22,100, 
with  interi'st  from  that  date,  an<l  by  striking  out  the  extra  allowance 
of  costs,  and  im  thus  mo<lified  the  judgment  of  the  trial  court  is 
anirmetl,  without  coats  in  this  court  or  in  the  Appellate  Division  to 
cither  |):irty. 

NoTK.  —  In  Archer  v.  Ile.ssc,  li'A  N.\.  Aj);).  \h\.  I'J.l,  the  court 
said  (p.  497):  "A  coriM)ration  may  use  its  original  uni.ssued  author- 
ized ciipital  stock  for  any  legitimate  or  lawful  purpose  it  six's  fit.  .  .  . 
Before  making  such  use  it  is  not  obligateti  to  give  to  existing  stock- 
holders an  opiH)rtunity  to  purchase."  But  .He«\  contra,  Reese  v.  Bank, 
31  Pa.  7S;  Way  v.  Amerimn  GVoi.se  Co.,  GO  N.J.  l->i.  2(>:}.  2f')9. 

Wall  v.  (tah  Copper  Co.,  70  N.J.  E(j.  17.  Existing  stockholders 
have  a  right  to  subscrilx;  for  bonds,  convertible  into  stock,  similar 
to  their  right  to  subscribe  to  new  issues  of  stock. 


D.  To  enjoin  any  Ad  which  the  Corp<yration  is  unauthorized  to  do,  or 
which  it  was  unauthorized  to  do  when  Plaintiff  became  a  Stockholder. 


NATUSCII   i:   IRVINCi. 

Gow  on  Partnership.  Appendix  No.  VI,  p.  398.     1824. 

Plaintiff,  on  behalf  of  him.solf  an<l  all  others  the  shareholders, 
members,  or  partners  of  the  Alliance  British  and  Foreign  Life  and 
Fire  Assurance  Company,  filed  this  bill  against  the  president  and 
directors,  praying,  inter  alia,  for  an  injunction  to  restrain  them  from 
carr>'ing  on  the  business  of  marine  insurance  in  the  name  or  on  the 
account  of  the  company,  and  from  applying  the  capital  of  the  com- 
pany to  any  such  purpose. 

The  case  made  by  the  liill  and  affidavits  was,  in  part,  as  follows: 

A  prospectus  was  issued  for  the  formation  of  an  unincorporated 

company  to  grant  fire  and  life  insurance,  with  a  capital  of  five  million 


SECT.  I.]  NATTJSCH   V.  IRVING.  851 

pounds  divided  into  fifty  thousand  shares,  Pl^^^i^^^.^^.^^^^'Vl?' 
fifteen  shares,  paid  the  required  deposit,  insured  his  hf e  in  the  com- 
pany and  paid  the  insurance  premium.  He  was  wiUmg  also  to  exe- 
cute a  proper  deed  of  settlement.  After  the  plaintiff  had  subscribed, 
etc.,  the  majority  of  the  company  undertook  to  carry  on  the  addi- 
tional business  of  marine  insurance.  They  prepared  a  deed  of  settle- 
ment which  contained  provisions  for  enabling  the  company  to  carry 
Si  marine  insurance;  and  which  plaintiff  refused  to  execute.  Plain- 
tiff objected  to  the  company's  carrying  on  a  marine  insurance  busi- 
ness The  directors  informed  plaintiff  that,  if  he  was  dissatisfied 
with  the  course  intended  to  be  pursued,  he  might  receive  back  his 
deposit  with  interest,  and  also  have  his  life  pohcy  cancelled  and  the 

^'ITD'^ELDONrCHANCELLOR.  ...  An  offcr  is  made  to  the  plaintiff 
that  he  may  receive  back  his  deposit  with  interest  from  the  date  o 
the  payment,  and  he  is  desired  to  consider  himself  as  having  received 
notice  thereof .  But  it  is  not,  I  apprehend,  competent  to  any  number 
of  persons  in  a  partnership  (unless  they  show  a  contract  rendering 
it  competent  to  them)  formed  for  specified  purposes,  if  they  propose 
to  form  a  partnership  for  very  different  purposes,  to  effect  that 
formation  by  calhng  upon  some  of  their  partners  to  receive  their  sub- 
scribed capital  and  interest  and  quit  the  concern;  and,  in  effect 
merely  by  compelling  them  to  retire  upon  such  terms,  so  to  form  a 
new  company.  This  would,  as  to  partnerships  be  a  most  dangerous 
doctrine    Where  a  partnership  is  dissolved  (even  where  it  can  be 
in  a  sense  dissolved  the  instant  after  notice  to  dissolve  is  given   if 
there  be  no  contract  to  the  contrary),  it  must  still  continue  for  the 
purpose  of  winding  up  its  affairs,  of  taking  and  settling  all  its  ac- 
counts, and  converting  all  the  property,  means  and  assets  o    the 
partnership  existing  at  the  time  of  the  dissolution  as  beneficially  as 
mav  be  for  the  benefit  of  all  who  were  partners,  according  to  then 
respective  shares  and  interests;  and  the  other  partners  cannot  say  to 
him  to  whom  they  have  given  an  offer  of  his  deposit  and  interest, 
Take  that   and  we  are  a  new  company,  keeping  the  effects,  means, 
assets,  and  property  of  the  old,  as  the  property  of  the  new  partner- 

^^The  company  will  indemnify  the  plaintiff  against  loss  by  its  trans- 
actions already  had,  or  hereafter  to  be  had,  not  for  the  specified  pur- 
poses  of  the  institution.  But  the  right  of  a  partner  is  to  hold  to  the 
specified  purposes  his  partners  whilst  the  partnership  continues,  and 
not  to  rest  upon  indemnities  with  respect  to  what  he  has  not  con- 
tracted to  engage  in.  ^  j  ui  u  +  i  ^ 
A  dissatisfied  partner  may  sell  his  shares  for  double  what  he 
orio-inally  gave  for  them.  But  he  cannot  be  compelled  to  part  with 
them  for  that  reason ;  it  may  be  his  principal  reason  for  keeping  them, 
having  the  partnership  concern  carried  on  according  to  the  contract. 


852  STEVEN'S   V.  RXTTIASD   k    BURLINGTON    R,R.  CO.      (cHAP.  II. 

The  origintil  contract  and  the  loss  which  hiM  partnera  would  Buffer  by 
a  dissolution,  is  his  security  that  it  shall  U*  so  carrie«l  on  for  him  and 
them  heneficiully,  ami  with  augmented  iini)roveinent  in  the  value  of 
his  sJKires  and  their  shares.  .  .  . 

If  six  iMTsoiis  joined  in  a  partnership  t)f  Uf-  '<-ar 

that  neither  the  majority,  nor  any  seUct  pji!  .t  of 

the  six,  could  engage  that  partnership  in  marine  insurances,  unless 
the  contract  of  partnership  expri'ssly  or  impliitlly  gave  that  [Miwer; 
Ik'cuusc  if  this  was  otherwise,  an  individual  or  individuals,  l»y  en- 
gaging in  one  six'cified  coiuern,  might  Ik*  implicate<l  in  any  other 
concern  whatever,  however  different  in  its  nature,  against  his  consent. 

It  may  l>c  taken  that  the  principle  that  would  apply  to  the  partner- 
ship of  six,  will  apply  to  this  partnership  of  ti<K)  or  700. 

Note.  —  A  stockholder  in  a  corporation  has  a  similar  right.  The 
authorities  to  that  effect  are  very  numerous. 

In  () field  V.  Xew  York,  AVir  1 1  mm  ,{  Hartford  R.R.  Co.,  2a3  U.S. 
'M2,  it  was  held  that,  on  the  facts,  a  statuti'  |)ermitting  the  con<lem- 
nation  of  minority  stock  of  a  railroad  coriwrition  u.i>  (nji>fitii- 
tional. 

By  statute  it  may  Ix^  provided  that  the  ohjeci.s  oi  a  rorjxtraiiun 
may  he  changed  on  the  vot«' of  the  holders  of  a  s|M'ci(i«>«|  fraction 
(.t^ay,  two  thirds)  of  the  stock,  hut  that  disjH»ntient  stockholders  shall 
have  a  right  to  have  their  stock  paid  for  at  a  valuation.  So<»,  for 
example,  section.s  40  and  43  of  chapter  437  of  the  Acts  of  1903, 
Massachusetts. 


STEVENS  V.   RUTLAND  &  lURLINCTON   H.K.  CO. 

29  Vt.  M5.     l»5l. 

At  the  time  the  orator  l)ecamc  a  shareholder,  the  defendant  was 
authorized  to  run  a  railroad  Ix'tween  siH'cified  jniints.  Thereafter, 
in  1S.")0,  the  legislature  authorizrd  an  extension,  and  this  act  was 
accepted  by  the  directors  and  a  majority  of  the  shareholders.  The 
orator  sought  to  restrain  the  use  of  the  corporate  funds  or  credit  in 
constructing  such  extension. 

Bennett,  Ch.\ncell<)r.  The  question  is,  can  the  orator,  upon 
such  a  state  of  facts,  claim,  at  the  hands  of  the  chancellor,  his  in- 
junction. 

It  is  an  admitted  principle,  that  in  partnerships,  and  joint-stock 
associations,  they  cannot  by  a  vote  of  the  m.ijority  change  or  alter 
their  fundamental  articles  of  co-partnership  or  association,  against 
the  will  of  the  minority,  however  small,  unless  there  is  an  express  or 
implied  provision  in  the  articles  themselves  that  they  may  do  it.  It  is 
equally  well  settled,  that  a  court  of  chancer}'  will,  upon  the  applica- 


SECT.  I.]       STEVENS    V.  RUTLAND    &    BURLINGTON    R.R.  CO.  853 

tion  of  an  individual  member  of  a  partnership,  or  joint-stock  associ- 
ation, restrain,  by  injunction,  the  majority  from  using  the  funds  or 
pledo-ing  the  credit  of  the  partnership  or  association  in  a  busmess  not 
warranted,  and  not  within  the  scope  of  their  fundamental  articles  of 
agreement.  Courts  of  equity  treat  such  proceedings  by  a  majority, 
as  a  fraud  upon  the  other  members,  which  they  will  neither  sanction 
nor  permit.  To  prevent  the  commission  of  fraud,  by  injunction,  has 
been  one  of  the  earhest  and  most  appropriate  heads  of  equity  juris- 
diction, as  well  as  to  relieve  against  it,  when  committed. 

It  was  well  conceded,  in  the  argument  on  the  defense,  that  if  the 
corporation  had  been  about  to  proceed  to  a  construction  of  the  con- 
templated extension  without  the  act  of  1850,  it  would  have  been  a 
proper  case  for  an  injunction.  The  only  question  which  can  be  open 
to  debate  is,  as  to  what  shall  be  the  effect  of  the  act  of  1850,  and  a 
subsequent  adoption  of  the  act  by  the  corporation,  upon  the  indi- 
vidual rights  of  a  shareholder  who  does  not  assent  to  its  adoption? 
If  bound  by  it,  there  is  no  equity  in  this  bill.  It  is,  and  must  be 
admitted,  that  the  legislature  has  no  constitutional  power,  unless  it 
be  reserved  in  the  grant,  to  change  or  alter  an  act  of  incorporation 
without  consent,  and  thereby  cast  upon  the  company  new  and  addi- 
tional obligations,  or  take  from  them  rights  guaranteed  under  the 
original  charter.  And  indeed  this  the  legislature  have  not  attempted 
to  do.  It  is  also  equally  true  that  it  is  a  part  of  the  law  of  corpora- 
tions, that  they  act  according  to  the  voice  of  the  majority.  But  it  is 
to  be  remembered,  that  this  is  not  a  suit  in  which  the  plaintiff  seeks 
to  protect  himself  in  any  corporate  right,  but  in  his  own  individual 
right,  growing  out  of  the  fact  of  his  having  become  a  corporator  by 
his  subscription  and  its  payment,  to  the  capital  stock  of  the  com- 
pany. One  of  an  aggregate  corporation  may  contract  with  the  com- 
pany, as  well  as  a  third  person;  and  the  rights  of  the  individual  so 
contracting  are  no  more  distinct  and  independent  in  the  one  case 
than  in  the  other.  The  plaintiff,  by  his  subscription,  assumed  to  pay 
to  the  corporation,  and  only  for  the  purpose  specified  in  the  charter, 
its  amount,  according  to  the  assessments;  and  there  was  at  the  same 
time  a  trust  created,  and  an  implied  assumption  on  the  part  of  the 
corporation,  to  apply  it  to  that  object,  and  none  other.  The  corpora- 
tion also  assumed  upon  themselves  to  account  to  this  corporator  for 
his  share  of  the  dividends,  when  this  road  should  be  completed  and 
put  in  operation,  and  for  his  share  of  capital  stock,  though  not  in 
numero.  The  charter,  in  this  case,  gives  to  the  state  the  right  to 
purchase  out  the  road  of  the  corporation,  after  a  given  number  of 
years,  upon  certain  terms  therein  specified.  The  relation  between 
each  original  shareholder  and  the  corporation  is  the  same.  The 
obligation  of  the  contract  between  the  legislature  and  the  corpora- 
tion, after  an  acceptance  of  the  charter,  is  no  more  sacred  than  that 
which  is  created  between  the  corporation  and  the  individual  corpo- 


854  STEVENft   V.  RLTLA.VD   A    BURLINGTON   B.R.  CO.      (ciUP.  II, 

rator.  Does  any  one  8up[)o8e  tlie  lenUIuture  could,  without  tin?  con- 
sent of  parties,  absolve  a  eorjKjrator  from  liability  on  hi«  HuljM:ription 
to  tliL'  corporation,  or  nuxlify  it?  aiul  can  they  do  the  rfven*'  of  it? 

It  is  conceded  that  there  is  a  chiss  of  a!  ater,  which 

the  corjKjrat ion  may  obtain  and  adopt,  ;  -  esacnlially 

change  the  contract  as  to  alwolvc  the  corporator  from  hifl  8ul«crip- 
tion,  or  give  him  a  right  to  comphiin  in  a  court  of  ju  '  he 

had  previously  paid  it.    Where  the  object  of  the  ;  or 

alteration  of  the  charter  is  auxiliar>'  to  the  original  object  of  it,  and 
tlesigned  to  enable  the  corixmition  to  carr>'  into  execution  the  ver>' 
purpos<>  of  the  f>riginal  grant,  with  n»ore  facility  and  more  iH-neficially 
than  they  otherwise  could,  the  iinot  com[)lain; 

and  I  shouhl  apprehend  it  won,  :  ■   with  the  rights 

of  a  corporation,  in  such  a  ctwo,  though  he  could  show  that  the  char- 
ter, as  amended,  was  less  l)enefuial  to  the  coqK)rators  than  the  origi- 
nal one  would  have  Ihhmi.  The  ground  uiK)n  which  suih  amendmentH 
bind  the  coriM)rator,  I  de<>nj  to  Ik*  his  own  cons4'nt.  When  he  Inromea 
a  coriK)rator  by  his  signing  for  a  portion  of  the  capital  t<t(M'k,  he  in 
efTect  agr(H.»s  to  the  by-laws,  rules,  and  votes  of  the  company,  and 
there  is  an  iiufjlitMl  ass4'nt.  on  his  part,  with  t!  n.  that 

they  may  apply  for,  and  adopt  such  antendmeii:  uin  the 

scope,  and  ilesigne<l  to  promote  the  execution  of  the  onguud  purpoec; 
and  he  signs,  and  the  coriK)ration  receive  his  sul*cription,  subject  to 
such  implie<|  contingency;  and  if  we  regard  it  in  the  nature  of  a 
license,  only,  it  would  not  alter  the  prinriple.  Both  [mrtira  having 
acted  ujMMi  it,  it  wouUl  not  U'  count«'rmarulable. 

But  suppose  the  object  of  the  alteration  is  a  fundamental  change 
in  the  original  purpos«>,  an<l  designe«|  to  sti|)4Tadil  to  it  .Miniething 
which  is  l>eyond  and  :isi<le  of  it ;  dcn-s  the  same  principle  apply?  Chief 
Justice  Neuson  lays  down  this  general  pro|Kxsition,  "that  corpora- 
tions can  exerci.se  no  [wwer  over  the  cor|K)rators,  l)eyond  thof<e  con- 
ferred by  the  charter  to  which  they  have  8ubscril)etl,  except  on  the 
condition  of  their  agreement  or  consi-nt." 

This  is  a  sound  proposition.  The  consent  or  assent  may,  however, 
be  implied  in  a  class  of  cases,  as  has  already  l)een  stateil,  where  the 
amendment  is  not  regarded  as  fundamental,  and  can  In*  brought 
within  the  scojm?  of  the  original  pur|x)s<'  of  the  ass<K-iation;  and  this  is 
going  to  the  verj'  verge  of  the  powers  of  the  corporation.  It  is  diffi- 
cult, and  would  l)e  unwise,  to  attempt  to  lay  down  any  general  rules 
to  determine  in  what  precise  cases  the  assent  of  the  corporator  should 
be  implied,  and  in  what  not.  It  is  suflicient  for  the  present  purix>se 
to  say,  that  his  assent  cannot  l)c  implied,  in  a  case  like  the  pres<«nt, 
from  a  majority  vote.  Courts  may  differ,  and  doubtless  will,  in 
regard  to  what  alterations  shall  be  sufficient  to  constitute  a  funda- 
mental change.  But  in  the  present  case,  I  think,  on  this  [x)int  there 
can  be  but  one  opinion.    The  termini  of  the  road,  as  fixed  by  the 


SECT.  I.]   STEVENS  V.   RUTLAND  &  BURLINGTON  R.R.  CO.       855 

charter,  are  Burlington,  and  some  point  on  the  west  bank  of  Con- 
necticut River,  in  the  county  of  Windsor  or  Windham.  The  capital 
stock  is  one  million  of  dollars,  with  a  right  in  the  corporation  to  in- 
crease it  to  an  amount  sufficient  to  complete  said  road,  and  furnish 
the  necessary  apparatus  for  conveyance.  The  supplementary  act  of 
1850  purports  to  authorize  the  corporation,  within  three  years,  to 
construct  and  extend  their  railroad  from  the  terminus  in  Burlington, 
to  some  point  in  Swanton,  in  the  county  of  Franklin,  a  distance  of 
about  thirty  miles;  and  the  act  provides  that  in  the  construction  of 
the  road,  they  shall  have  all  the  rights  and  privileges,  and  be  subject 
to  all  the  liabilities,  contained  in  their  original  charter,  and  the  acts 
in  addition  to  it. 

The  franchise  granted  to  this  company  was  territorial;  and  an  ex- 
tension of  the  termini  necessarily  is  an  extension  of  the  franchise.  It 
cannot  remain  the  same  thing  in  substance,  until  it  can  be  established 
that  a  part  is  equal  to  the  whole.  Besides,  the  company  may  increase 
the  capital  stock  to  such  additional  sum  as  shall  be  necessary  to  con- 
struct the  extension. 

The  statute  of  1850  is  little  less  in  effect,  if  anything,  than  an  at- 
tempt to  create  in  a  summary  manner,  and  by  the  way  of  reference, 
a  new  corporation,  and  to  transfer  all  the  old  corporators  to  it.  It  is 
not  necessary  that  the  business  should  be  changed  in  kind,  to  change 
the  original  purpose.  If  this  is  not  a  change  in  purpose,  it  would  not 
be  to  extend  the  road  in  one  direction  to  Canada  line,  and  in  the 
other  to  Massachusetts  line;  and  there  would  be  no  limits  to  the 
control  which  the  corporation  might  acquire  over  the  individual 
corporators,  and  this,  too,  without  their  consent,  except  what  arises 
from  the  confines  of  legislative  authority. 

The  change,  then,  in  the  charter  being  fundamental  and  the  corpo- 
ration not  being  able  to  bind  the  plaintiff  by  a  majority  vote,  what 
must  be  the  result?  If  he  had  been  sued  for  an  assessment  upon  his 
stock,  he  might  have  claimed  that  he  was  absolved  from  all  liability 
upon  the  acceptance  of  the  amendment.  And  is  not  this  reasonable? 
Shall  it  be  said  that  the  legislature  and  the  corporation  have  power  to 
embark  this  corporator  in  a  speculation  to  which  he  has  never  con- 
sented? If  it  can  be  done  in  one  case  it  can  in  another.  But  having 
paid  his  funds  into  the  corporation,  he  has  a  right  in  chancery  to 
compel  a  faithful  performance  of  the  trust  by  the  corporation,  in 
conformity  to  the  original  charter,  and  to  keep  them  within  its  pur- 
view. 

In  the  case  before  us,  it  must  follow,  if  the  plaintiff  is  not  bound  by 
the  conjoined  effect  of  the  act  of  1850,  and  a  majority  vote  of  the 
corporation,  the  defendants  can  stand  on  no  better  ground,  than  a 
voluntary  association,  who  are  about  to  go  beyond  and  aside  of  their 
original  articles,  against  the  will  of  a  minority.  This,  in  effect,  was 
conceded  in  the  argument.   There  was  nothing  improper  in  the  pas- 


85G  STEVEN'S    I'.  RUTLAND    t    BURLINGTON'    R.R.  CO.      (cHAP.  II. 

sage  of  the  act  of  1850,  though  upon  the  appHcation  of  a  portion  of 
the  directors  of  the  coiii[)any,  u.s  stated  in  the  hill.  No  attempt  is 
made  by  tlie  iegi.slature  to  impair  the  oUigation  of  any  contract 
between  themselves  and  the  corporation,  or  to  cast  u|>on  the  com- 
pany any  new  and  additional  burthens  without  their  consent.  There 
was  no  attempt  to  impair  any  contract  arising  under  the  pri(jr  ehar- 
ter,  ijctween  the  corporation  and  the  toriK)rator  as  an  individual,  or 
disturb  any  vested  right  in  either.  The  act  is  not  mandator}-;  and 
there  is,  in  fact,  an  implied  condition  annexeil  to  it,  that  it  is  to  \)C 
accepted  by  all  whose  individual  and  coriH)rate  interi'sts  are  to  \)e 
affected  by  it,  before  it  shall  Urome  oiK-rative.  But  supjKxsc  this 
act  had  been  mandator}'  u|X)n  the  corporation  and  the  several  stock- 
holders, to  build  this  extension  in  the  road  within  three  years;  would 
not  all  cry  out  against  its  pal|)able  injustice?  SupjKise,  instead  of  this, 
the  legislature  had  left  it  optional  with  the  corporation  to  accept  or 
reject  the  act  of  1830,  and  had  proviiled,  that  in  case  of  the  accept- 
ance of  the  amendment  by  the  corporation,  it  should  bind  the  cor- 
porators who  dissented  from  it,  or  did  not  ass<'nt  to  it,  and  this  too, 
in  their  individual  rights;  would  there  not  Ik*  the  same  reason  to  cr}' 
out  against  it?  Would  it  not,  by  its  carr}ing  a  stockholder  into  an 
enterprise  which  he  had  never  consented  to,  and  changing  the  prin- 
ciples of  liability  between  the  corporation  and  the  individual  cor- 
porator from  what  they  were  under  the  original  compa<t.  impair 
and  disturb  vested  rights  under  it?  I  have  no  hesitation  in  saying, 
that,  in  my  opinion,  it  would  be  beyond  the  pale  of  the  constitutional 
authority  of  the  legislature. 

Note.  —  It  has  been  held  that  a  re.ser\'ation  by  a  State  of  the 
power  to  alter,  amend,  or  re[x?al  corporate  charters  simply  affects  the 
relations  of  the  corporation  to  the  State,  and  not  the  relations  of  the 
majority  of  the  stockholders  to  the  minority.  See  Avondnlc  Land 
Co.  v.  Shook,  170  .\la.  370;  Zabriskie  v.  Ilackensack  d*  \ew  York  R.R. 
Co.,  18  N.J.  Eq.  178.  But  there  is  important  authority  contra.  See 
Durfee  v.  Old  Colony  R.R.  Co.,  5  All.  (Mass.)  230;  Buffalo  &  Neiv 
York  City  R.R.  Co.  v.  Dudley,  14  N.Y.  336. 


SECT.  I.]  BREWER   V.  BOSTON   THEATRE.  857 


E.  To  prevent  and  redress  an  Appropriation  of  Corporate  Assets  by 

the  Majority. 


BREWER  V.  BOSTON  THEATRE. 

104  Mass.  378.     1870. 

This  was  a  bill  in  equity,  brought  by  minority  stockholders, 
against  the  corporation  and  against  certain  directors  and  other  indi- 
viduals, for  fraudulently  conspiring  to  lease  the  corporate  property 
on  a  rent  much  below  the  market  value  and  share  in  the  profits  of  the 
lessees.  The  bill  (as  amended)  alleged  that  individual  defendants 
own  or  control  a  majority  of  the  stock  and  control  the  proceedings 
at  stockholders'  meetings;  also  that  a  majority  of  the  directors  are 
fraudulently  colluding  with  these  defendants  to  continue  to  them  the 
control  of  the  corporation  and  its  property. 

Wells,  J.  The  defendants  contend  that  the  corporation  cannot 
be  deprived  of  its  right  to  determine,  in  all  matters  not  ultra  vires, 
whether  to  impeach  or  to  ratify  transactions  supposed  to  be  preju- 
dicial to  its  interests.  Granting  this  position,  it  would  result  that  in 
no  case,  as  to  matters  intra  vires,  could  a  suit  be  maintained  by  indi- 
vidual stockholders  to  enforce  rights  or  redress  wrongs  of  the  cor- 
porate body,  except  where  the  delay  necessary  in  order  to  secure 
corporate  action  might  defeat  or  endanger  the  attainment  of  appro- 
priate relief.  If,  when  called  upon  to  act,  the  corporate  body  should 
elect  to  confirm  the  supposed  wrongful  transactions,  or  should  do  so 
indirectly  by  refusal  to  act,  they  would  no  longer  be  open  to  impeach- 
ment. If,  on  the  other  hand,  it  should  determine  to  take  action,  it 
would  do  so  in  its  own  name  and  behalf;  and  there  would  be  no 
ground  of  necessity  for  proceedings  in  the  name  of  the  individual 
corporator. 

We  are  not  prepared  to  say  that  this  would  not  be  the  case  in  all 
matters  to  which  the  only  objection  is  that  they  are  prejudicial,  or 
supposed  to  be  so,  to  the  corporate  interests  merely,  but  not  illegal 
in  themselves,  and  affecting  all  the  corporators  alike.  Perhaps  it 
would  be  so  whenever  the  surrender  of  property  or  the  release  of 
rights,  acquired  by  the  corporation  through  the  transactions  sought 
to  be  impeached,  is  necessary  in  order  to  reach  the  proper  remedy. 
Great  Luxembourg  Railway  Co.  v.  Magnay,  25  Beav.  586.  The  corpo- 
ration might  be  entitled  to  determine  for  itself  exclusively  whether  it 
would  retain  or  release  property  or  rights  thus  acquired,  although  it 
thereby  precluded,  or  rendered  ineffectual,  all  proceedings  against  par- 
ties who  may  have  made  illegal  or  fraudulent  gains  out  of  the  trans- 
actions.   These  questions,  however,  we  need  not  at  present  decide. 


85S  BREW'ER    V.  BOSTON'   THEATRE.  [CIIAP.  II. 

The  cases  now  Ijefore  u.s  involve  no  release  of  [)rof)erty  or  riKht0 
by  the  corixjration.  The  alleged  wrongM  are  not  nierrly  prrjuilieial 
to  the  interest.^  of  the  coryxjration;  but  are  Mueh  as  tend  to  deprive 
one  part  of  the  corponitons  of  the'r  rightful  .share  in  the  fruits  of  the 
common  propi-rty  anil  bu.><iness,  for  the  advantage  of  others  of  the 
corporators.  This  inequality  and  injustice  is  accomplished  by  means 
of  the  control  over  the  corporate  organization  and  management, 
which  Ikus  l)een  .secured  by  tlu'  partii-s  .so  lK>nehte<l.  Hy  tin-  anu-nd- 
mcnt.s  to  the  .several  bills  it  is  allegetl  that  su»*h  control  has  U'cn  excr- 
ci.scd  since  the  year  lH(i<),  inclusive,  by  Tompkins  and  Thayer,  with 
the  aid  of  the  other  defendants.  That  which  is  imixjrtant  is  the  fact 
of  such  control  and  its  e.\ercis<^  for  such  pur[^)s<\  rather  than  the 
moans  by  which  it  Iuls  In-en  obtained.  A  majority  of  the  corj^orutors 
have  no  right  to  exercise  the  control  over  the  corjx)rate  management, 
which  legitimately  iK'longs  to  them,  for  the  purjKJse  of  appropriating 
the  corporate  projx^rty  or  its  avails  or  income  to  themselvt^  or  to 
any  of  the  shareholders,  to  the  exclusion  or  prejudice  of  tlic  others. 
And  if  any  have  obtained  such  unfair  advantage  by  fraud  or  abuse 
of  the  trust  confided  to  them  as  officers  or  agents  of  the  cor|X)ration, 
it  is  not  in  the  power  of  a  niajority  to  ratify  or  condone  the  fraud  and 
breach  of  trust,  so  far  as  it  atT«cts  the  rights  <»f  the  others,  without 
rciisonable  restitution.  This  proiK)sition,  if  stated  in  refrrence  to 
formal  transactions,  such  as  :us.s('ssments  of  capital  or  dividends  of 
income,  would  not  Ik*  (|uestioned.  Preston  v.  (irand  Collier  Dock  Co., 
11  Sim.  .'^27.  Unthjhinson  v.  \alionnl  Lire  Slock  Insurance  Co.,  20 
Bcav.  473.  liut  the  indirect  appropriation  of  the  common  profxTty, 
profits  or  means  of  profit,  to  their  own  l)enefit,  by  any  portion  of  the 
corporators,  in  fraud  of  their  as.sociates,  is  equally  incapabU'  of  Ix-ing 
authorized  or  ratified  by  the  vote  of  a  majority  of  the  c<)rporators, 
or  by  any  act  or  omission  of  the  cor|K)rate  Ixxly.  (Jngory  v.  I'otchett, 
33  Bcav.  595.  Alwool  v.  Mcrnjueather,  Law  Rep.  5  Va\.  4VA,  note. 
If  it  were  othenvi.se,  the  minority  would  l)e  without  means  r)f  protec- 
tion or  redress  against  ine(juality  and  injustice.  They  would  Ik* 
equally  so  if  they  coulil  obtain  redress  only  in  the  name  and  through 
the  action  of  the  corporation  itself.  Such  acts  are  wrongs  done  pri- 
marily to  the  corporation;  and  therefore  the  restitution  or  redress  is 
to  be  secured  to  the  corporation.  But  in  their  efTect  and  essential 
character  they  are  wrongs  to  the  individual  shareholder,  inflicted 
upon  his  corporate  interests  by  means  of  the  control  over  those 
interests  secured  through  the  corporate  organization  and  manage- 
ment. He  can  seek  his  redress  only  through  the  corporation;  but 
that  does  not  give  the  corporation  the  right  to  deprive  him  of  all 
redress.  Any  attempt  to  do  so,  whether  regarded  as  the  action  of 
the  corporation  or  of  a  majority  of  shareholders,  would  have  the 
same  voidable  character  as  the  original  wrong.  Officers  of  a  corpora- 
tion, deaUng  with  it  in  matters  of  their  own  individual  interest, 


gECT.  I.]  CHAMBERS  V.   McKEE  &  BROS.  859 

Stand  very  differently  in  this  respect  from  strangers  w^jo  ^jave  no 

occasion  to  regard  any  other  than  the  ^o^-P^^'^f.^^^^-  ,^  J^f  J^^ 
of  their  relations  to  the  corporate  management  they  secuie  to  them- 
selves undue  advantage  over  their  associates,  they  ^a^/^o^  retain  ^^^ 
Such  transactions  are  voidable,  not  merely  for  want  of  authoiity  m 
the  officers  by  whom  they  are  done,  but  because  neither  the  officers 
nor  the  corporation  itself,  by  whatever  majority  of  votes  it  may  act 
can  do,  assent  to,  or  confirm  them.  The  wrong  to  the  individual 
shareholder  is  the  same,  whether  committed  with  the  concurrence 
or  subsequent  approval  and  adoption  of  Ms  associates  controlhng 

^luTuToS"^^^  eases,  as  set  forth  in  the  several 

amended  bills,  show  such  abuse  of  authority  and  breaches  of  trust 
by  the  defendants,  in  misappropriating  the  income  of  the.  corporate 
property  to  the  benefit  of  themselves  or  of  some  of  them,  as  cannot 
be  ratified  or  remitted  by  the  corporation;  and  a  so  such  mcapacity 
of  the  plaintiffs  to  move  the  corporation  to  take  action  for  Uieir 
redi-ess,  as  entitles  them,  from  necessity,  to  seek  it  m  the  form  of  these 
proceechngs. 

Note.  -  The  authorities  in  accord  are  very  numerous.  For  recent 
cases  see  Palmhaitm  v.  Magulsky,  217  Mass.  306;  Godley  v.  Crandall 
Co.,  212  N.Y.  121. 

F.  To  compel  the  Corporation  to  assert  Valid  Claims,  and  to  resist 
Invalid  Claims. 


CHAMBERS  v.  McKEE  &  BROS. 

185  Pa.  105.     1898. 

OpinionbyIMr.  Justice  Williams,  March  21,  1898:  — 
McKee  &  Brothers  is  a  partnership  engaged  in  the  manufacture  of 
glass  tableware.  The  Chambers  &  McKee  Glass  Co.  is  a  corporation 
orcranized  under  the  act  of  1874  and  its  supplements,  for  the  manu- 
facture of  window  glass.  The  manufacturing  plants  of  the  partner- 
ship and  the  corporation  are  in  close  proximity,  and  are  supphed  with 
natural  gas  as  a  fuel  from  wells  owned  and  operated  by  the  corpora- 
tion under  an  agreement  that  the  expense  of  furnishing  the  natural 
gas  shaU  be  shared,  as  near  as  may  be,  in  proportion  to  the  amount 
used  at  each  plant.  Mrs.  Chambers,  the  plaintiff  is  a  large  stock- 
holder in  the  Chambers  &  McKee  Glass  Co.,  but  has  no  interest  in 
the  partnership  of  McKee  &  Brothers.  _ 

Operations  were  begun  in  both  factories  some  time  m  1889.  A  dif- 
ference of  opinion  arose  as  to  the  relative  proportions  of  the  expense 


860  CHAMBERS    V.  McKEE    &    BROS.  [cHAP.  II. 

of  the  natural  gas  used  and  to  lx»  paitl  for  by  each.  This  difFercnce 
was  submitted  to  two  competent  exfKTts  for  dccisif)n,  who  were  to 
determine  what  sum  sliould  be  paid  by  MeKeo  &  Hrolhers  from  the 
commencement  of  operations  to  DecemIxT  21,  ISIU.  If  unable  to 
agree  they  were  empowered  to  select  an  umi)ire  anil  decide  l)y  a  ma- 
jority. They  entered  upon  an  examination  of  the  subject  and  sub- 
mitted a  report  without  selectin>;  an  um|)ire,  in  which  they  fixed  the 
amount  to  l)e  paid  by  McKee  tV  Brothers  at  si'ventcH'n  and  seventy- 
two  one  hundredths  \)ct  cent  of  the  entire  cost  of  the  natural  gas  for 
both  plants,  and  that  to  be  paid  by  the  C'haml)ors  &.  McKw  ( Jlass  Co. 
at  eighty-two  and  twenty-eight  one  hundredths.  On  Deceml)er  29, 
1891,  the  report  was  presented  to  the  l)oard  of  directors,  and  on  the 
same  day  one  of  the  arbitrators  conununicated  to  them  the  fact  that 
his  assent  to  the  award  had  Ixvn  given  under  the  influence  of  an  im- 
portant mistake  of  fact,  and  that  the  award  was  not  jissented  to  by 
him.  The  reference  to  the  arbitrators  dm's  not  seem  to  have  been 
made  a  rule  of  court  or  to  havi*  been  drawn  under  any  statute  relat- 
ing to  arbitration,  but  to  have  l)een  made  by  the  parties  with  a  view 
to  securing  the  judgment  of  competent  persons  upon  the  quantity  of 
gas  used  !)y  each,  and  to  relieve  Mr.  II.  Sellers  McKee  from  the  very 
embarnissing  position  in  which  he  found  himself.  He  was  the  presi- 
dent and  a  large  stockholder  in  the  cor  juration.  He  was  also  the 
largest  contributor  to  the  capital  of  the  partnership  of  McKee  & 
Brothers.  He  was  thus  the  head  of  the  creditor  corporation,  and  he 
was  personally,  as  a  member  of  his  firm,  the  del)tor.  Without  further 
meeting  of  the  arbitrators,  or  other  effort  to  investigate  the  alleged 
mistake  asserted  by  one  of  them,  the  board  of  tlirectors  of  the  corpo- 
ration, II.  Sellers  McKee  being  one  of  them,  decided  in  March,  1892, 
to  settle  with  McKee  Brothers  on  the  basis  of  the  (liscre<lited  award, 
and  this  was  accordingly  done.  Four  years  afterwards  Mrs.  Cham- 
bers served  the  notice  attached  to  her  bill  requiring  the  directors 
of  the  corporation  to  take  steps  to  compel  McKee  &  Brothers  to  pay 
to  the  corporation  the  money  it  owed  for  natural  gas  both  before  and 
after  such  settlement,  within  two  wet^ks  after  such  notice,  and  stating 
her  intention,  if  this  was  not  done,  to  proceed  on  her  own  U'half  as  a 
stockholder  to  compel  such  settlement.  This  bill  was  filed  pursuant 
to  the  notice  given  by  her.  It  is  against  the  corporation  of  which 
she  is  a  stockholder,  and  the  partnership  which  she  alleges  to  be  its 
debtor,  and  the  relief  asked  includes  the  taking  of  an  account  of  the 
gas  used  by  McKee  &  Brothers  from  the  wells  and  pipe  lines  of  the 
Chambers  &  McKee  Cdass  Company,  and  the  pa>nnent  therefor  in 
the  proportion  which  the  amount  so  used  bears  to  the  whole  amount 
consumed  by  both  plants.  Is  she  entitled  to  have  an  account  taken 
of  the  gas  consumed  by  McKee  &  Brothers?  We  do  not  tliiuk  the 
award  is  in  her  way.  W"e  fully  agree  with  the  learned  judge  of  the 
court  below  that  the  mistake  brought  to  the  attention  of  the  parties 


SECT.  I.]  CHAMBERS  V.   MCKEE  &  BROS.  861 

by  George  H.  Browne,  one  of  the  arbitrators,  soon  after  the  award 
was  made,  and  before  any  action  was  taken  upon  it  by  either  party, 
was  of  such  a  character  as  to  prevent  its  enforcement  at  law  or  in 
equity.  As  the  learned  judge  well  said,  "It  was  not  a  mere  error  in 
judgment  based  upon  established  facts,  but  an  error  in  reference  to 
the  facts  themselves  upon  which  his  judgment  was  based,  and  which 
he  hastened  to  correct  as  soon  as  he  became  aware  of  his  mistake  by 
notifying  defendant  company  to  that  effect." 

After  this  mistake  was  brought  to  the  attention  of  the  directors, 
and  the  fact  was  made  known  to  them  that  the  relative  proportion  of 
gas  consumed  by  McKee  &  Brothers  was,  so  far  at  least  as  Mr. 
Browne  was  concerned,  fixed  under  the  influence  of  this  mistake  at 
much  less  than  it  should  have  been,  it  was  no  longer  binding  upon 
them.  But  corporations  are  governed  and  their  business  is  directed 
by  persons  chosen  by  the  stockholders  for  that  purpose.  Their  action 
legally  taken  is  the  action  of  the  corporation,  and  as  between  it  and 
the  persons  with  whom  it  deals,  it  is  binding.  The  board  of  directors 
of  the  Chambers  &  McKee  Glass  Company,  with  full  notice  of  the 
mistake  of  Browne,  and  against  the  protest  of  one  or  more  of  its 
members,  resolved  to  settle  the  claim  of  the  corporation  they  repre- 
sented on  the  basis  of  the  award.  The  amount  so  fixed  was  paid  by 
McKee  &  Brothers,  and  received  by  the  corporation  in  full  settle- 
ment of  the  demand  which  had  been  considered  by  the  arbitrators. 
If  this  was  done  in  good  faith  by  the  board  of  directors  of  the  corpo- 
ration, every  stockholder  was  bound  by  it,  even  though  it  was  an 
error  in  judgment  and  resulted  in  a  serious  loss  to  the  corporation. 
If  it  was  not  so  done,  but  was  collusive  and  fraudulent,  it  is  not  con- 
clusive, but  may  be  investigated,  and  upon  a  proper  showing  held  to 
be  a  nulhty,  and  an  account  taken  for  the  purpose  of  determining  the 
true  amount  of  gas  consumed  by  McKee  &  Brothers  and  the  actual 
amount  of  their  indebtedness  to  the  corporation  therefor.  The  real 
question,  therefore,  on  which  the  plaintiff's  right  as  a  stocldiolder  to 
an  account  depends,  is  the  validity  of  the  action  of  her  agents,  the 
board  of  directors.  They  have  settled  this  claim.  That  action  binds 
the  stockholder  unless  it  was  fraudulently  taken.  Fraud  is  not  pre- 
sumed. The  natural  presumption  is  in  favor  of  innocence  and  good 
faith.  The  plaintiff  has  this  presumption  to  overcome  both  in  her 
bill  and  by  her  proofs,  and  until  she  presents  such  a  case  as  will 
justify  a  finding  that  the  conduct  of  the  board  of  directors  in  making 
the  settlement  with  McKee  &  Brothers  was  fraudulent,  and  in  bad 
faith  toward  the  corporation  represented  by  them,  she  has  no  title 
to  the  rehef  she  seeks.  It  would  seem  from  the  evidence  before  us 
that  the  settlement  complained  of  was  not  an  advantageous  one  to 
the  corporation  or  its  stockholders.  It  is  possible  that  personal  con- 
siderations may  have  influenced  the  result;  but  stockholders  take  the 
risk  of  the  business  quaUfications  and  business  judgment  of  those 


862  FOBS    V.  HARBOTTLE.  (cHAP.  11. 

whom  they  may  select  as  directors,  and  as  a  general  rule  they  cannot 
be  heard  to  coinphiin  if  the  action  of  their  a^rnts  is  not  the  most  dij*- 
creet  and  the  most  careful  that  could  have  l>een  taken.  But  when  a 
director  betrays  his  trust  and  defrauds  those  whom  he  ought  to  serv'e 
with  fidelity,  every  stockholder  has  a  right  to  complain,  and  it  is  the 
duty  of  the  courts  to  a.ssist  in  relieving  against  tlie  fon.«*e{iuences  of 
such  frauds  whenever  it  is  practical )le.  The  learned  judge  who  heard 
the  testimony  in  this  case  reached  this  conclusion  from  it :  "  It  is  true 
the  plaiiitilT  alleges  that  this  was  done  (the  settlement  of  this  claim) 
in  violation  and  fraud  of  her  rights,  but  I  can  find  nothing  which  will 
justify  me  in  coming  to  the  conclusion  that  the  directors  acted  in  bad 
faith  or  knowingly  or  intentionally  disregarded  the  interests  of  the 
stockholders  of  the  company."  In  the  absence  of  the  finding  of  bad 
faith  on  the  part  of  the  directors,  or  an  intentional  ilisregard  of  the 
interests  of  the  corporation  confi(le<l  to  their  care,  the  only  ground  on 
which  the  relief  sought  coukl  l)e  exteniled  was  absent,  and  there  was 
nothing  left  for  the  learned  judge  to  do  but  dismiss  the  plaintiff's 
bill  witiiout  prejudice  to  her  right  to  proc(>ed  in  any  projHT  way  to 
relieve  herself  from  the  con.'^equences  of  any  fraudulent  acts  of  her 
agents,  the  directoi-s  of  the  Chaml)ers  &  McKe<»  Glass  Company,  in 
connection  with  the  settlement  of  which  she  complains. 

We  are  not  disposed  to  allow  the  costs  in  this  case  to  follow  the  re- 
sult of  this  apjM'al.  but  will  modify  the  decree  appeak-d  from  by  im- 
posing one  third  of  the  costs  in  this  case  upon  the  plaintiff,  one  third 
upon  the  directors  of  the  Chambers  &  McKee  Glass  Co.,  as  individ- 
uals, and  one  third  upon  McKee  S:  Brothers. 

As  so  moihfied  the  decree  is  affirmed. 


FOSS  V.   HARBOTTLE. 

2  Hare.  461.     1H43. 

Bill  in  equity  by  Foss  and  Turton,  shareholders  in  a  corporation 
styled  the  \'ictoria  Park  Company,  on  behalf  of  themselves  and  all 
other  shareholders,  against  five  persons  who  had  been  directors,  and 
also  against  several  other  persons. 

The  case  stated  in  the  bill  was,  in  part,  as  follows: 
At  or  after  the  formation  of  the  company  was  agreed  upon,  an 
arrangement  was  fraudulently  concerted  between  certain  parties 
(including  a  majority  of  the  directors),  with  the  object  of  enabling 
themselves  to  derive  a  profit  or  personal  benefit  from  the  establish- 
ment of  the  company.  The  arrangement  was,  that  certain  of  the 
parties  should  be  appointed  directors,  and  should  purchase  for  the 
company  certain  lands  owned  by  themselves  and  by  other  parties 
to  the  combination,  at  greatly  increased  and  exorbitant  prices.  The 


SECT.   I.]  FOSS    V.  HARBOTTLE.  863 

directors,  accordingly,  before  the  passing  of  the  act,  agreed  to  pur- 
chase certain  lands  at  rents  or  prices  greatly  exceeding  those  at  which 
the  vendors  had  purchased  the  same.  After  the  passing  of  the  act 
of  incorporation,  the  directors  and  their  confederates  proceeded  to 
carry  into  execution  the  previously  formed  design  of  fraudulently 
profiting  by  the  establishment  of  the  company  and  at  its  expense. 

WiGRAM,  V.C.  The  Victoria  Park  Company  is  an  incorporated 
body,  and  the  conduct  with  which  the  Defendants  are  charged  in  this 
suit  is  an  injury  not  to  the  Plaintiffs  exclusively;  it  is  an  injury  to  the 
whole  corporation  by  individuals  whom  the  corporation  entrusted 
with  powers  to  be  exercised  only  for  the  good  of  the  corporation. 
And  from  the  case  of  the  Attorney-General  v.  Wilson,  Cr.  &  Ph.  1 
(without  going  further),  it  may  be  stated  as  undoubted  law,  that 
a  bill  or  information  by  a  corporation  will  lie  to  be  relieved  in  respect 
of  injuries  which  the  corporation  has  suffered  at  the  hands  of  persons 
standing  in  the  situation  of  the  directors  upon  this  record.  This  bill, 
however,  differs  from  that  in  the  Attorney-General  v.  Wilson  in  this, 
—  that  instead  of  the  corporation  being  formally  represented  as 
plaintiffs,  the  bill  in  this  case  is  brought  by  two  individual  corpora- 
tors, professedly  on  behalf  of  themselves  and  all  the  other  members 
of  the  corporation,  except  those  who  committed  the  injuries  com- 
plained of,  —  the  plaintiffs  assuming  to  themselves  the  right  and 
power  in  that  manner  to  sue  on  behalf  of  and  represent  the  corpora- 
tion itself. 

It  was  not,  nor  could  it  successfully  be  argued,  that  it  was  a  matter 
of  course  for  any  individual  members  of  a  corporation  thus  to  assume 
to  themselves  the  right  of  suing  in  the  name  of  the  corporation.  In 
law,  the  corporation,  and  the  aggregate  members  of  the  corporation, 
are  not  the  same  thing  for  purposes  like  this;  and  the  only  question 
can  be,  whether  the  facts  alleged  in  this  case  justify  a  departure  from 
the  rule  whiclf  pn'wd/aa'e  would  require  that  the  corporation  should 
sue  in  its  own  name  and  in  its  corporate  character,  or  in  the  name  of 
some  one  whom  the  law  has  appointed  to  be  its  representative. 

The  first  objection  taken  in  the  argument  for  the  Defendants  was, 
that  the  individual  members  of  the  corporation  cannot  in  any  case 
sue  in  the  form  in  which  this  bill  is  framed.  During  the  argument  I 
intimated  an  opinion,  to  which,  upon  further  consideration,  I  fully 
adhere,  that  the  rule  was  much  too  broadly  stated  on  the  part  of  the 
Defendants.  I  think  there  are  cases  in  which  a  suit  might  properly 
be  so  framed.  Corporations  like  this,  of  a  private  nature,  are  in  truth 
little  more  than  private  partnerships ;  and  in  cases  which  may  easily 
be  suggested,  it  would  be  too  much  to  hold,  that  a  society  of  private 
persons  associated  together  in  undertakings,  which,  though  certainly 
beneficial  to  the  public,  are  nevertheless  matters  of  private  property, 
are  to  be  deprived  of  their  civil  rights,  inter  se,  because,  in  order  to 
make  their  common  objects  more  attainable,  the  crown  or  the  legi&- 


864  FOSS    V.  HARBOTTLE.  (ciUP.  11. 

lature  may  have  conferred  upon  them  the  Ijcncfit  of  a  foriX)rate 
character.  If  a  ca.se  should  arise  of  injur\'  to  a  corjKjration  hy  some 
of  its  members,  for  which  no  utle(iuate  remedy  remained,  except  that 
of  a  suit  by  individual  corporators  in  their  private  characters,  and 
a.sking  in  such  character  the  protection  of  those  right.s  to  which  in 
their  c(jrporate  cliaracter  they  were  entitU'd,  I  caimot  but  think  that 
the  principle  so  forcibly  laid  down  by  Ix)rtl  Cottknmam  in  Walluorth 
v.  lioll,  4  Myl.  &  Cr.  G.'i5;  .see  also  17  Ves.  320,  per  Lord  Kldo.n,  and 
other  cases,  would  apply,  and  the  claims  of  justice  would  1)6  found 
superior  to  any  difhculties  arisinj;  out  of  technical  rules  respecting 
the  mod(!  in  which  corporations  are  re(iuired  to  sue. 

But,  on  the  other  hand,  it  nmst  not  l>e  without  rea.sons  of  a  very 
urgent  character  that  establisluxl  rules  of  law  and  practice  are  to  be 
departed  from,  —  rules,  which,  though  in  a  sense  technical,  are 
founded  on  general  principles  of  justice  and  convenience;  and  the 
question  is,  whether  a  c;use  is  stated  in  this  bill,  i-ntitling  the  Plain- 
tiffs to  sue  in  their  private  characters.  [By  the  constitution  of  the 
company]  the  directors  are  made  the  governing  bo<ly,  subject  to  the 
superior  control  of  the  proprietoi-s  ji.s.s(>ini)led  in  general  meetings; 
and,  as  I  undei-stand  the  act,  the  proprietors  .so  ius.semble<l  have 
power,  due  notice  being  given  of  the  puriK).ses  of  the  meeting,  to 
originate  proceedings  for  any  purpose  within  the  scope  of  the  com- 
pany's powers,  as  well  as  to  cf)ntrol  the  directors  in  any  acts  which 
they  may  have  originated.  There  may  pos.'^ibly  be  some  excei)tions 
to  this  proposition,  but  such  is  the  general  effect  of  the  provisions 
of  the  statute.  .  .  .  The  corporation  might  elect  to  adopt  those 
tran.sactions. 

Whilst  the  supreme  governing  body,  the  proprietors  at  a  special 
general  meeting  a.s.sembled,  retain  the  power  of  exercising  the  func- 
tions conferred  upon  them  by  the  act  of  incorporation,  it  cannot  be 
competent  to  individual  corporators  to  sue  in  the  manner  proposed 
by  the  PlaintifTs  on  the  present  record.  This  in  effect  purports  to 
be  a  suit  by  cestui  que  trusts,  complaining  of  a  fraud  committed  or 
alleged  to  have  been  committed  by  jX'rsons  in  a  fiducian*'  character. 
The  complaint  is,  that  those  trustees  have  sold  lands  to  them.selves, 
ostensil)ly  for  the  benefit  of  the  cestui  que  trusts.  The  proposition  I 
have  advanced  is,  that  although  the  act  should  prove  to  be  voidable, 
the  cestui  que  trusts  may  elect  to  confirm  it.  Now,  who  are  the  cestui 
que  trusts  in  this  case?  The  corporation,  in  a  sense,  is  undoul)tedly 
the  cestui  que  trust;  but  the  majority  of  the  proprietors  at  a  special 
general  meeting  assembled,  independently  of  any  general  rules  of  law 
upon  the  subject,  by  the  vcr>'  terms  of  the  incorporation  in  the  pres- 
ent case,  has  power  to  bind  the  whole  body,  and  every  individual 
corporator  must  be  taken  to  have  come  into  the  corporation  upon 
the  terms  of  being  liable  to  be  so  bound.  How  then  can  this  Court 
act  in  a  suit  constituted  as  this  is,  if  it  is  to  be  assumed,  for  the  pur- 


SECT.  I.]  FOSS    V.  HARBOTTLE.  865 

poses  of  the  argument,  that  the  powers  of  the  body  of  the  proprietors 
are  still  in  existence,  and  may  lawfully  be  exercised  for  a  purpose  like 
that  I  have  suggested?  Whilst  the  Court  may  be  declaring  the  acts 
complained  of  to  be  void  at  the  suit  of  the  present  Plaintiffs,  who  in 
fact  may  be  the  only  proprietors  who  disapprove  of  them,  the  govern- 
ing body  of  proprietors  may  defeat  the  decree  by  lawfully  resolving 
upon  the  confirmation  of  the  very  acts  which  are  the  subject  of  the 
suit.  The  very  fact  that  the  governing  body  of  proprietors  assembled 
at  the  special  general  meeting  may  so  bind  even  a  reluctant  minority, 
is  decisive  to  shew  that  the  frame  of  this  suit  cannot  be  sustained 
whilst  that  body  retains  its  functions.  In  order  then  that  this  suit 
may  be  sustained,  it  must  be  shewn  either  that  there  is  no  such 
power  as  I  have  supposed  remaining  in  the  proprietors,  or,  at  least, 
that  all  means  have  been  resorted  to  and  found  ineffectual  to  set  that 
body  in  motion :  this  latter  point  is  nowhere  suggested  in  the  bill. 

Note.  —  In  Burland  v.  Earle,  [1902]  A.C.  83,  Lord  Davey  said 
(p.  93):  "It  is  an  elementary  principle  of  the  law  relating  to  joints 
stock  companies  that  the  Court  will  not  interfere  with  the  internal 
management  of  companies  acting  within  their  powers,  and  in  fact 
has  no  jurisdiction  to  do  so.  Again,  it  is  clear  law  that  in  order  to 
redress  a  wrong  done  to  the  company  or  to  recover  moneys  or  dam- 
ages alleged  to  be  due  to  the  company,  the  action  should  prifnd 
facie  be  brought  by  the  company  itself.  These  cardinal  principles 
are  laid  down  in  the  well-known  cases  of  Foss  v.  Harbottle,  (1843) 
2  Hare,  461,  and  Mozley  v.  Alston,  (1847)  1  Ph.  790,  and  in  numer- 
ous later  cases  which  it  is  unnecessary  to  cite.  But  an  exception  is 
made  to  the  second  rule,  where  the  persons  against  whom  the  relief 
is  sought  themselves  hold  and  control  the  majority  of  the  shares  in 
the  company,  ^nd  will  not  permit  an  action  to  be  brought  in  the 
name  of  the  company.  In  that  case  the  Courts  allow  the  sharehold- 
ers complaining  to  bring  an  action  in  their  own  names.  This,  how- 
ever, is  mere  matter  of  procedure  in  order  to  give  a  remedy  for  a 
wrong  which  would  otherwise  escape  redress,  and  it  is  obvious  that 
in  such  an  action  the  plaintiffs  cannot  have  a  larger  right  to  relief 
than  the  company  itself  would  have  if  it  were  plaintiff,  and  cannot 
complain  of  acts  which  are  valid  if  done  with  the  approval  of  the 
majority  of  the  shareholders,  or  are  capable  of  being  confirmed 
by  the  majority.  The  cases  in  which  the  minority  can  maintain 
such  an  action  are,  therefore,  confined  to  those  in  which  the  acts 
complained  of  are  of  a  fraudulent  character  or  beyond  the  powers 
of  the  company.  A  familiar  example  is  where  the  majority  are  en- 
deavoring directly  or  indirectly  to  appropriate  to  themselves  money, 
property,  or  advantages  which  belong  to  the  company,  or  in  which 
the  other  shareholders  are  entitled  to  participate,  as  was  alleged  in 
the  case  of  Menier  v.  Hooper's  Telegraph  Works,  (1874)  L.R.  9  Ch. 


8G6  GROEL   V.  UNITED   ELECTRIC   COMPANT.  (ciIAf.  II. 

350."    See  "also  Dominion  CoUon  Mills  Co.,  Ltd.,  v.  Amgot,  [1912) 
A.C.  546. 
See  PoUilz  v.  Wabash  KM.  Co.,  207  N.Y.  113. 


GROKL  t.  UNITED  ELECTRIC  CuMr.VNV. 

70  N.J.  Eq.  616.     1905. 

Garri.son,  V.C.  From  the  abo%'c  statement  of  the  contents  of  the 
pleadings,  it  \n\\  apinnir  that  the  following  excerpts  from  the  brief  of 
coun.stl  for  the  defendants  corrcetly  define  the  i.^siio:  — 

"The  i)ill  in  this  c;use  \v;us  lile«l  to  coin|K'l  the  Inited  Gas  Improve- 
ment Company  to  account  to  the  I'nitetl  Electric  Company  of  New 
Jersey  for  the  profits  alleged  to  have  l)een  made  by  the  gari  company 
secretly  in  the  promotion  of  the  electric  company.  The  gas  company 
and  the  electric  company  are  named  in  the  bill  Jis  defendants,  but  it 
is  obvious  that  the  gjia  company  is  the  only  defentlant  against  which 
a  decree  can  Ix;  made.  The  electric  eomimny  wtis  made  a  party  as 
re(iuired  by  the  practice  in  cjuses  where  a  .stockholder  is  inrmitted  to 
bring  suit  to  enforce  a  claim  which  the  company  should  have  prose- 
cuted voluntarily.  .  .  . 

"  The  electric  company  filed  the  plea  for  the  rea^sons  stated  therein, 
and  in  the  schedules  thereto  annextxi,  and  in.sists  that  an  it  thinks  the 
bringing  of  such  a  suit  is  inexiM'ilient,  all  things  cof»sidere<l,  it  ha.s  a 
right  to  prohibit  any  stockholder  from  doing  so  who  difTers  with  the 
judgment  of  its  board  of  directors  on  that  subject." 

A  stockholder  .sets  up  that  approximately  $20,000,000  of  stock  as 
a  secret  profit  was  made  by  the  promoter  out  of  the  incorporation  of 
the  company  of  which  he  is  a  stockholder.  He  sues  the  promoter  and 
joins  his  corporation,  which  has  refu.sed  to  bring  the  suit,  to  recover 
the  §20,000,000  of  stock.  His  corporation  responds  that  it  deems  it 
inexpedient  to  l)ring  the  suit.  The  single  point  is  whether  a  board  of 
directors  may  prohibit  a  stocklK)lder  from  bringing  a  suit  in  behalf  of 
the  corporation  to  recover  moneys  secretly  made  by  a  promoter  out 
of  the  incorporation  of  the  company,  if,  in  the  judgment  of  the  board, 
it  is  inexpedient  to  l)ring  such  a  suit. 

There  can  be  no  question  that  promoters  are  lial)le  to  the  corpora- 
tion for  profits  secretly  made  by  them  in  its  promotion,  and  that  such 
liability  arises  in  cases  where  future  allottees  of  stock  are  concerned. 

There  can  be  likewise  no  question  that  where  the  corporation  re- 
fuses to  bring  a  suit  stockholders  may  sue  in  its  Ix^half,  joining  it  as 
a  defendant. 

It  is  true  that  courts  will  not  interfere,  as  a  rule,  with  the  manage- 
ment of  corporations  by  the  directors  thereof  when  they  are  acting 
within  their  powers  and  in  good  faith.    But  whether  the  directors 


SECT.  I.]  GROEL   V.  UNITED    ELECTRIC    COMPANY.  867 

are  acting  in  good  faith  and  as  honest,  diligent  trustees,  or  not,  will 
be  inquired  into  by  the  courts  at  the  instance  of  stockholders  in  cases 
like  the  present. 

"A  stockholder  has  no  standing  in  the  court  to  prosecute  such  an 
action  except  on  the  refusal  of  the  directors,  either  actual  or  presump- 
tive, to  prosecute.  But  such  refusal  of  the  directors  to  prosecute 
must  be  an  unjustifiable  refusal."  Willoughby  v.  Chicago  Junction 
Railways  Co.,  50  N.J.  Eq.  (5  Dick.)  at  p.  667  (Vice-Chancellor 
Green,  1892). 

In  the  case  of  Kessler  v.  Ensley  Company,  129  Fed.  Rep.  397  (at 
p.  400),  the  court  said:  "Of  necessity,  then,  the  governing  body,  in 
every  intra  vires  matter,  has  a  discretion  to  determine  what  action  to 
take  on  the  stockholder's  request  to  sue,  and  when  the  stockholder 
comes  into  court  the  first  question  it  must  determine  is  whether  that 
discretion  has  been  properly  or  improperly  exercised." 

The  Supreme  Court  of  the  United  States  reviewed  the  previous 
decisions  concerning  this  matter,  and  announced  the  true  rule  in  the 
case  of  Corhus  v.  Alaska  Treadwell  Gold  Mining  Co.,  187  U.S.  455; 
47L.  Ed.  256:  — 

"This  court  will  examine  the  bill  in  its  entirety  and  determine 
whether,  under  all  the  circumstances,  the  plaintiff  has  made  such  a 
showing  of  wrong  on  the  part  of  the  corporation  or  its  officers  and 
injury  to  himself  as  will  justify  the  suit."  And  it  hkewise  quoted 
with  approval  the  following  language:  "The  circumstances  of  each 
case  must  determine  the  jurisdiction  of  a  court  of  equity  to  give  the 
relief  sought." 

Viewing  this  case  in  the  light  of  the  principles  which  must  be  ap- 
plied to  it,  and  of  the  authorities  which  have  been  quoted,  can  it  be 
said  that  the  directors  have  shown  justification  for  refusing  to  bring 
a  suit  to  recover  approximately  §20,000,000  of  stock  improperly  ob- 
tained by  a  promoter? 

Would  it  not  clearly  be  held  by  any  court  to  be  a  breach  of  trust 
for  directors  to  neglect  or  refuse  to  recover,  or  seek  to  recover,  such 
an  amount  of  stock  improperly  obtained  from  it  by  a  promoter? 

It  is  perfectly  clear  that  if  the  complainant  sets  forth  a  good  cause 
of  action,  and  there  is  a  right  in  the  corporation  to  recover  §20,000,000 
of  stock  from  the  promoter,  it  is  a  clear  breach  of  trust  on  the  part  of 
the  directors  not  to  proceed  to  recover  the  same. 

For  them  to  reply  that  it  is  by  them  deemed  inexpedient  to  do  so, 
is  only  to  emphasize  the  breach  of  trust  they  are  committing  by  not 
doing  so. 

I  am  aware  that  counsel  for  the  defendant  argues  that  their  un- 
willingness to  bring  the  suit,  and  that  which  in  their  judgment  makes 
it  inexpedient  to  bring  the  suit,  proceeds  from  their  \aew  that  the 
suit  cannot  succeed.  I  think  I  have  sufficiently  expressed  my  idea 
that  this  issue  is  not  present  before  me  for  determination.  If,  on  the 


868  DODGE    V.  WOOL8EY.  [CHAI*.  II. 

face  of  the  bill,  it  appears  that  the  eonipluinant  cannot  succeed,  then 
demurrer  is  the  proper  remedy.  If  tiie  bill,  however,  does  set  up  a 
good  cause  of  action,  then,  as  I  have  already  pointed  out,  the  plea 
does  not  set  up  any  other  facts  excepting  the  passage  by  the  directors 
of  a  resolution  refusing  to  bring  the  suit  because  in  their  judgment 
inexpedient. 

There  was  much  argument  before  me  upon  issues  which  I  do  not 
find  in  the  case,  the  defendant  contending  that  it  had  sulliciently 
shown  that  the  suit  ought  not  to  be  brought  l^ecause  it  could  not  be 
successful,  and  the  complainant  replying  that  the  statements  in  the 
report  of  the  committee,  as  incorporated  into  the  plea,  show  clearly 
that  there  is  a  cause  of  action,  and  that  the  defendant  has  not,  on  the 
merits,  shown  any  reason  why  the  suit  should  not  Ije  brought.  I  do 
not  stop  to  consider  these  questions  for  the  reasons  given.  I  find 
that  the  complainant  sets  out  a  cause  of  action,  and  that  the  dt-fend- 
ant  replies  by  plea  that  it  deems  it  inex|x>dient  to  bring  a  suit  for 
this  cause  of  action,  and  that  the  complainant,  its  stockholder,  is 
precluded  by  rea.'^on  of  this  fact. 

I  find  that  the- principle  to  be  applied  is  that  the  stockholder  may 
appeal  to  the  discretion  of  the  court  in  this  respect,  and  upon  con- 
sidering the  whole  case,  I  do  not  think  it  apjx'ars  that  the  defendant 
was  justified  in  refusing  to  bring  the  suit,  with  the  result  that  the 
complainant  may  proceed,  and  the  plea  must  be  overruled. 

Note.  —  See  Hill  v.  Murphy,  212  Mass.  1. 


DODGE  V.  WOOLSEY. 

18  How.  (U.S.)  331.     1855. 

This  is  a  suit  in  equity  by  John  M.  Woolsey,  to  enjoin  the  collec- 
tion of  a  tax,  assessed  by  the  State  of  Ohio,  on  the  Commercial 
Branch  Bank  of  Cleveland,  a  branch  of  the  State  Bank  of  Ohio. 
The  defendants  are  Dodge,  the  tax  collector,  the  directors  of  the 
bank,  and  the  bank  itself. 

Woolsey  avers  that  he  is  a  citizen  of  Connecticut,  that  he  is  the 
owner  of  thirty  shares  in  the  Branch  Bank  of  Cleveland,  that  Dodge 
and  the  other  defendants  are  all  citizens  of  Ohio,  and  that  the  Com- 
mercial Branch  Bank  is  a  corporation,  made  such  by  an  act  of  the 
legislature  of  Ohio.  He  alleges  that,  by  the  act  of  incorporation,  the 
Bank  was  to  pay  semiannually  to  the  State  a  certain  percentage  on 
its  profits,  which  was  to  be  in  lieu  of  all  taxes  to  which  the  corpora- 
tion, or  the  stockholders  on  account  of  their  stock,  would  otherwise 
be  subject.  He  further  alleges  that  subsequent  changes  were  made 
by  the  constitution  and  statutes  of  Ohio,  undertaking  to  tax  the 


SECT.  I.]  DODGE    V.  WOOLSEY.  869 

Bank  at  a  different  and  more  burdensome  rate.  He  asks  the  court 
to  enjoin  Dodge  from  collecting  by  distress  a  tax  which  has  been 
assessed  against  the  Bank  under  this  law;  contending  that  the  subse- 
quent statute  and  assessment  are  in  violation  of  the  clause  in  the 
U.S.  Constitution,  which  prohibits  States  from  passing  laws  impair- 
ing the  obligation  of  contracts.  He  finally  declares  that,  as  a  stock- 
holder of  the  Bank,  he  had  requested  the  directors  to  take  measures, 
by  suit  or  otherwise,  to  assert  the  franchises  of  the  Bank  against  the 
collection  of  what  he  believes  to  be  an  unconstitutional  tax,  and  that 
they  had  refused  to  do  so. 

Dodge  filed  an  answer,  in  which  he  denied  that  Woolsey  had  made 
any  application  to  the  directors  to  prevent  the  collection  of  the  tax. 
But  it  was  agreed  by  the  counsel  that  such  an  application  had  been 
made;  and  that  the  directors  replied  that,  though  concurring  in  the 
view  that  the  tax  was  illegal,  yet,  in  consideration  of  the  many  ob- 
stacles in  the  way  of  testing  the  law  in  the  courts  of  the  State,  they 
could  not  consent  to  take  the  action  which  they  were  asked  to  take. 

Wayne,  J.  Upon  the  foregoing  pleadings  and  admission,  the  cir- 
cuit court  rendered  a  final  decree  for  the  complainant,  perpetually 
enjoining  the  treasurer  against  the  collection  of  the  tax,  under  the 
act  of  the  13th  February,  1852,  and  subjecting  the  defendant,  Dodge, 
to  the  payment  of  the  costs  of  the  suit.  From  that  decision  the  de- 
fendant, Dodge,  has  appealed  to  this  court. 

His  counsel  have  relied  upon  the  following  points  to  sustain  the 
appeal :  — 

1.  The  complainant  does  not  show  himself  to  be  entitled  to  relief 
in  a  court  of  chancery,  because  the  charter  of  the  bank  provides  that 
its  affairs  shall  be  managed  by  a  board  of  directors,  and  that  they  are 
not  amenable  to  the  stockholders  for  an  error  of  judgment  merely. 
And  that  in  order  to  make  them  so,  it  should  have  been  averred  that 
they  were  in  collusion  with  the  tax  collector  in  their  refusal  to  take 
legal  steps  to  test  the  validity  of  the  tax. 

2.  It  was  urged  that  this  suit  had  been  improperly  brought  in  the 
circuit  court  of  the  United  States  for  the  district  of  Ohio,  because  it 
is  a  contrivance  to  create  a  jurisdiction,  where  none  fairly  exists,  by 
substituting  an  individual  stockholder  in  place  of  the  Commercial 
Bank  as  complainant,  and  making  the  directors  defendants;  the 
stockholder  being  made  complainant,  because  he  is  a  citizen  of  the 
State  of  Connecticut,  and  the  directors  being  made  defendants  to 
give  countenance  to  his  suit.  .  .  . 

We  will  consider  the  points  in  their  order.  The  first  comprehends 
two  propositions,  namely:  that  courts  of  equity  have  no  jurisdiction 
over  corporations,  as  such,  at  the  suit  of  a  stockholder  for  violations 
of  charters,  and  none  for  the  errors  of  judgment  of  those  who  manage 
their  business  ordinarily. 

There  has  been  a  conflict  of  judicial  authority  in  both.  Still,  it  has 


870  DODGE    I'.  WOOLSEY.  [cHAP.  II. 

been  found  necessary,  for  prevention  of  injuries  for  which  cornnion- 
lavv  courts  were  inadequate,  to  entertain  in  erjuity  su<h  a  jurisiiiction 
in  the  progressive  development  of  the  powers  and  elTectij  of  private 
corporations  upon  all  the  l)usiness  and  interests  of  society. 

It  is  now  no  longer  doul)ted,  either  in  Kiigland  or  tlie  I'nited  States, 
that  courts  of  ecjuity,  in  both,  have  a  jurisdi(ti()n  over  corfXJralions, 
at  the  instance  of  one  or  more  of  their  memlx»rs;  to  apply  preventive 
remedies  by  injunction,  to  restrain  those  who  administer  tiiem  from 
doing  acts  which  would  amount  to  a  violation  of  charters,  or  to  pre- 
vent any  misapplication  of  their  capitals  or  profits,  which  might 
resultjn  lessening  the  dividends  of  stockhoUlers,  or  the  value  of  their 
shares,  as  either  may  be  protected  by  the  franchises  of  a  corporation, 
if  the  acts  intended  to  be  done  create  what  is  in  the  law  denominated 
a  breach  of  trust.  And  the  jurisdiction  extenils  to  iiuiuire  into,  and 
to  enjoin,  as  the  case  may  require  that  to  l)e  done,  any  proceedings 
by  individuals,  in  whatever  character  they  may  profeSvS  to  act,  if  the 
subject  of  complaint  is  an  imputed  violation  of  a  corf)orate  franchise, 
or  the  denial  of  a  right  growing  out  of  it,  for  which  there  is  not  an 
ade(iuate  remedy  at  law.  2  Uuss.  it  Mylne  Ch.  R.,  Cunliffe  v.  MaH' 
Chester  and  Bolton  Canal  Company,  4H0,  n.;  Ware  v.  Grand  Jundion 
Water  Company,  2  Uuss.  &  Mylne,  470;  liagshatc  v.  Eastern  Counties 
Railway  Company,  7  Hare  Ch.  U.  Ill;  Angell  &.  Ames,  4th  ed.  424, 
and  the  other  ca.ses  there  cited. 

It  was  ruled  in  the  case  of  Cunliffe  v.  The  Manchester  and  Bolton 
Canal  Company,  2  Ru.ss.  &  Mylne  Ch.  II.  481,  that  where  the  legal 
remedy  against  a  corporation  is  inadequate,  a  court  of  equity  will 
interfere,  and  that  there  were  ca.'^es  in  which  a  bill  in  e(|uity  will  lie 
against  a  corporation  i)y  one  of  its  meml)ers.  "It  is  a  breach  of 
trust  towards  a  shareholder  in  a  joint  stock  incorporated  company, 
established  for  certain  definite  purposes  prescril)ed  by  its  charter, 
if  the  funds  or  credit  of  the  company  are,  without  his  consent,  di- 
verted from  such  purpose,  though  the  misapi)lication  be  .sanctioned 
by  the  votes  of  a  majority;  and,  therefore,  he  may  file  a  bill  in  equity 
against  the  company  in  his  own  behalf  to  restrain  the  company  by 
injunction  from  any  such  diversion  or  misapplication."  In  the  case 
of  Ware  v.  Grand  Junction  Water  Company,  2  Russell  <fc  Mylne,  a 
bill  filed  by  a  member  of  the  company  against  it,  Lord  Brougham 
said:  " It  is  said  this  is  an  attempt  on  the  part  of  the  company  to  do 
acts  which  they  are  not  empowered  to  do  by  the  acts  of  parliament," 
meaning  the  charter  of  the  company;  "so  far  I  restrain  them  by 
injunction."  "Indeed,  an  investment  in  the  stock  of  a  corporation 
must,  by  everj'  one,  be  considered  a  wild  speculation,  if  it  exposed  the 
owners  of  the  stock  to  all  sorts  of  risk  in  support  of  plausible  projects 
not  set  forth  and  authorized  by  the  act  of  incorporation,  and  which 
may  possibly  lead  to  extraordinary'  losses."  The  same  jurisdiction 
was  invoked  and  applied  in  the  case  of  Bagshaw  v.  The  Eastern 


SECT.  I.]  DODGE    V.  WOOLSEY.  871 

Counties  Railway  Company;  so,  also,  in  Coleman  v.  the  same  company, 
10  Beavan's  Ch.  Reports,  1.  It  appeared  in  that  case  that  the 
directors  of  the  company,  for  the  purpose  of  increasing  their  traffic, 
proposed  to  guarantee  certain  profits,  and  to  secure  the  capital  of  an 
intended  steam  packet  company,  which  was  to  act  in  connection 
with  the  railway.  It  was  held,  such  a  transaction  was  not  witliin  the 
scope  of  their  powers,  and  they  were  restrained  by  injunction.  And 
in  the  second  place,  that  in  such  a  case  one  of  the  shareholders  in  the 
railway  company  was  entitled  to  sue  in  behalf  of  himself  and  all 
the  other  shareholders,  except  the  directors,  who  were  defendants, 
although  some  of  the  shareholders  had  taken  shares  in  the  steam 
packet  company.  It  was  contended  in  this  case  that  the  corporation 
might  pledge,  without  limit,  the  funds  of  the  company  for  the 
encouragement  of  other  transactions,  however  various  and  exten- 
sive, provided  the  object  of  that  liability  was  to  increase  the  traffic 
upon  the  railway,  and  thereby  increase  the  traffic  to  the  shareholders. 
But  the  master  of  the  rolls,  Lord  Langdale,  said,  "there  was  no 
authority  for  anything  of  that  kind." 

But  further,  it  is  not  only  illegal  for  a  corporation  to  apply  its  cap- 
ital to  objects  not  contemplated  by  its  charter,  but  also  to  apply  its 
profits.  And  therefore  a  shareholder  may  maintain  a  bill  in  equity 
against  the  directors  and  compel  the  company  to  refund  any  of  the 
profits  thus  improperly  applied.  It  is  an  improper  application  for  a 
railway  company  to  invest  the  profits  of  the  company  in  the  pur- 
chase of  shares  in  another  company.  .  .  . 

The  result  of  the  cases  is  weW  stated  in  Angell  &  Ames,  paragraphs 
391,  393.  "In  cases  where  the  legal  remedy  against  a  corporation  is 
inadequate,  a  court  of  equity  will  interfere,  is  well  settled,  and  there 
are  cases  in  which  a  bill  in  equity  will  lie  against  a  corporation  by  one 
of  its  members."  "Though  the  result  of  the  authorities  clearly  is, 
that  in  a  corporation,  when  acting  within  the  scope  of  and  in  obedi- 
ence to  the  pro\"isions  of  its  constitution,  the  will  of  the  majority, 
duly  expressed  at  a  legally  constituted  meeting,  must  govern;  yet 
beyond  the  limits  of  the  act  of  incorporation,  the  will  of  the  majority 
cannot  make  an  act  valid;  and  the  powers  of  a  court  of  equity  may 
be  put  in  motion  at  the  instance  of  a  single  shareholder,  if  he  can 
show  that  the  corporation  are  employing  their  statutory  powers  for 
the  accomplishment  of  purposes  not  within  the  scope  of  their  institu- 
tion. Yet  it  is  to  be  observed,  that  there  is  an  important  distinction 
between  this  class  of  cases  and  those  in  which  there  is  no  breach  of 
trust,  but  only  error  and  misapprehension,  or  simple  negligence  on  . 
the  part  of  the  directors."  .  .  . 

We  have  then  the  rule  and  its  limitation.  It  is  contended  that  this 
case  is  within  the  limitation;  or  that  the  directors  of  the  Commercial 
Bank  of  Cleveland,  in  their  action  in  respect  to  the  tax  assessed  upon 
it,  under  the  act  of  April  18,  1852,  and  in  their  refusal  to  take  proper 


872  DODGE    V.  WOOLSEY.  [cil\l».   II. 

measures  for  testing  its  validity,  have  cominitted  an  "error  of  judg- 
ment merely."  .  .  . 

Now,  in  our  view,  the  refusal  upon  the  part  of  tiie  directt)rs,  by 
their  own  showing,  partakes  more  of  disregartl  of  duty,  than  of  an 
error  of  judgment.  It  was  a  non-performance  of  a  confessed  official 
obligation,  amounting  to  what  the  law  considers  a  breach  of  trust, 
though  it  may  not  involve  intentional  moral  delincjuency.  It  was  a 
mistake,  it  is  true,  of  what  their  duty  required  from  them,  according 
to  their  own  sense  of  it,  but,  being  a  duty  by  their  own  confession, 
their  refusal  was  an  act  outside  of  the  obligation  which  the  charter 
imposed  upon  them  to  protect  what  they  conscientiously  believed 
to  be  the  franchises  of  the  bank.  A  sense  of  duty  and  conduct  con- 
trary to  it,  is  not  "an  error  of  judgment  inertly,"  and  cannot  be  so 
called  in  any  case.  It  amounted  to  an  illegal  application  of  the  profits 
due  to  the  stockholders  of  the  bank,  into  which  a  court  of  equity  will 
inquire  to  prevent  its  being  made. 

Thinking,  as  we  do,  that  the  action  of  the  board  of  directors  was 
not  "an  error  of  judgment  merely,"  but  a  breach  of  duty,  it  is  our 
opinion  that  they  were  properly  made  parties  to  the  bill,  and  that  the 
jurisdiction  of  a  court  of  equity  reaches  such  a  case  to  give  such  a 
remedy  as  its  circumstances  may  require.  This  conclusion  makes  it 
unnecessary  for  us  to  notice  further  the  point  matle  by  the  counsel 
that  the  suit  should  have  been  brought  in  the  name  of  the  corpora- 
tion, in  support  of  which  they  cited  the  case  of  the  Bank  of  the  United 
States  v,  Osborn.  The  obvious  difference  Ijetwecn  this  case  and  that 
is,  that  the  Bank  of  the  United  States  brought  a  bill  in  the  circuit 
court  of  the  United  States  for  the  district  of  Ohio,  to  resist  a  tax 
assessed  under  an  act  of  that  State,  and  executed  by  its  auditor,  and 
here  the  directors  of  the  Commercial  Bank  of  Cleveland,  by  refusing 
to  do  what  they  had  declared  it  to  l)e  their  duty  to  do,  have  forced 
one  of  its  corporators,  in  self-defense,  to  sue.  If  the  directors  had 
done  so  in  a  state  court  of  Ohio,  and  put  their  case  upon  the  uncon- 
stitutionality of  the  tax  act,  because  it  impaired  the  obligation  of  a 
contract,  and  had  the  decision  been  against  such  claim,  the  judgment 
of  the  state  court  could  have  been  re-examined,  in  that  particular, 
in  the  supreme  court  of  the  United  States,  under  the  same  authority 
or  jusridiction  by  which  it  reversed  the  judgment  of  the  supreme 
court  of  Ohio,  in  the  case  of  the  Piqua  Branch  of  the  State  Bank  of 
Ohio  v.  Jacob  Knoop,  treasurer  of  Miami  County,  16  How.  369.  ! 

Decree  of  Circuit  Court  affirmed. 
■    Catron,  J.,  Daniel,  J.,  and  Campbell,  J.,  dissented. 


SECT.  I.]  DAVENPORT    V.  DOWS.  873 

G.  Procedure  in  a  Suit  by  Stockholder  to  assert  a  Corporate  Right. 


DAVENPORT  v.  DOWS. 

18  Wall.  (U.S.)  626.     1873. 

Dows,  a  citizen  of  New  York,  in  behalf  of  himself  and  all  other 
non-resident  citizens  of  Iowa,  who  were  stockholders  in  the  Chicago, 
Rock  Island,  and  Pacific  Railroad  Company,  filed  a  bill  in  the  court 
below  against  the  city  of  Davenport,  and  its  marshal,  to  arrest  the 
collection  of  a  tax,  alleged  to  be  illegal,  levied  by  the  said  city  for 
general  revenue  purposes,  on  the  property  of  the  company  within 
its  limits.  The  bill  assigned  as  a  reason  for  its  being  filed  by  Dows,  a 
stockholder  in  the  company,  instead  of  by  the  company  itself,  that 
the  company  neglected  and  refused  to  take  action  on  the  subject. 
A  demurrer  was  interposed  to  the  bill,  which  was  overruled,  and  on 
the  defendants  refusing  to  answer  over,  the  circuit  court  ordered 
that  the  collection  of  the  tax  be  perpetually  enjoined.  From  this,  its 
action,  the  defendants  appealed,  insisting  that  the  circuit  court 
erred  in  overruling  the  demurrer,  for  three  reasons: 

First.  Because  the  railroad  company  was  not  made  a  party  to 
the  bill 

Mr.  Justice  Wayne.  That  a  stockholder  may  bring  a  suit  when 
a  corporation  refuses  is  settled  in  Dodge  v.  Woolsey,  18  Howard,  340, 
but  such  a  suit  can  only  be  maintained  on  the  ground  that  the  rights 
of  the  corporation  are  involved.  These  rights  the  individual  share- 
holder is  allowed  to  assert  in  behalf  of  himself  and  associates,  because 
the  directors  of  the  corporation  dechne  to  take  the  proper  steps  to 
assert  them.  Manifestly  the  proceedings  for  this  purpose  should  be 
so  conducted  that  any  decree  which  shall  be  made  on  the  merits  shall 
conclude  the  corporation.  This  can  only  be  done  by  making  the  cor- 
poration a  party  defendant.  The  relief  asked  is  on  behalf  of  the  cor- 
poration, not  the  individual  shareholder,  and  if  it  be  granted  the 
complainant  derives  only  an  incidental  benefit  from  it.  It  would  be 
wrong,  in  case  the  shareholder  were  unsuccessful,  to  allow  the  cor- 
poration to  renew  the  litigation  in  another  suit,  involving  precisely 
the  same  subject-matter.  To  avoid  such  a  result,  a  court  of  equity 
will  not  take  cognizance  of  a  bill  brought  to  settle  a  question  in 
which  the  corporation  is  the  essential  party  in  interest,  unless  it  is 
made  a  party  to  the  litigation. 


874      DUNPIIY    V.  TRAVELLER    NEWSPAPER    AS5>0CIATI0N.       [cHAP.   II. 

DUNPHY  I'.  TRAVELLER  NEWSPAPER  ASSOCLVTION. 

146  Mass.  495.     1888. 

Knowlton,  J.  .  .  .  The  only  exception  to  the  rule  that  :i  stock- 
holder must  apply  to  the  directors,  and  also  if  need  be  to  the  corpora- 
tion, for  redress  of  a  wrong  done  it,  before  he  can  sue  in  a  court  of 
equity,  for  himself  and  in  behalf  of  other  stockholders,  is  when  it 
appears  that  such  application  would  be  unavailing  to  protect  his 
rights.  Brewer  v.  Boston  Theatre,  104  Mass.  378;  Allen  v.  Wiison,  28 
Fed.  Rep.  067;  Ilawes  v.  Oakland,  104  I'.S.  450;  Detroit  v.  Dean,  106 
U.S.  537;  Dimpfell  v.  Ohio  &  Mississippi  Railway,  110  U.S.  209; 
Foss  V.  Harhottle,  2  Hare,  461.  That  may  happen  when  the  directors 
themselves  arc  the  wrongdoers,  or  arc  in  fraudulent  combination 
with  them,  or  when  the  corporation  is  controlled  by  them,  or  when 
it  is  necessary  that  action  should  1x3  taken  too  speedily  to  leave  time 
for  a  corporate  meeting  of  stockholders. 

In  the  case  at  bar  there  is  an  averment  that  Roland  Worthington, 
the  alleged  wrongdoer,  has  for  a  long  time  controlled  a  majority  of 
the  stock,  and  has  elected  such  persons  directors  as  he  chose.  That 
states  a  sufficient  reason  for  not  ap[)lying  to  the  corporation,  at  a 
meeting  of  its  members,  for  action  to  redress  its  wrongs.  But  it  is 
not  alleged  that  ihe  plaintiff  ever  attempted  to  move  the  directors  in 
the  interest  of  the  corporation  in  the  matters  complained  of,  or  that 
any  good  reason  existed  for  his  failure  so  to  do.  It  does  not  even 
appear  who  or  how  many  the  directors  are.  It  is  said  that  the  defend- 
ants Roland  Worthington  and  Roland  Worthington  the  younger  are 
directors,  but  no  others  are  named.  The  law  provides  that  tluTc  shall 
be  at  least  three,  and  it  is  to  be  presumed  that  there  are  others  be- 
sides these  defendants.  Rev.  Sts.  c.  38,  §  3;  Pub.  Sts.  c.  106,  §  25. 
There  is  no  allegation  of  fraud,  or  of  wrongful  combination  with 
Roland  Worthington,  or  of  other  miscontluct,  on  the  part  of  any  of 
them.  And  it  cannot  be  presumed,  in  the  absence  of  such  averments, 
that  they  would  refuse  to  do  their  duty  if  their  attention  were  called 
to  it. 

In  Brewer  v.  Boston  Theatre,  nbi  supra,  —  a  much  stronger  case  for 
the  plaintiff  than  this,  —  an  allegation  was  in  these  words:  "A  ma- 
jority of  the  present  board  of  directors  of  said  defendant  corporation 
are  acting  in  the  interest  of,  and  are  under  the  control  of,  Tompkins 
and  Thayer,"  the  authors  of  the  alleged  frauds;  and  it  was  held  that 
this  allegation  did  not  set  forth  a  sufficient  reason  for  bringing  a  suit 
without  first  requesting  the  directors  to  do  it. 


SECT.  I.]  CONTINENTAL    SECURITIES    CO.  V.  BELMONT,  875 

CONTINENTAL  SECURITIES  CO.  v.  BELMONT. 

206  N.Y.  7.     1912. 

Chase,  J.  This  is  a  representative  action  derived  from  the  Inter- 
borough  Rapid  Transit  Company.  It  is  brought  in  behalf  of  the 
plaintiffs  and  all  others  similarly  interested,  as  stockholders  of  said 
company,  against  the  directors  of  said  company  and  said  company 
to  requires  said  individual  defendants  to  account  to  said  company 
for  fifteen  thousand  shares  of  its  capital  stock,  alleged  to  have  been 
issued  fraudulently  and  illegally,  and  without  any  valid  or  adequate 
consideration  therefor,  but  upon  an  alleged  consideration  that  was  a 
pretense  and  subterfuge  and  intended  to  cover  a  gift  or  bonus  to  the 
defendants  Belmont  and  Luttgen,  and  their  nominees,  and  also  to 
require  said  individual  defendants  to  account  for  the  dividends 
which  have  been  paid  on  said  stock.  It  is  alleged  that  by  reason  of 
the  facts  set  forth  in  the  complaint  the  defendant  corporation  has 
suffered  damage  to  an  amount  exceeding  $4,500,000. 

It  is  conceded  that  an  action  in  equity  cannot  be  maintained  by 
the  plaintiffs  as  individual  stockholders  for  themselves  and  all  others 
similarly  interested  unless  it  is  necessary  because  of  the  neglect  and 
refusal  of  the  corporate  body  to  act. 

It  is  necessaiy,  therefore,  in  an  action  by  the  plaintiffs  to  set  forth 
two  things,  first,  a  cause  of  action  in  favor  of  the  corporation  with 
the  same  detail  of  facts  as  would  be  proper  in  case  the  corporation 
itself  had  brought  the  action;  second,  the  facts  which  entitle  the  plain- 
tiff to  maintain  the  action  in  place  of  the  corporation.  Kavanaugh  v. 
Commonwealth  Trust  Co.,  181  N.Y.  121;  0^ Connor  v.  Virginia  Pas- 
senger &  Power  Co.,  184  N.Y.  46. 

It  is  not  seriously  contended  that  the  complaint  does  not  state  a 
good  cause  of  action  in  favor  of  the  defendant  corporation.  It  is 
insisted  by  the  defendants  that  it  was  necessary  for  the  plaintiffs  in 
addition  to  alleging  a  demand  upon  the  defendant  corporation  and  its 
board  of  directors  to  bring  the  action  and  their  neglect  and  refusal 
to  do  so,  to  allege  that  they  had  given  notice  of  the  alleged  fraud  to 
the  body  of  stockholders  of  the  defendant  corporation  and  had  de- 
manded of  said  stockholders  that  some  action  be  taken  by  them  to 
redress  the  wrong,  and  that  such  body  of  stockholders  had  neglected 
and  refused  to  take  any  action  relating  thereto.  The  cause  of  action 
belongs  to  the  corporate  body  and  not  to  the  plaintiffs  and  other 
stockholders  individually,  nor  to  the  body  of  stockholders  collec- 
tively. 

The  board  of  directors  represents  the  corporate  body.  It  is  pro- 
vided by  statute  in  this  state  that  the  affairs  of  every  corporation 
shall  be  managed  by  its  board  of  directors.  General  Corporation 
Law,  §  34.   The  directors  are  not  ordinary  agents  in  the  immediate 


876  CONTINENTAL    SECURITIES    CO.  V.  BELMONT.        (CHAP.  II. 

control  of  the  stockhoklcrs.  The  directors  hold  their  office  charged 
with  the  duty  to  act  for  the  corporation  according  to  their  hest 
judgment,  and  in  so  doing  they  cainiot  he  controlled  in  the  rea.son- 
able  exercise  and  performance  of  such  duty.  The  corporation  is  the 
owner  of  the  property,  but  the  directors  in  the  performance  of  their 
duty  possess  it  and  act  in  every  way  as  if  they  owned  it.  Piojtlc  ex 
rel.  Manice  v.  Powell,  201  N.Y.  194.  They  are  trustees  clothed  with 
the  power  of  controlling  the  property  and  managing  the  affairs  of  a 
corporation  without  let  or  hinihance.  As  to  third  pei-sons  they  are 
its  agents,  but  as  to  the  corporation  itself,  eciuity  holds  them  liable 
as  trustees.  2  Pomeroy's  Ecjuity  Jurisj)ru(lence,  §§  1001,  1073,  1088, 
1097;  People  ex  ret.  Manice  v.  Powell,  supra. 

The  claim  of  the  apjx'llants  that  the  body  of  stockholders  has 
some  immediate  or  direct  authority  to  act  for  the  corporation  or  to 
control  the  board  of  directors  in  the  mtitters  .set  forth  in  the  com- 
plaint is  based  upon  an  erroneous  conception  of  the  duties  and 
powers  of  the  body  of  stockholders  in  this  state.  As  a  general  rule 
stockholders  cannot  act  in  relation  to  the  ordinary  business  of  a 
corporation.  The  body  of  stockholders  have  certain  authority  con- 
ferred by  statute  which  must  be  exercised  to  enable  the  corporation 
to  act  in  specific  cases,  but  except  for  certain  authority  conferred  by 
statute,  which  is  mainly  permissive  or  confirmatory,  such  as  consent- 
ing to  the  mortgage,  lease  or  sale  of  real  property  of  the  corporation, 
they  have  no  express  power  given  by  statute.  They  are  not  by  any 
statute  in  this  state  given  general  power  of  initiative  in  corporate 
affairs.  Any  action  by  them  relating  to  the  details  of  the  corporate 
business  is  necessatily  in  the  form  of  an  a.s.sent,  refjuest  or  recom- 
mendation. Recommendations  by  a  body  of  stockholders  can  only 
be  enforced  through  the  board  of  directors,  and  indirectly  by  the 
authority  of  the  stockholders  to  change  the  personnel  of  the  directors 
at  a  meeting  for  the  election  of  directors.  Such  action  may  or  may 
not  result  in  securing  adecjuate  corporate  action  with  reference  to 
illegal  or  fraudulent  acts.  For  reasons  wholly  ajiart  from  the  matter 
in  dispute  the  stockholders  may  not  desire  to  change  a  majority  of 
the  persons  comprising  its  board  of  directors.  Some  of  the  reasons 
why  the  power  vested  in  stockholders  to  elect  directors  is  inadequate 
as  a  remedy  for  specific  fraudulent  acts  are  stated  by  Cook  in  his 
work  on  Stock  and  Stockholders,  §  740,  in  which  he  says:  "There 
has  been  considerable  discussion  as  to  whether  the  stockholder  in 
addition  to  his  request  to  the  corporate  officers  to  institute  the  suit, 
should  not  also  be  required  to  attempt  to  induce  the  stockholders  in 
meeting  assembled  to  take  action  bj'  directing  the  directors  to  bring 
suit,  or  by  refusing  to  re-elect  them  at  the  next  election.  The  facts, 
however,  that  the  stockholders  in  meeting  assembled  cannot  control 
the  discretion  of  the  directors  in  bringing  such  a  suit;  that  the  rem- 
edy of  refusing  to  re-elect  them  involves  delay,  and  the  assumption 


SECT.  I.]  CONTINENTAL    SECURITIES    CO.  V.  BELMONT.  877 

that  a  minority  of  the  stockholders  can  by  the  election  control  such 
a  suit;  that  irreparable  injury  or  the  vesting  of  great  financial  inter- 
ests may  occur  in  the  meantime ;  and  that  laches  may  arise  as  a  bar 
to  the  stockholder's  suit,  have  settled  the  rule  that  the  stockholder's 
request  to  the  corporate  directors  to  institute  the  suit  is  sufficient. 
He  need  not  also  apply  to  a  stockholders'  meeting."  Although  it  is 
said  that  the  authority  of  stockholders  in  the  management  of  business 
corporations  is  exhausted  when  they  elect  the  directors  (Thompson  on 
Corporations  [2d  ed.],  §  1178)  nevertheless  it  is  generally  recognized 
that  certain  acts  of  boards  of  directors  that  are  legal,  but  voidable, 
can  be  ratified  and  confirmed  by  a  majority  of  the  body  of  stockhold- 
ers as  the  ultimate  parties  in  interest  and  thus  make  them  binding 
upon  the  corporation.  Morawetz  on  Corporations  (2d  ed.),  §§  625, 
626.  Such  recognized  authority  in  stockholders  to  ratif}^  and  confirm 
the  acts  of  boards  of  directors  is  confined  to  acts  voidable  by  reason 
of  irregularities  in  the  make  up  of  the  board  or  otherwise  or  by 
reason  of  the  directors  or  some  of  them  being  personally  interested 
in  the  subject-matter  of  the  contract  or  act,  or  for  some  other  similar 
reason  which  makes  the  action  of  the  directors  voidable.  No  such 
authority  exists  in  case  of  an  act  of  the  board  of  directors  which  is 
prohibited  by  law  or  which  is  against  public  policy.  Kent  v.  Quick- 
silver Mining  Co..  78  N.Y.  159.  In  any  case  where  action  is  taken  by 
stockholders  confirming  and  ratifying  a  fraud  and  misapplication  of 
the  funds  of  the  corporation  by  the  directors  or  others  the  action 
is  binding  only  by  way  of  estoppel  upon  such  stockholders  as  vote  in 
favor  of  such  approval.  Morawetz  on  Corporations  (2d  ed.),  §  625. 
The  distinction  between  acts  that  can  and  those  that  cannot  be 
confirmed  and  ratified  is  shown  in  the  report  of  two  frequently  cited 
English  decisions,  namely,  Foss  v.  Harbottle,  2  Hare,  461,  and  Bag- 
shaw  V.  Eastern  Union  R'way  Co.,  7  Hare,  114.  The  former  of  these 
cases  was  limited  to  the  approval  of  a  legal  but  voidable  act.  In  the 
Bagshaw  case  where  the  directors  of  a  corporation  had  misapplied 
or  were  about  to  misapply  certain  moneys  of  the  corporation,  the 
court  say:  "No  majority  of  the  shareholders,  however  large,  could 
sanction  the  misapplication  of  this  portion  of  the  capital,  A  single 
dissenting  voice  would  frustrate  the  wishes  of  the  majority.  Indeed, 
in  strictness,  even  unanimity  would  not  make  the  act  lawful.  This 
appears  to  me  to  take  it  out  of  the  case  of  Foss  v.  Harbottle,  to  which 
I  was  referred.  That  case  does  not,  I  apprehend,  upon  this  point,  go 
further  than  this:  That  if  the  act,  though  it  be  the  act  of  the  directors 
only,  be  one  which  a  general  meeting  of  the  company  could  sanction, 
a  bill  by  some  of  the  shareholders  on  behalf  of  themselves  and 
others,  to  impeach  that  act,  cannot  be  sustained,  because  a  general 
meeting  of  the  company  might  immediately  confirm  and  give  valid- 
ity to  the  act  of  which  the  bill  complains." 

It  is  the  governing  body  or  bodies  of  a  corporation  with  powxr  to 


878  WATHEN    V.  JACKSON    OIL    CO.  [CHAP.   II. 

enforce  a  remedy  to  whom  complaining  stockholders  must  go  with 
their  demand  for  relief.  The  govcrniiifj;  body  of  corponition.s  in  this 
state,  as  we  have  seen,  is  the  board  of  directors.  A  complaining  stock- 
holder must  go  to  such  board  for  relief  before  he  can  bring  an  action, 
unless  it  clearly  appears  by  the  complaint  that  such  application  is 
useless.  If  the  subject-matter  of  the  stockholder's  complaint  is  for 
any  reason  within  the  immediate  control,  direction  or  power  of  con- 
firmation of  the  body  of  stocklioldcrs,  it  should  be  brought  to  the 
attention  of  such  stockholders  for  action,  before  an  action  is  com- 
menced by  a  stockholder  unless  it  clearly  appears  by  the  complaint 
that  such  application  is  useless. 

The  decision  reported  in  Hawes  v.  Oakland,  104  U.S.  450,  and 
other  similar  decisions  in  the  Federal  and  state  courts  are  not  in 
conflict  with  the  decision  about  to  be  rendered  herein.  In  such  cases, 
as  in  this  case,  it  is  asserted  that  an  application  to  the  body  of 
stockholders  is  unnecessary'  when  it  is  unreasonable  to  require  it.  If 
the  body  of  stockholders  has  no  adequate  power  or  authority  to 
remedy  the  wrong  asserted  by  the  individual  stockholders  it  is  un- 
reasonable and  unnecessary  to  reciuire  an  application  to  it  to  redress 
the  wrong  before  bringing  a  representative  action.  See  opinion  of 
Carr,  J.,  in  the  Appellate  Division  herein,  150  App.  Div.  298.  See, 
also,  Delaware  &  H.  Co.  v.  Albany  &  S.  R.R.  Co.,  213  U.S.  435. 

Note.— See  Baillie  v.  Oriental  Telephone  Co.,  [1915]  1  Ch.  503. 


WATHEN  r.  JACKSON  OIL  CO. 

235  U.S.  635.     1915. 

Mr.  Justice  Hughes  delivered  the  opinion  of  the  court. 

The  appellant  brought  this  suit  in  the  District  Court  to  restrain 
the  Jackson  Oil  &  Refining  Company,  its  manager  and  officers,  from 
compljdng  with  a  statute  of  Mississippi  prohibiting  employment  in 
described  occupations  for  more  than  ten  hours  a  day,  except  in  cases 
of  emergency  or  public  necessity  (Chapter  157,  Laws  of  Mississippi, 
1912,  p.  165)  and  to  enjoin  the  other  defendants  (certain  public 
officers)  from  enforcing  its  provisions  as  against  that  company. 

It  was  alleged  in  the  bill,  in  substance,  that  the  defendant  corpora- 
tion was  engaged  in  operating  a  cotton  seed  oil  mill  of  the  value  of 
$100,000;  that  the  complainant  owned  five  hundred  and  two  shares  of 
its  stock  of  the  par  value  of  one  hundred  dollars  each  and  of  the  actual 
value  of  $60,000;  that  the  business  required  that  the  mill  should  be 
operated  continuously,  both  day  and  night,  two  shifts  of  laborers 
being  employed;  that  the  employment  was  under  wholesome  condi- 
tions, without  any  detriment  to  the  physical,  mental  and  moral  well- 


SECT.  I.]  WATHEN    V.  JACKSON    OIL    CO.  879 

being  of  those  employed;  that  the  statute,  if  enforced,  would  work  a 
deprivation  of  liberty  of  contract  and  of  property,  and  an  arbitrary 
discrimination,  contrary  to  the  Fourteenth  Amendment;  that  com- 
pliance with  the  statute  would  involve  greatly  increased  cost  of 
operation  and  render  the  corporation  insolvent  and  its  property 
valueless,  to  the  complainant's  injur}^*  that  the  statute  had  been 
sustained  by  the  Supreme  Court  of  Mississippi  in  a  suit  against 
another  manufacturing  company;  that,  although  the  officers  of  the 
defendant  corporation  desired  to  disobey  the  statute,  they  were 
complying  therewith  being  constrained  to  obedience  through  fear  of 
the  enormous  penalties  imposed;  and  that  these  penalties  were  so 
severe  that  no  owner  or  operator  in  the  position  of  the  defendant 
corporation  could  invoke  the  jurisdiction  of  a  court  to  test  the  valid- 
ity of  the  statute,  except  at  the  risk  of  confiscation. 

Those  defendants  who  were  public  officers  demurred  to  the  bill 
upon  the  grounds  (among  others)  that  the  complainant  as  a  stock- 
holder of  the  corporation  had  no  right  to  sue;  that  the  bill  could  not 
be  maintained  to  restrain  the  enforcement  of  the  criminal  law  of  the 
State;  and  that  the  statute  was  constitutional. 

An  application  for  a  preliminary  injunction  was  heard  on  the  bill 
and  demurrer  and  was  denied,  and  from  the  order  entered  to  this 
effect  the  complainant  appeals  to  this  court.  Judicial  Code,  §  266. 

The  objection  urged  below,  and  repeated  here,  that  the  complain- 
ant has  failed  to  show  any  right  to  maintain  this  suit  must  be  sus- 
tained. The  right  of  action  to  restrain  the  enforcement  of  the  statute 
as  an  unconstitutional  deprivation  of  the  liberty  and  property  of  the 
corporation  was  a  right  existing  in  the  corporation  itself,  and  a  stock- 
holder was  not  entitled  to  sue  without  showing  to  the  satisfaction  of 
the  court  that  he  had  exhausted  the  means  within  his  reach  to  obtain 
action  by  the  corporation  in  conformity  with  his  wishes.  Hawes  v. 
Oakland,  104  U.S.  450,  460,  461;  Detroit  v.  Dean,  106  U.S.  537,  541, 
542;  Quincy  v.  Steel,  120  U.S.  241,  248;  Doctor  v.  Harririgton,  196 
U.S.  579,  588.  The  former  equity  rule  (Rule  94,  210  U.S.  541)  pro- 
vided not  only  that  the  bill  must  allege  that  the  suit  was  "not  a 
collusive  one  to  confer  upon  a  court  of  the  United  States  jurisdiction 
of  a  case  of  which  it  would  not  otherwise  have  cognizance,"  but  that 
the  bill "  must  also  set  forth  with  particularity  the  efforts  of  the  plain- 
tiff to  secure  such  action  as  he  desires  on  the  part  of  the  managing 
directors  or  trustees,  and,  if  necessary,  of  the  shareholders,  and  the 
cause  of  his  failure  to  obtain  such  action."  The  present  rule  (Rule 
27,  226  U.S.  Appx.,  p.  8)  adds  to  this  provision  the  words,  —  "or 
the  reasons  for  not  making  such  effort " ;  and  these  reasons,  of  course, 
must  be  adequate.  The  rule  embraces  those  cases  where  the  wrong 
to  the  corporation  arises  from  unconstitutional  legislation.  Corhus  v. 
Alaska  Gold  Mining  Co.,  187  U.S.  455;  Davis  &  Famum  Mfg.  Co.  v. 
Los  Angeles,  189  U.S.  207,  220;  Ex  parte  Young,  209  U.S.  123,  143. 


880  WATIIEN    V.  JACKSON    OIL    CO.  [CHAP.   II. 

Here,  while  it  is  averred  that  the  suit  is  not  a  collusive  one  in  order 
to  confer  a  jurisdiction  which  would  not  otherwise  exist,  there  is  no 
allegation  that  the  complainant  has  made  any  retjuest  that  the 
corporation  should  bring  the  suit  to  prevent  the  alleged  invasion  of 
its  rights;  nor  does  it  appear  that,  by  reason  of  antagonistic  control 
of  the  corporation,  such  a  request  would  be  futile.  Although  ap- 
parently the  holder  of  a  majority  of  its  stock,  the  complainant  does 
not  show  any  effoit  whatever  to  induce  the  corporation  to  sue.  He 
contents  himself  with  a.sserting  in  efi'cct  that,  though  the  directors 
and  officers  do  not  wish  to  comply  with  the  statute,  they  will  do  so 
through  fear  of  its  penalties.  But  this  reason  is  palpably  inadequate 
inasmuch  as  the  corporation  itself  would  be  entitled  to  protection 
against  the  imposition  of  such  penalties  as  would  virtually  deny 
access  to  the  courts  for  the  protection  of  rights  guaranteed  l)y  the 
Federal  Constitution.  Ex  parte  Young,  209  U.S.,  p.  147;  WiUcox  v. 
Consolidated  Gas  Co.,  212  U.S.  19,  53,  54;  Missouri  Pacific  Ruy.  v. 
Tucker,  230  U.S.  340,  351 ;  Ohio  Tax  Cases,  232  U.S.  57G,  587;  Wadlcy 
Southern  Rwy.  v.  Georgia,  235  U.S.  651.  The  allegations  of  the  l>ill 
show  no  ground  for  dispensing  with  efforts  to  procure  action  by  the 
corporation;  and  in  this  view,  without  di.-^cussing  the  merits  of  the 
case,  wc  are  of  the  opinion  that  the  complainant  was  not  entitled  to 
the  injunction  sought. 

Order  (ijfirmed. 

Note.  —  Rule  27  of  the  Rules  of  Practice  in  Eciuity.  promulgated 
by  the  U.S.  Supreme  Court,  and  in  force  on  and  after  February  1, 
1913  (taking  the  place  of  Rule  94  of  the  Rules  adopted  in  1882),  is  as 
follows:  "Every  bill  brought  by  one  or  more  stockholders  in  a  cor- 
poration against  the  corporation  and  other  parties,  founded  on  rights 
which  may  properly  be  asserted  by  the  corporation,  must  be  verified 
by  oath,  and  must  contain  an  allegation  that  the  plaintiff  was  a  share- 
holder at  the  time  of  the  transaction  of  which  he  complains,  or  that 
his  share  had  devolved  on  him  since  by  operation  of  law,  and  that 
the  suit  is  not  a  collusive  one  to  confer  on  a  court  of  the  United 
States  jurisdiction  of  a  case  of  which  it  would  not  otherwise  have 
cognizance.  It  must  also  set  forth  with  particularity  the  efforts  of 
the  plaintiff  to  secure  such  action  as  he  desires  on  the  part  of  the 
managing  directors  or  trustees,  and,  if  nccessar^^  of  the  shareholders, 
and  the  causes  of  his  failure  to  obtain  such  action,  or  the  reasons  for 
not  making  such  effort." 

Personal  exception  to  the  plaintiff.  If  the  plaintiff  has  approved  of 
the  corporate  action,  now  complained  of,  or  has  taken  any  benefit  to 
himself  from  it,  such  fact  is,  without  more,  a  sufficient  defense  to  a 
suit  instituted  by  him.  Wormser  v.  Metropolitan  Street  Ry.  Co.,  184 
N.Y.  83. 

It  has  been  held  that,  if  the  plaintiff  is  a  puppet,  acting  in  behalf 


SECT.  I.]  POLLITZ    V.  GOULD.  881 

of  some  third  person  having  interests  hostile  to  the  corporation,  such 
fact  is  a  defense.  Forrest  v.  Manchester  Ry.  Co.,  4  De  Gex,  Fisher  & 
Jones,  126;  Jenkins  v.  Auburn  City  Ry.  Co.,  27  N.Y.  App.  Div.  553. 
But  cf.  Ceiitral  R.R.  Co.  v.  Collins,  40  Ga.  582;  Carver  v.  Southern 
Iron  Co.,  78  N.J.  Eq.  81,  94. 

There  is  authority  that  if  the  plaintiff  is  suing  for  his  own  purposes, 
the  court  will  not  inquire  into  his  motives.  Seaton  v.  Grant,  L.R. 
2  Ch.  459. 


H.  Rights  of  Persons  who  became  Stockholders  at  a  time  subsequent  to 
the  Commission  of  the  Alleged  Wrong. 


POLLITZ  V.  GOULD. 

202    N.Y.  11.     1911. 

Appeal,  by  permission,  from  an  order  of  the  Appellate  Division 
of  the  Supreme  Court  in  the  first  judicial  department,  entered  Jan- 
uary 13,  1911,  which  affirmed  an  order  of  Special  Term  denying  a 
motion  to  dismiss  the  complaint  upon  the  pleading. 

The  following  questions  were  certified:  "1.  Does  the  fact  that 
the  plaintiff  acquired  liis  stock  of  the  defendant,  the  Wabash  Rail- 
road Company,  upon  which  he  bases  his  right  to  ask  the  com-t  to 
enforce  a  cause  of  action  in  favor  of  the  railroad  company  against 
the  individual  defendants,  after  all  the  transactions  which  the  plain- 
tiff insists  imposed  a  liability  in  favor  of  the  railroad  company 
against  the  individual  defendants  had  been  consummated,  all  stocks 
and  bonds  issued  and  the  transactions  complained  of  in  all  respects 
completed,  prevent  the  plaintiff  from  maintaining  this  action?  2.  Is 
the  enforcement  of  such  a  cause  of  action  confined  to  stockholders 
who  actually  owned  stock  at  the  time  the  transactions  complained 
of  were  consummated  and  completed?" 

HiscocK,  J.  This  action  was  brought  by  plaintiff  as  a  stock- 
holder in  the  Wabash  Railroad  Company  in  behalf  of  said  company 
for  the  benefit  of  himself  and  all  other  stockholders  to  set  aside  as 
fraudulent  a  transfer  and  exchange  of  several  millions  of  dollars  par 
value  of  its  stock  for  an  equivalent  amount  of  the  capital  stock  of  the 
Wabash  Pittsburg  Terminal  Railway  Company.  It  is  unnecessary 
to  go  into  the  details  of  the  transaction  which  is  being  attacked  by 
the  plaintiff  through  and  in  behalf  of  the  company,  for  the  sole  ques- 
tion presented  for  our  consideration  may  be  discussed  without  doing 
this.  This  question  is  whether  a  stockholder  may  bring  an  action  of 
this  character  for  the  purpose  of  avoiding  an  improper  transaction 
consummated  at  the  expense  of  the  corporation  before  he  acquired 
his  stock,  and  as  presented  here  the  question  is  unembarrassed  by 


882  POLLITZ    V.  GOULD.  [CHAP,   II. 

any  incidental  considerations,  as,  that  the  prior  holder  of  the  stock 
consented  to  the  transaction  or  that  pluintifT's  subsequent  actjui- 
sition  of  the  stock  was  accompanied  by  any  circumstances  wliich 
would  render  it  inequitable  for  him  to  seek  relief. 

While  somewhat  strangely  this  question  does  not  appear  to  have 
been  decided  by  this  court,  it  has  been  passed  on  by  the  lower  courts 
of  this  state  and  by  those  of  many  other  states  and  by  the  Supreme 
Court  of  the  United  States.  It  has  also  been  somewhat  considered 
by  the  courts  of  England.  Conflicting  conclusions  have  been  reached 
by  these  decisions.  Without  reviewing  the  Englisli  authorities, 
which  so  far  as  cited  do  not  seem  to  l)e  very  decisive,  reference  may 
be  made  to  the  decisions  in  this  country. 

The  question  was  presented  in  Haives  v.  Oakland,  104  U.S.  450, 
and  it  was  there  held  that  a  stockholder  might  not  bring  an  action 
in  behalf  of  the  corporation  to  avoid  a  fraudulent  transaction  con- 
summated before  he  accjuired  his  stock.  While  the  question  was 
directly  passed  on  it  is  fair  to  state  that  it  was  not  considered  at  any 
great  length  and  that  the  court  seems  to  have  been  more  concerned 
with  estal)lishing  this  rule  as  one  of  practice  than  of  substantive  law. 
The  decision  resulted  in  the  adojition  of  a  rule  rcfiuiring  tlie  phiiiitiff 
in  such  an  action  to  show  before  bringing  suit  that  he  owned  the 
stock  on  which  it  was  brought  at  the  time  the  transaction  com- 
plained of  occurred,  and  whether  it  be  regarded  as  establishing  a 
principle  of  law  or  a  rule  of  practice  this  authority  has  been  subse- 
quently followed  in  the  United  States  courts. 

In  addition,  this  rule  in  such  a  stockholder's  action  has  been 
approved  in  the  following  cases:  Alexander  v.  Searcy,  81  Ga.  536; 
Boldenweek  v.  Bullis,  40  Colo.  253;  Rankin  v.  >S.  W.  B.  &  I.  Co.,  12 
N.  Mex.  54;  Moore  v.  Silver  VallcyCo.,  104  N.C.  534;  Clark  v.  Amer- 
ican Coal  Co.,  86  la.  436;  Ho7ne  Fire  Ins.  Co.  v.  Barber,  67  Neb.  644. 

The  contraiy  doctrine  that  a  stockholder  acquiring  his  stock  sub- 
sequent to  the  occurrence  complained  of  may  maintain  this  char- 
acter of  an  action  has  been  affirmed  in  the  following  cases  outside  of 
this  state:  Winsor  v.  Bailey,  55  N.H.  218;  City  of  Chicago  v.  Camercm, 
22  111.  App.  91  (affirmed,  120  111.  447) ;  Montgomery  Light  &  Power 
Co.  v.  Lahey,  121  Ala.  131;  Forrester  v.  B.  &  M.,  etc.,  Co.,  21  Mont. 
544,  565;  Just  v.  Idaho,  etc.,  Co.,  102  Pac.  Rep.  381;  Rafferty  v. 
Donnelly,  197  Pa.  St.  423;  Appleton  v.  Am.  Malting  Co.,  65  N.J.  Eq. 
375. 

It  has  also  been  approved  in  this  state  directly  or  indirectly  in  the 
following  cases:  Ramsey  v.  Gould,  57  Barb.  398;  Young  v.  Drake,  8 
Hun,  61;  Ervin  v.  Oregon  Ry.  &  N.  Co.,  35  Hun,  544;  Frothingham  v. 
Broadway  &  Seventh  Ave.  R.R.  Co.,  9  Civ.  Pro.  Rep.  304;  Sayles  v. 
Central  Nat.  Bank,  18  Misc.  Rep.  155;  O'Connor  v.  Virginia  P.  cfc  P. 
Co.,  46  Misc.  Rep.  530,  535. 

Assuming  this  question  to  be  an  open  one  in  this  court,  we  have 


SECT.  I.]  POLLITZ    V.  GOULD.  883 

no  hesitation  in  approving  the  rule  which  has  heretofore  prevailed 
in  this  state,  that  in  the  absence  of  special  circumstances  this  char- 
acter of  action  may  be  maintained  by  a  stockholder  acquiring  his 
stock  subsequent  to  the  transaction  which  is  challenged,  rather  than 
the  contrary  one  prevailing  elsewhere.  We  do  this  not  only  because 
a  long  and  uniform  line  of  decisions  by  our  own  courts  ought  to  have 
weight,  but  because  the  rule  established  by  these  decisions  seems  to 
be  the  sounder  one. 

A  stockholder  has  an  indivisible  interest  in  the  property  and 
assets  of  a  corporation  subject  to  the  discharge  of  its  obhgations. 
This  indivisible  interest  generally  speaking  is  represented  by  certifi- 
cates of  stock  and  is  transferred  by  their  transfer.  The  general 
character  of  these  certificates  and  the  effect  of  their  transfer  in 
passing  the  interest  of  the  holder  is  too  well  established  and  under- 
stood to  require  any  discussion.  As  an  original  proposition  it  would 
seem  to  be  clear  that  a  right  of  action  by  or  in  behalf  of  the  cor- 
poration for  fraud  to  set  aside  a  conveyance  of  its  assets  or  to  avoid 
obligations  imposed  upon  it  is  part  of  its  rights,  property  and  assets 
in  which  a  stockholder  has  this  indivisible  interest  transferable  by 
the  transfer  of  his  certificates.  I  am  unable  to  see  any  real  or  sub- 
stantial distinction  by  virtue  of  which  a  stockholder  transferring  his 
certificates  would  transfer  all  of  his  indivisible  interest  in  bonds  or 
real  estate  on  hand,  but  would  not  transfer  his  interest  in  a  right 
of  action  to  recover  bonds  or  real  estate  which  had  been  fraudu- 
lently withdrawn  from  the  possession  of  the  corporation,  and  which 
it  was  entitled  to  recover.  And  if  the  subsequent  holder  by  acquir- 
ing the  certificates  does  acquire  such  latter  interest,  it  seems  to  fol- 
low that  he  may  if  necessary,  in  behalf  of  the  corporation,  assert 
and  prosecute  an  action  to  protect  and  enforce  the  same. 

Brief  reference  may  be  made  to  some  of  the  reasons  advanced  in 
opposition  to  this  view.  Counsel  points  out  practical  inconvenience 
which  he  says  will  result  from  its  application  owing  to  the  difficulties 
in  tracing  stock  and  distinguishing  that  which  has  not  assented  to 
the  transaction  from  that  which  has  or  from  that  which  perhaps  has 
been  issued  since  its  consummation.  These  arguments,  however,  are 
so  counterbalanced  by  corresponding  claims  from  the  opposite 
standpoint  as  to  be  of  little  weight. 

Again,  it  is  argued  that  if  one  buys  stock  subsequent  to  the  trans- 
action he  should  be  regarded  as  buying  subject  to  it  and  not  be  per- 
mitted to  question  it.  If  the  prior  holder  should  give  binding  consent 
to  the  transaction,  this  under  certain  circumstances  undoubtedly 
would  prevent  the  subsequent  purchaser  from  questioning  it.  But, 
in  the  absence  of  special  circumstances,  I  fail  to  see  any  principle  of 
estoppel  or  logic  which  makes  a  subsequent  purchase  of  stock  so 
subject  to  a  fraudulent  corporate  transaction  that  the  purchaser 
may  not  insist  upon  its  being  set  aside.  There  is  scarcely  any  analogy 


884  POLLITZ    V.  GOULD.  [CHAP.  II. 

between  the  situation  of  one  who  buys  from  an  individual  some 
property  which  has  been  subjected  to  a  transaction  which  has  not 
been  disaffirmed  and  that  of  one  who  purchases  stock  in  a  corpora- 
tion which  has  the  continuing  right  both  before  and  after  the  pur- 
chase to  (Usaffirm  a  wrong  which  has  been  perpetrated  on  it  by  its 
agents.  There  is  httle  or  no  basis  for  the  practical  consideration  that 
one  who  buys  stock  should  be  deemed  to  have  adjusted  his  price  to 
an  existing  transaction  even  though  voidable.  If  he  knows  of  it  he 
may  just  as  properly  be  assumed  to  have  adjusted  his  price  to  the 
knowledge  that  the  transaction  may  still  l)c  disaffirmed  and  avoided. 

Then,  lastly,  an  argument  is  made  which  seems  to  be  founded  on 
the  idea  that  in  order  to  bring  an  action  of  this  nature  the  stockholder 
must  in  effect  disaffirm  the  corporate  transaction  and  that  this  dis- 
affirmance involves  a  personal  right  of  election  which  vests  in  the 
one  holding  the  stock  when  the  transaction  is  consummated  and 
which  cannot  be  transferred.  It  is  said  "  the  right  to  question  a  fraud 
is  not  a  purchasable  commodity,"  and  is  not  "capable  of  a.ssignment 
and  transfer,"  and  does  not  pass  "as  an  implied  incident  to  every 
sale  of  corporate  stock,"  and  this  view  seems  to  be  supported  by 
some  of  the  many  cases  which  have  been  collected  and  reviewed  by 
counsel  with  manifest  industry  and  care. 

So  far  as  this  argument  means  to  assert  that  a  mere  naked  right 
to  question  a  corporate  transaction  could  not  be  transferred  to  a 
stranger,  if  such  an  attempt  can  be  conceived  of,  it  may  be  assumed 
to  be  true.  But  the  assertion  that  the  right  to  protect  stock  by  pro- 
curing an  improper  corporate  transaction  to  be  vacated  does  not 
pass  on  a  transfer  of  the  stock  is  a  very  different  proposition. 

The  election  to  disaffirm  a  fraudulent  corporate  transaction  be- 
longs to  and  is  exercised  in  the  right  and  name  of  the  corporation 
and  not  of  the  stockholder.  The  stockholder  demands  that  the 
right  shall  be  exercised  and  the  cause  of  action  be  prosecuted  by  the 
corporation  or  does  it  himself  for  the  corporation.  It  is  conceded  that 
the  one  holding  the  stock  when  the  fraud  is  consummated  has  this 
right.  When  he  transfers  his  certificates  the  transaction  still  stands 
a  continuing  wrong  impairing  the  surplus  of  the  company  and  affect- 
ing the  stock.  If  the  transferee  has  the  right  to  have  it  avoided  this 
will  protect  and  increase  the  value  of  his  stock.  If  he  has  not  ac- 
quired this  right  it  is  the  only  one  held  by  his  predecessor  in  or 
through  the -corporation,  which  has  been  thought  of,  which  has  not 
been  transferred  by  the  transfer  of  the  stock.  It  will  be  an  anomalous 
exception  if  the  prior  holder  retains  the  right  to  maintain  or  have 
maintained  this  action  while  he  passes  all  of  his  other  rights  by  the 
transfer  of  his  stock.  The  only  justification  pleaded  for  this  is  the 
idea  suggested  of  a  personal  and  non-transferable  right  of  election 
to  disaffu-m  vested  in  the  original  holder.  But  this  theory  is  entirely 
unsubstantial.  Such  prior  holder  does  not  acquire  this  right  to  object 


SECT.  I.]  PARSONS  V.  JOSEPH.  885 

to  the  transaction  and  bring  an  action  to  set  it  aside  as  a  power  con- 
ferred upon  him  by  reason  of  any  personal  quahties,  but  because  of 
his  character  as  a  stockholder,  and  when  he  loses  this  character  and 
transfers  it  to  another  with  his  stock  there  is  no  reason  why  the 
latter  should  not  exercise  the  right  as  a  proper  and  necessary  inci- 
dent to  his  stock  ownership. 

The  order  should  be  affirmed,  with  costs,  and  both  questions  certi- 
fied to  us  answered  in  the  negative. 

CuLLEN,  Ch.J.,  Vann,  Werner,  Willard  Bartlett  and  Chase, 
JJ.,  concur;  Haight,  J.,  absent. 

Order  affirmed. 


PARSONS  V.  JOSEPH. 

92  Ala.  403.     1890. 

The  bill  in  this  case  was  filed  on  the  19th  day  of  July,  1890,  by 
Henry  Joseph,  as  a  stockholder  in  the  Birmingham,  Powderly  & 
Bessemer  Street  Railroad  Company,  against  the  said  corporation  and 
J.  H.  Parsons;  and  sought  the  cancellation  of  certain  certificates  of 
stock  issued  by  the  corporation  to  said  Parsons,  on  the  ground  that 
the  stock  was  fictitious  and  fraudulent.  There  was  a  demurrer  to  the 
bill,  and  a  motion  to  dissolve  the  injunction,  each  of  which  was  over- 
ruled; and  this  appeal  is  sued  out  by  the  defendants  from  that  inter- 
locutoiy  decree. 

Coleman,  J.  Among  other  averments,  the  bill  substantially  al- 
leges that  plaintiff  is  a  bona  fide  stockholder  in  said  company;  that 
shortly  after  the  organization  of  the  companj^,  the  defendant  sub- 
scribed for  one  hundred  and  seven  shares  of  the  capital  stock  of  the 
company,  of  the  par  value  of  fifty  dollars  each,  and  paid  for  the  same 
in  full  by  conveying  to  the  company  thirty-nine  acres  of  land  (de- 
scribing the  land)  at  an  agreed  price  and  valuation  of  one  hundred 
and  thirty-seven  dollars  per  acre,  when  the  land  was  not  worth  more 
than  twenty-five  dollars  per  acre,  and  for  this  land  Parsons  was  to 
receive  one  hundred  and  seven  shares  of  the  stock;  that  shortly 
thereafter,  the  capital  stock  of  the  company  was  doubled,  and  with- 
out further  consideration  than  the  thirty-nine  acres  of  land,  Parsons' 
stock  was  doubled,  and  he  received  two  hundred  and  fourteen  shares 
of  the  capital  stock.  The  bill,  as  amended,  charges  the  excessive 
valuation  of  the  land  was  made  knowingly,  willfully,  and  with  the 
fraudulent  intent  of  having  issued  to  Parsons  the  fictitious  stock,  in 
\'iolation  of  law.  The  answer  denied  that  plaintiff  was  a  bona  fide 
stockholder,  and  set  up  that  plaintiff  was  the  transferee  of  one  E. 
Lesser.  The  answer  admits  that  defendant's  stock  was  doubled  with- 
out the  pajonent  of  any  additional  consideration  than  that  of  the 
land;  but  by  way  of  explanation  and  defense,  avers  that  the  lands 


886  PARSONS    V.  JOSEPH.  [CHAP.  II. 

were  not  truly  and  properly  valued  at  first,  and  the  increased  valu- 
ation of  the  lands  only  raised  them  to  their  real  and  true  value,  and 
the  additional  issue  of  stock  was  for  property  at  its  fair  valuation. 
The  answer  continues,  however,  as  follows:  that  if  said  transaction 
had  been  illegal  and  fraudulent,  and  not  done  in  good  faith,  com- 
plainant is  estopped  from  setting  up  fraud  in  said  transaction,  or 
seeking  to  cancel  said  stock,  because  E.  Lesser,  who  was  complain- 
ant's transferer,  participated  in  all  of  said  transactions  and  himself 
fixed  the  value  of  said  lands,  with  full  knowledge  of  and  after  full 
investigation  of  the  value  of  said  land. 

A  transferee  of  stock  is  not  necessarily  disqualified  as  a  suitor  in  all 
cases,  because  the  prior  holders  were  personally  disf|ualified.  If  the 
transferee  purcha.sed  the  shares  in  gootl  faith,  and  without  notice  of 
the  fact  that  the  prior  holder  had  precluded  himself  from  suing,  he 
would  have  as  just  a  title  to  relief,  as  if  he  had  purcha.sed  from  a  share- 
holder who  was  under  no  disability;  but,  if  the  purchaser  was  aware 
that  the  prior  holder  had  barred  his  right  to  relief,  neither  justice  nor 
public  policy  would  require  that  the  transferee,  under  these  circum- 
stances, should  be  accorded  any  greater  rights  than  his  transferer. 
Morawetz,  §  267. 

Note. — See  also  Warren  v.  Robimn,  25  Utah,  205.  The  prin- 
cipal case  is  not,  however,  supported  by  the  present  weight  of 
authority.  Thus  in  Babcock  v.  Farwell,  245  111.  14,  the  court  said 
(p.  41) :  "Neither  can  an  assignee  of  stock  maintain  a  suit  in  regard 
to  transactions  with  the  corporation  done  or  a.ssented  to  by  his 
assignor.  The  purchaser  of  shares  of  stock  acquires  no  greater  rights 
than  his  vendor.  He  holds  by  the  same  title  and  subject  to  the  same 
liability.  Shares  of  stock  are  merely  choses  in  action,  and  the  succes- 
sive owners  acquire  only  the  rights  held  by  their  predecessors  in 
title."  In  support  of  this  doctrine,  see  Boldenxccck  v.  BuUis,  40  Colo. 
253;  Callanan  v.  Windsor,  78  Iowa,  193;  Trimble  v.  American  Sugar 
Refining  Co.,  61  N.J.  Eq.  340;  McCampbell  v.  Railroad,  111  Tenn.  55. 

It  is  submitted  that,  oh  principle,  the  principal  case  is  sound. 
Three  things  are  to  be  distinguished:  (1)  a  right  which  is  not  trans- 
ferable, such  as  a  chose  in  action  at  the  connnon  law;  (2)  a  right 
which  is  transferable,  even  by  the  casual  holder  who  has  acquired 
his  holding  in  an  improper  fashion,  such  as  a  negotiable  instrument; 
(3)  a  right  which  is  transferable,  but  not  by  the  casual  holder.  Now 
it  is  settled  that  shares  of  stock  do  not  belong  to  the  second  class, 
and  it  is  easy  to  reason  from  this  that  they  are  subject  to  all  the  rules 
governing  ordinary  choses  in  action.  But  shares  of  stock  do  not  fall 
into  the  first  class,  but  into  the  third.  The  objection  to  allowing  a 
chose  in  action  to  be  transferred  was  twofold:  (1)  it  was  conceived 
to  be  against  public  policy;  and  (2)  it  was  conceived  as  a  hardship 
upon  an  obligor  to  make  him  bound  to  some  one  to  whom  he  had 


SECT.  I.]  PAESONS   V.  JOSEPH.  887 

not  consented  to  be  bound.  But  both  of  these  objections  drop  when 
shares  of  stock  are  considered.  The  State,  by  granting  the  franchise 
of  incorporation,  has  consented  that  there  should  be  succession 
among  the  members.  Nothing  is  more  characteristic  of  a  corpora- 
tion than  this  "capacity  for  succession."  This  means  that,  where 
corporate  membership  is  determined  by  the  ownership  of  stock, 
the  stock  is  transferable.  Of  course  this  is  no  hardship  to  the  cor- 
poration. 

There  is  therefore  no  good  reason  why  the  bona  fide  purchaser  of 
a  share  of  stock  should  not  stand  as  well  as  the  purchaser  of  land  or 
a  chattel.  He  gets  the  legal  title,  and  he  should  hold  that  legal  title 
free  from  equities  or  estoppels  that  would  have  bound  his  transferor. 

Suppose  A,  president  of  X,  misappropriates  its  assets.  The  stock 
is  freely  sold  on  the  market,  and  is  bought  by  purchasers  on  the  sup- 
position that  the  affairs  of  X  are  being  honestly  managed.  B,  an 
innocent  stockholder,  sells  his  stock  to  C.  A  sells  some  of  his  stock 
to  D.  C  may  require  X  to  assert  its  right  against  A.  Pollitz  v.  Gould, 
supra.  Why  should  not  D  have  a  similar  right? 


The  student  should  consider  the  cases  in  this  subsection  in  con- 
nection with  Old  Dominion  Copper  Co.  v.  Leivisohn,  p.  341,  supra; 
Old  Dominion  Copper  Co.  v.  Bigelow,  p.  349,  supra,  and  the  cases 
on  "Setting  Aside  Ultra  Vires  Transactions,"  p.  753,  supra. 


888  TISDALE    V.  HARRIS.  [CHAP.  II. 


SECTION  2. 
TRANSFER  OF  SHARES. 


TISDALE  V.  HARRIS. 

20  Pick.  (Mass.)  9.     1838. 

Assumpsit  on  an  oral  agreement  of  the  defendant,  to  sell  to  the 
plaintiff  two  hundred  shares,  with  all  the  earnings  thereon,  in  a  Con- 
necticut corporation. 

Verdict  for  plaintiff.  Motion  to  set  aside  verdict.  One  ground  of 
the  motion  was,  because  the  contract  set  up  was  within  the  statute 
of  frauds. 

Shaw,  C.J.  [After  deciding  another  question.]  But  i)y  far  the 
most  important  question  in  the  case,  anscs  on  the  objection,  that  the 
case  is  within  the  statute  of  frauds.  This  statute,  which  is  copied 
precisely  from  the  English  statute,  is  as  follows:  "No  contract  for 
the  sale  of  goods,  wares  or  merchandise  for  the  price  of  ten  pounds 
($33.33)  or  more,  shall  be  allowed  to  be  good,  except  tlie  purchaser 
shall  accept  part  of  the  goods  so  sold,  and  actually  receive  the  same 
or  give  something  in  earnest  to  bind  the  bargain,  or  in  part  payment, 
or  that  some  note  or  memorandum  in  writing  of  the  said  ijargain,  be 
made  and  signed  by  the  parties  to  be  charged  by  such  contract,  or 
their  agent,  thereunto  lawfully  authorized." 

This  being  a  contract  for  the  sale  of  shares  in  an  incorporated  com- 
pany in  a  neighboring  State,  for  the  price  of  more  than  ten  pounds, 
and  no  part  having  been  delivered,  and  no  purchase  money  or  earnest 
paid,  the  question  is,  whether  it  can  be  allowed  to  be  good,  without 
a  note  or  memorandum  in  writing,  signed  by  the  party  to  be  charged 
with  it.  This  depends  ujjon  the  question,  whether  such  shares  are 
goods,  wares  or  merchandise  within  the  true  meaning  of  the  statute. 

It  is  somewhat  remarkable  that  this  question,  arising  on  the  St.  29 
Car.  2,  in  the  same  terms,  which  ours  has  copied,  has  not  been  defini- 
tively settled  in  England.  In  the  case  of  Pickering  v.  Appleby,  Com. 
Rep.  354,  the  case  was  directly  and  fully  argued,  before  the  twelve 
judges,  who  were  equally  divided  upon  it.  But  in  several  other  cases 
afterwards  determined  in  Chancer}',  the  better  opinion  seemed  to  be, 
that  shares  in  incorporated  companies,  w^ere  within  the  statute,  as 
goods  or  merchandise.  Mussell  v.  Cooke,  Free,  in  Ch.  533;  Crull  v. 
Dodson,  Sel.  Cas.  in  Ch.  41. 

We  are  inclined  to  the  opinion,  that  the  weight  of  authorities,  win 
modern  times,  is,  that  contracts  for  the  sale  of  stocks  and  shares  in 


SECT.  II.]  TISDALE    V.  HARRIS.  889 

incorporated  companies,  for  more  than  ten  pounds,  are  not  valid, 
unless  there  has  been  a  note  or  memorandum  in  writing,  or  earnest 
or  part  payment.  4  Wheaton,  89,  note;  3  Starkie  on  Evid.  4th  Amer. 
Edit.  608.    ' 

Supposing  this  a  new  question  now  for  the  first  time  calling  for  a 
construction  of  the  statute,  the  Court  are  of  opinion  that  as  well  by 
its  terms,  as  its  general  policj^,  stocks  are  fairly  within  its  operation. 
The  words  "goods"  and  "merchandise,"  are  both  of  veiy  large  sig- 
nification. Bona,  as  used  in  the  civil  law,  is  almost  as  extensive  as 
personal  property  itself,  and  in  many  respects  it  has  nearly  as  large 
a  signification  in  the  common  law.  The  word  "merchandise"  also, 
including  in  general  objects  of  traffic  and  commerce,  is  broad  enough 
to  include  stocks  or  shares  in  incorporated  companies. 

There  are  many  cases  indeed  in  which  it  has  been  held  in  England, 
that  buying  and  selling  stocks  did  not  subject  a  person  to  the  opera- 
tion of  the  bankrupt  laws,  and  thence  it  has  been  argued  that  they 
cannot  be  considered  as  merchandise,  because  bankruptcy  extends  to 
persons  using  the  trade  of  merchandise.  But  it  must  be  recollected 
that  the  bankrupt  acts  were  deemed  to  be  highly  penal,  and  coercive, 
and  tended  to  deprive  a  man  in  trade  of  all  his  property.  But  most 
joint-stock  companies  were  founded  on  the  hypothesis  at  least,  that 
most  of  the  shareholders  took  shares  as  an  investment  and  not  as  an 
object  of  traffic;  and  the  construction  in  question  only  decided,  that 
by  taking  and  holding  such  shares  merely  as  an  investment,  a  man 
should  not  be  deemed  a  merchant  so  as  to  subject  himself  to  the 
highly  coercive  process  of  the  bankrupt  laws.  These  cases,  therefore, 
do  not  bear  much  on  the  general  question. 

The  main  argument  relied  upon,  by  those  who  contend  that  shares 
are  not  within  the  statute,  is  this.  That  statute  provides  that  such 
contract  shall  not  be  good,  etc.,  among  other  things,  except  the  pur- 
chaser shall  accept  part  of  the  goods.  From  this  it  is  argued,  that  by 
necessary  implication,  the  statute  applies  only  to  goods,  of  which 
part  may  be  delivered.  This  seems  however  to  be  rather  a  narrow 
and  forced  construction.  The  provision  is  general,  that  no  contract 
for  the  sale  of  goods,  etc.,  shall  be  allowed  to  be  good.  The  exception 
is,  when  part  are  delivered;  but  if  part  cannot  be  delivered,  then  the 
exception  cannot  exist  to  take  the  case  out  of  the  general  prohibition. 
The  provision  extended  to  a  great  variety  of  objects,  and  the  excep- 
tion may  well  be  construed  to  apply  only  to  such  of  those  objects  to 
which  it  is  applicable,  without  affecting  others,  to  which  from  their 
nature  it  cannot  apply. 

There  is  nothing  in  the  nature  of  stocks,  or  shares  in  companies 
which  in  reason  or  sound  policy  should  exempt  contracts  in  respect 
to  them  from  those  reasonable  restrictions,  designed  by  the  statute, 
to  prevent  frauds  in  the  sale  of  other  commodities.  On  the  contrary, 
these  companies  have  become  so  numerous,  so  large  an  amount  of  the 


890  EAST    BIRMINGHAM    LAND    CO.  I'.  DENNIS,  [cHAP.  II. 

property  of  the  community  is  now  invested  in  them,  and  as  the  ordi- 
nary indtc/a  of  property,  arising  from  delivery  and  possession,  cannot 
take  place,  there  seems  to  be  peculiar  reason  for  extending  the  provi- 
sions of  this  statute  to  them.  As  they  may  properly  be  included 
under  the  term  goods,  as  they  are  within  the  rea.son  and  policy  of  the 
act,  the  Court  are  of  opinion,  that  a  contract  for  the  sale  of  shares,  in 
the  absence  of  the  other  requisites,  must  be  proved  by  some  note  or 
memorandum  in  writing;  and  as  there  was  no  such  memorandum  in 
writing,  in  the  present  case,  the  plaintiff  is  not  entitled  to  maintain 
this  action.  As  to  the  argument,  that  here  was  a  part  performance, 
by  a  payment  of  the  money  on  one  side,  and  the  deliveiy  of  the 
certificate  on  the  other,  these  acts  took  place  after  tiiis  action  was 
brought,  and  cannot  therefore  be  relied  upon  to  show  a  cause  of 
action  when  the  action  was  commenced. 

Verdict  set  aside  and  plaintiff  nonsuit. 

Note.  —  See,  accord,  North  v.  Forest,  15  Conn.  400;  Ilightnwer  v. 
Ansley,  126  Ga.  8  (overruling  Rogers  v.  Burr,  105  Ga.  432);  Pray  v. 
Mitchell,  60  Me.  430;  Spragiie  v.  Hosie,  155  Mich.  30;  Tompkins  v. 
Sheehan,  158  N.Y.  617.  See  also  So)ithern  Life  Insurance  Co.  v.  Cole, 
4  Fla.  359,  378  (statute  covers  contracts  for  the  sale  of  "any  per- 
sonal property,  goods,  wares,  or  merchandise");  Snow  Storm  Co.  v. 
Johnson,  186  Fed.  745  (statute  covered  sale  of  "things  in  action  "). 

See,  contra,  Dvnaift  v.  Albrccht,  12  Sim.  189.  See  also  Vauier  v. 
Griffin,  40  Ind.  593,  602;  Webb  v.  Baltimore  Co.,  77  Md.  92,  98;  Sed- 
don  v.  Rosenbaum,  85  Va.  928. 

R7jers  V.  Tuska,  14  N.Y.  Supp.  926.  A  contract  for  the  sale  of 
stocks,  of  which  there  is  no  memorandum  in  writing,  as  rcfiuired  by 
the  statute  of  frauds,  cannot  be  enforced,  though  the  contract  was 
made  in  a  stock  exchange  of  which  both  parties  were  members,  the 
constitution  and  by-laws  of  which  pro\ides  that  "all  offers  to  buy 
and  sell  securities  shall  be  binding,"  and  that  "  any  member  who  may 
fail  to  comply  with  his  contracts,  or  who  may  become  insolvent, 
shall  be  suspended  until  he  has  settled  with  his  creditors." 


EAST  BIRMINGHAM  LAND  CO.  v.  DENNIS. 

85  Ala.  565.     1888. 

Appeal  from  the  City  Court  of  Birmingham,  in  equity. 

Heard  before  the  Hon.  H.  A.  Sharpe. 

The  bill  in  this  case  was  filed  on  the  13th  April,  1888,  by  J.  F. 
Dennis,  against  J.  P.  Mudd,  and  the  East  Birmingham  Land  Com- 
pany, a  private  corporation;  and  sought  to  compel  the  transfer,  on 
the  books  of  the  corporation,  of  a  certificate  for  ten  shares  of  stock, 


SECT.  II.]  EAST    BIRMINGHAM    LAND    CO.  V.  DENNIS.  891 

of  which  the  complainant  claimed  to  be  the  owner,  and  to  compel  the 
delivery  of  the  certificate  to  him  by  said  Mudd,  who  had  possession 
of  it  under  claim  of  ownership.  The  certificate  was  issued  in  the 
name  of  A.  R.  Dearborn,  and  was  indorsed  by  him  in  blank.  The 
complainant  claimed  that  he  had  bought  the  certificate,  with  the 
blank  indorsement  thereon,  from  a  holder  who  had  acquired  it  by 
purchase  from  said  Dearborn;  and  that  it  was  lost  by  him,  or  stolen 
from  him,  without  fault  on  his  part.  Mudd  purchased  the  certificate, 
for  full  value,  from  Wilson,  Sage  &  Clark,  stockbrokers  in  Birming- 
ham; and  while  denying  complainant's  ownership,  claimed  that  he 
acquired  a  good  title  by  the  custom  and  usage  of  brokers  and  mer- 
chants in  Birmingham.  A  decree  pro  conjesso  was  taken  against 
the  corporation.  On  final  hearing,  on  pleadings  and  proof,  the  court 
rendered  a  decree  for  the  complainant;  and  this  decree  is  now 
assigned  as  error,  by  each  of  the  defendants  separately. 

SoMERViLLE,  J.  We  concur  in  the  conclusion  reached  by  the  judge 
of  the  City  Court,  that  the  appellee,  Dennis,  complainant  in  the  bill, 
is  the  owner  of  the  ten  shares  of  stock  which  are  the  subject  of  litiga- 
tion in  the  present  suit.  The  testimony  satisfactorily  proves  that  the 
certificate  of  stock,  indorsed  in  blank  by  Dearborn,  who  was  the 
owner  on  the  books  of  the  defendant  corporation,  was  the  property 
of  the  appellee,  and  was  taken  or  stolen  from  his  possession,  without 
any  negligence  on  his  part  whatever,  several  months  before  it  was 
purchased  by  the  defendant  Mudd,  who  innocently  bought  and  paid 
value  for  it,  some  time  in  March,  1888. 

The  only  question  is,  whether  Mudd,  who  paid  full  value  for  this 
stock,  without  notice  of  the  complainant's  claim  to  it,  acquired  a 
title  superior  to  that  of  complainant. 

The  established  rule  is  that  no  person  can  ordinarily  be  deprived  of 
his  ownership  of  property  save  by  his  own  consent,  or  his  negligence. 
The  only  exception  to  this  rule  is  the  case  of  a  bona  fide  purchaser  for 
value,  of  negotiable  paper.  We  have  no  reference,  of  course,  to  the 
taking  of  property  for  public  uses  by  judicial  condemnation,  which 
may  be  done  without  the  owner's  consent. 

It  can  not  be  contended,  with  any  degree  of  plausibility,  that, 
under  the  facts  of  this  case,  the  complainant  was  guilty  of  negligence, 
or  the  want  of  ordinary  care  in  the  custody  of  the  certificate.  He 
kept  it  in  a  box  in  the  vault  of  a  banking-house,  whence  it  was  ab- 
stracted by  some  unknown  person,  apparently,  without  any  fault 
on  his  part. 

Nor  does  any  question  arise  involving  the  rights  of  a  subsequent 
ho7ia  fide  purchase  of  stock,  from  one  shown  to  be  owner  on  the  cor- 
porate books,  who  has  already  made  a  prior  unregistered  transfer  of 
it  to  another  purchaser.  All  such  transfers  made  by  the  true  owner, 
and  not  registered  on  the  books  of  the  corporation  within  fifteen 
days,  are  declared  by  statute  to  be  "void  as  to  bona  fide  creditors,  or 


892  EAST    BIRMINGHAM    LAND    CO.  I'.  DENNIS.  [CHAP.  II. 

purchasers  without  notice." —  Code  1886,  §  1671;  Fisher  v.  Jones, 
82  Ala.  117.  If  the  defendant  Mudd  had  chiirned  by  a  subsequent 
purchase  from  Dearborn,  the  owner  of  the  stock  on  the  corporate 
books,  this  question  would  arise.  But  he  docs  not  so  claim,  his  title 
being  derived  through  the  complainant  Dennis  himself,  l)y  two  or 
more  intermediate  transferees,  the  first  of  whom  was  a  fraudulent 
holder  without  title.  Whether  Mudd's  title  to  the  stock,  there- 
fore, is  superior  to  that  of  Dennis,  depends  on  whether  a  certificate 
of  stock,  indorsed  in  blank  by  the  owner,  is  to  be  treated  as 
negotia})le  paper. 

The  rule  is  well  settled,  that  a  bona  fide  purchaser  of  a  negotiable 
bill,  bond  or  note,  although  he  l)uys  from  a  thief,  acquires  a  good 
title,  if  he  pays  value  for  it  without  notice  of  the  infirmity  of  his 
vendor's  title.  The  authorities  are  clear  in  support  of  the  view,  that 
a  certificate  of  corporate  shares  of  stock,  in  the  ordinary'  form,  is  not 
negotiable  paper,  and  that  a  purchaser  of  such  certificate,  although 
indorsed  in  blank  by  the  owner,  where  no  cjuestion  arises  under  the 
registration  laws,  obtains  no  better  title  to  the  stock  than  his  vendor 
had,  in  the  absence  of  all  negligence  on  the  part  of  the  owner,  or  his 
authority  to  make  the  sale.  This  question  arose,  and  was  decided  by 
the  New  York  Court  of  Ajipeals,  in  Mechanics  Bank  v.  A'ew  York  & 
New  Haven  R.R.  Co.,  13  N.Y.  (1856),  599.  It  was  there  held,  that 
such  a  certificate  does  not  partake  of  the  character  of  a  negotiable 
instrument,  and  that  a  bona  fide  a.ssignee,  with  full  power  to  transfer 
the  stock,  takes  the  certificate  subject  to  the  equities  which  existed 
against  his  assignor.  Such  certificates,  said  Comstock,  J.,  "contain 
no  words  of  negotiability.  They  declare  simply  that  the  person 
named  is  entitled  to  certain  shares  of  stock.  They  do  not,  like  nego- 
tiable instruments,  run  to  the  liearer,  or  order  of  the  party  to  whom 
they  are  given."  They  were  said  to  be,  in  some  respects,  like  a  1)111  of 
lading,  or  warehouse  receipt,  being  "the  representative  of  property 
existing  under  certain  conditions,  and  the  documentary  evidence  of 
title  thereto."  The  most  that  can  l)e  said  is,  that  all  such  instruments 
possess  a  sort  of  quasi  negotiability,  dependent  on  the  custom  of 
merchants  and  the  convenience  of  trade.  They  are  not,  in  the  matter 
of  transferability,  protected  strictly  as  negotiable  paper. 

In  Shall)  V.  Spencer,  100  Mass.  382;  s.c,  97  Amer.  Dec,  1  Amer. 
Rep.  115  (1868),  it  was  also  decided  that  a  certificate  of  corporate 
stock,  transferred  in  blank  on  its  back,  was  clearly  not  a  negotiable 
instrument.  "No  commercial  usage,"  it  was  said,  "could  give  to 
such  an  instrument  the  attribute  of  negotiability.  However  many 
intermediate  hands  it  may  pass  through,  whoever  would  obtain  a 
new  certificate  in  his  own  name,  must  fill  out  the  blanks,  ...  so  as 
to  derive  title  to  himself  directly  from  the  last  recorded  stockliolder, 
who  is  the  only  recognized  and  legal  owner  of  the  shares."  The  case 
of  Sewall  V.  Boston  Water  Power  Co.,  4  Allen,  282;  s.c,  81  Amer.  Dec. 


SECT.  II.]  EAST    BIRMINGHAM    LAND    CO.  V.  DENNIS.  893 

701,  decided  by  the  same  court  a  few  years  before,  is  referred  to  as 
a  precedent  in  support  of  this  conclusion. 

The  precise  point  in  the  present  case  was  also  decided  in  Barstow  v. 
Savage  Mining  Co.,  64  Cal.  388;  s.c,  49  Amer.  Rep.  705,  where  it 
was  expressly  held  that  a  boriafide  purchaser  of  stock  standing  on  the 
company's  books  in  the  name  of  the  former  owner,  regularly  indorsed 
by  him,  and  stolen  from  the  present  owner  without  his  fault,  gets  no 
title.  The  decision  was  based  on  the  fact,  that  such  certificates  are 
not  negotiable  instruments,  but  simply  muniments  of  title,  and  evi- 
dences of  the  holder's  right  to  a  given  share  in  the  property  and 
franchises  of  the  corporation.  It  was  observed,  in  regard  to  the  mat- 
ter of  neghgence,  as  follows:  "But,  if  the  purchaser  from  one  who 
has  not  the  title,  and  has  no  authority  to  sell,  relies  for  his  protection 
on  the  negligence  of  the  true  owner,  he  must  show  that  such  negli- 
gence was  the  proximate  cause  of  the  deceit." 

The  same  principle  was  applied  to  bills  of  lading,  in  Gurney  v.  Beh- 
rend,  3  Ellis  &  Bl.  622,  decided  by  the  English  Queen's  Bench,  where 
an  instrument  of  that  kind,  indorsed  in  blank  by  the  consignor,  and 
sent  by  him  to  his  correspondent,  had  been  misappropriated.  The 
correspondent,  without  authority,  fraudulently  transferred  the  bill 
for  value;  and  it  was  held  by  Lord  Campbell,  that  for  the  want  of 
the  element  of  negotiability  in  the  paper,  the  title  to  the  goods  was 
unaffected  by  the  transaction. 

The  doctrine  of  Barstow  v.  Savage  Mining  Co.,  supra,  is  well  sup- 
ported by  authority,  and,  in  our  judgment,  announces  a  correct  prin- 
ciple of  law,  and  we  fully  approve  it.  —  Woolley  v.  Sargeant,  14  Amer. 
Dec,  Note,  on  page  427,  and  cases  there  cited;  Cook  on  Stock  and 
Stockholders,  §§  368,  437,  192,  7,  10;  2  Daniel's  Neg.  Instr.  (3d  Ed.), 
§  1708gr.  It  harmonizes  entirely  with  the  declaration  of  our  statute, 
that  shares  of  stock  in  private  corporations  "are  personal  property, 
transferable  on  the  books  of  the  corporation"  in  accordance  with 
the  rules  and  regulation  of  the  corporation.  —  Code  1886,  §  1669; 
Campbell  v.  Woodstock  Iron  Co.,  83  Ala.  451. 

There  is  a  class  of  cases,  not  to  be  confounded  with  the  one  in 
hand,  where  the  holder  of  such  a  certificate  of  stock,  indorsed  in 
blank,  is  clothed  with  power  as  agent  or  trustee,  to  deal  with  such 
stock  to  a  limited  extent,  and  transfers  it  by  exceeding  his  powers, 
or  in  breach  of  his  trust.  In  such  cases,  it  has  often  been  held  that 
the  true  owner,  ha\'ing  conferred  on  the  holder,  by  contract,  all  the 
external  indicia  of  title,  and  an  apparently  unlimited  power  of  dis- 
position over  the  stock,  "is  estopped  to  assert  his  title  as  against  a 
third  person,  w^ho,  acting  in  good  faith,  acquires  it  for  value  from 
the  apparent  owner."  —  2  Dan.  Neg.  Inst.  (3d  Ed.),  §  1708^;  McNeil 
V.  Tenth  Nat.  Bank,  46  N.Y.  325;  Mou7it  Holly  Turnpike  Co.  v. 
Ferree,  17  N.J.  Eq.  117;  Prall  v.  TUt,  28  Ih.  479;  Merchant's  Nat. 
Bank  v.  Livingston,  74  N.Y.  223.  These  cases  rest  on  the  principle, 


894  MCNEIL    V.  TENTH    NATIONAL    BANK.  [CHAP.  II. 

that  it  is  more  just  and  reasonable,  where  one  of  two  innocent  parties 
must  suffer  loss,  that  he  should  be  the  loser  who  has  put  trust  and 
confidence  in  the  deceiver,  than  a  stranger  who  has  been  negligent  in 
trusting  no  one."  —  Allen  v.  Maury  &  Co.,  66  Ala.  10. 

It  being  an  established  principle  of  law,  that  certificates  of  stock 
are  not  to  be  regarded  as  negotial)le  paper,  it  is  not  permissible  to 
prove  a  custom  or  usage  among  stock-brokers  to  the  contrary.  No 
usage  is  good  which  conflicts  with  an  established  piinciple  of  law, 
any  more  than  one  which  contravenes  or  nullifies  the  express  stipu- 
lations of  a  contract.  Dickiiiso)}  v.  Gay,  83  Amer.  Dec.  656,  and 
note,  664;  E.  T.,  Va.  &  Ga.  R.R.  Co.  v.  Johnston,  75  Ala.  576; 
Lehman  v.  Marshall,  47  Ala.  362. 

The  decree  of  the  court  below  is  in  accordance  with  these  views, 
and  must  be  affirmed. 

Note.  —  There  are  several  cases,  accord.  For  recent  cases,  see 
Schumacher  v.  Greene  Cananea  Co.,  117  Minn.  124;  Barstow  v.  City 
Trust  Co.,  216  Mass.  330. 

Sicim  V.  Wilson,  90  Cal.  126.  If  a  stock-broker,  acting  in  good 
faith,  receives  from  a  thief  certificates  of  stock  indorsed  in  blank, 
sells  them,  and  pays  the  net  proceeds  to  the  thief,  he  converts  the 
stock.  See  Warren's  Cases  on  Property,  p.  400. 


McNEIL  V.   TENTH  NATIONAL  BANK. 

46  N.Y.  325.     1871. 

The  plaintiff  pledged  with  Goodyear  Brothers  &  Durant,  stock- 
brokers, certain  certificates  of  stock  endorsed  in  blank.  These  were 
tortiously  pledged  by  the  stockbrokers  to  Fred.  Butterfiold,  Jacobs 
&  Co.  for  a  debt  larger  than  the  debt  due  from  the  plaintiff.  The 
defendant,  at  the  request  of  the  stockbrokers,  paid  Butterfield, 
Jacobs  &  Co.  and  took  the  pledged  securities  from  them.  The  ques- 
tion was  whether  plaintiff  was  entitled  to  the  certificates  on  paying 
the  defendant  the  amount  due  from  him  to  the  stockbrokers,  or 
whether  the  defendant  was  entitled  to  be  treated  as  a  pledgee  of  the 
certificates  for  the  amount  due  from  the  stockbrokers  to  them. 

Rapallo,  J.  The  pledge  of  the  plaintiff's  shares  by  his  brokers,  for 
a  larger  sum  than  the  amount  of  their  lien  thereon,  was  a  clear  viola- 
tion of  their  duty,  and  excess  of  their  actual  power.  And  if  the  effect 
of  the  transaction  was  merely  to  transfer  to  the  appellant,  through 
Fred.  Butterfield,  Jacobs  &  Co.,  the  title  or  interest  of  Goodyear 
Brothers  &  Durant  in  the  shares,  the  judgment  appealed  from  was 
right. 

It  must  be  conceded,  that  as  a  general  rule,  applicable  to  property 


SECT.  II.]       MCNEIL  V.   TENTH  NATIONAL  BANK.  895 

other  than  negotiable  securities,  the  vendor  or  pledgor  can  convey  no 
greater  right  or  title  than  he  has.  But  this  is  a  truism,  predicable  of  a 
simple  transfer  from  one  party  to  another  where  no  other  element  in- 
tervenes. It  does  not  interfere  with  the  well-established  principle, 
that  where  the  true  owner  holds  out  another,  or  allows  him  to  appear, 
as  the  owner  of,  or  as  having  full  power  of  disposition  over  the  prop- 
erty, and  innocent  third  parties  are  thus  led  into  dealing  with  such 
apparent  owner,  they  will  be  protected.  Their  rights  in  such  cases  do 
not  depend  upon  the  actual  title  or  authority  of  the  party  with  whom 
they  deal  directly,  but  are  derived  from  the  act  of  the  real  owner, 
which  precludes  him  from  disputing,  as  against  them,  the  existence 
of  the  title  or  power  which,  through  negligence  or  mistaken  confi- 
dence, he  caused  or  allowed  to  appear  to  be  vested  in  the  party  mak- 
ing the  conveyance.  Pickering  v.  Busk,  15  East,  38;  Gregg  v.  Wells, 
10  Adol.  &  El.  90;  Saltus  v.  Everett,  20  Wend.  268,  284;  Mowreij  v. 
Walsh,  8  Cow.  238;  Root  v.  French,  13  Wend.  570. 

The  true  point  of  inquiry  in  this  case  is,  whether  the  plaintiff  did 
confer  upon  his  brokers  such  an  apparent  title  to,  or  power  of  disposi- 
tion over,  the  shares  in  question,  as  will  thus  estop  him  from  assert- 
ing his  own  title,  as  against  parties  who  took  bona  fide  through  the 
brokers. 

Simply  intrusting  the  possession  of  a  chattel  to  another  as  deposi- 
tary, pledgee  or  other  bailee,  or  even  under  a  conditional  executory 
contract  of  sale,  is  clearly  insufficient  to  preclude  the  real  owner  from 
reclaiming  his  property,  in  case  of  an  unauthorized  disposition  of  it 
by  the  person  so  intrusted.  Ballard  v.  Biirgett,  40  N.Y.  R.  314.  "  The 
mere  possession  of  chattels,  by  whatever  means  acquired,  if  there  he 
no  other  evidence  of  property  or  authority  to  sell  from  the  true  owner, 
will  not  enable  the  possessor  to  give  a  good  title."  Per  Denio,  J.,  in 
Covin  V.  Hill,  4  Den.  323. 

But  if  the  owner  intrusts  to  another,  not  merely  the  possession  of 
the  property,  but  also  written  evidence,  over  his  own  signature,  of 
title  thereto,  and  of  an  unconditional  power  of  disposition  over  it,  the 
case  is  vastly  different.  There  can  be  no  occasion  for  the  delivery  of 
such  documents,  unless  it  is  intended  that  they  shall  be  used,  either 
at  the  pleasure  of  the  depositary,  or  under  contingencies  to  arise.  If 
the  conditions  upon  which  this  apparent  right  of  control  is  to  be  exer- 
cised, are  not  expressed  on  the  face  of  the  instrument,  but  remain  in 
confidence  between  the  owner  and  the  depositary,  the  case  cannot  be 
distinguished  in  principle,  from  that  of  an  agent  who  receives  secret 
instructions  qualifying  or  restricting  an  apparently  absolute  power. 

In  the  present  case,  the  plaintiff  delivered  to  and  left  with  his 
brokers,  the  certificate  of  the  shares,  having  indorsed  thereon  the 
form  of  an  assignment,  expressed  to  be  made  "for  value  received," 
and  an  irrevocable  power  to  make  all  necessary  transfers.  The  name 
of  the  transferee  and  attorney,  and  the  date,  were  left  blank.   This 


896  MCNEIL    V.  TEXTH    NAT.ONAL    BANK.  [cHAP.   II. 

document  was  signed  by  the  i)hiintilT,  ami  its  effect  must  be  now 
considered. 

It  is  said  in  some  English  ca.ses,  that  blank  assignments  of  shares  in 
corporations  are  irregular  and  invalid;  but  that  opinion  is  expressed 
in  cases  where  the  shares  could  only  be  transferred  by  deed  under 
seal,  duly  attested,  and  is  placed  upon  the  ground  that  a  deed  cannot 
be  executed  in  blank. 

Without  referring  to  the  American  doctrine  on  that  subject,  it  is 
sufficient  to  say  that  no  such  formality  was  requisite  in  this  case.  It 
was  only  necessary  to  a  valid  transfer  as  l)etween  the  parties,  that  the 
assignment  and  power  should  be  in  writing.  The  common  practice  of 
passing  the  title  to  stock  by  delivery  of  the  certificate  with  blank  a.s- 
signments  and  power,  has  been  rcix'atetll}'  shown  and  .sanctioned  in 
cases  which  have  come  before  our  courts.  Such  was  established  to  be 
the  common  practice  in  the  city  of  New  York,  in  the  case  of  the  New 
York  and  New  Haven  Railroad  Company  v.  Schuyler,  34  N.Y.  41,  and 
the  rights  of  parties  claiming  under  such  instruments  were  fully  rec- 
ognized in  that  case.  And  in  the  ca.^'  of  Kortriijld  v.  The  Commercial 
Bank  of  Buffalo  (20  Wend.  91,  and  22  Wend.  348),  the  same  usage 
was  established  as  existing  in  New  York  and  other  States,  and  it  was 
expressly  held  that  even  in  the  absence  of  such  usage,  a  blank  transfer 
on  the  back  of  the  certificate,  to  which  the  holder  has  affixed  his 
name,  is  a  good  a.ssignment ;  and  that  a  party  to  whom  it  is  delivered 
is  authorized  to  fill  it  up,  by  writing  a  transfer  and  power  of  attorney 
over  the  signature.  .  .  . 

The  holder  of  such  a  certificate  and  power,  possesses  all  the  exter- 
nal indicia  of  title  to  the  stock,  and  an  apparently  unlimited  power  of 
disposition  over  it.  He  does  not  appear  to  have,  as  is  said  in  some  of 
the  authorities  cited,  concerning  the  assignee  of  a  chose  in  action,  a 
mere  equitable  interest,  which  is  saitl  to  be  notice  to  all  persons  deal- 
ing with  him  that  they  take  subject  to  all  equities,  latent  or  other- 
wise, of  third  parties;  but,  apparently,  the  legal  title,  and  the  means 
of  transferring  such  title  in  the  most  effectual  manner. 

Such,  then,  being  the  nature  and  effect  of  the  documents  with 
which  the  plaintiff  intrusted  his  brokers,  what  position  does  he  oc- 
cupy toward  pcnsons  who,  in  reliance  upon  those  documents,  have  in 
good  faith  advanced  money  to  the  brokers  or  their  assigns  on  a  pledge 
of  the  shares?  When  he  asserts  his  title,  and  claims,  as  against  them, 
that  he  could  not  be  deprived  of  his  property  without  his  consent, 
cannot  he  be  truly  answered  that,  by  leaving  the  certificate  in  the 
hands  of  his  brokers,  accompanied  by  an  instrument  bearing  his  own 
signature,  which  purported  to  be  executed  for  a  consideration,  and 
to  convey  the  title  away  from  him,  and  to  empower  the  bearer  of  it 
irrevocably  to  dispose  of  the  stock,  he  in  fact  "substituted  his  trust 
in  the  honesty  of  his  brokers,  for  the  control  which  the  law  gave  him 
over  his  own  property,"  and  that  the  consequences  of  a  betrayal  of 


SECT.  II.]  CLEWS    V.  FRIEDMAN.  897 

that  trust,  should  fall  upon  him  who  reposed  it,  rather  than  upon 
innocent  strangers  from  whom  the  brokers  were  thereby  enabled  to 
obtain  their  money?  .  .  . 

My  conclusion  is,  that  the  Tenth  National  Bank  must,  on  the  facts 
found,  be  deemed  to  have  advanced  bona  fide  on  the  credit  of  the 
shares,  and  of  the  assignment  and  power  executed  by  the  plaintiff, 
and  is  entitled  to  hold  the  stock  for  the  full  amount  so  advanced,  and 
remaining  unpaid  after  exhausting  the  other  securities  received  for 
the  same  advance. 

Note.  —  See,  accord,  Nelson  v.  Owen,  113  Ala.  372;  Brittan  v. 
Oakland  Bank,  124  Cal.  282;  Otis  v.  Gard7ier,  105  111.  436;  Baker  v. 
Davie,  211  Mass.  429;  Walker  v.  Detroit  Transit  Co.,  47  Mich.  338; 
Gass  V.  Hampton,  16  Nev.  185;  Mou7it  Holly  Co.  v.  Ferree,  17  N.J. 
Eq.  117;  Bcckwith  v.  Galice  Mines  Co.,  50  Or.  542;  Wood's  Appeal,  92 
Pa.  379;  State  Bank  v.  Cox,  11  Rich.  Eq.  (S.C.)  344;  Chemj  v.  Frost, 
7  Lea  (Tenn.)  1 ;  Strange  v.  H.  &  T.  C.R.  R.  Co.,  53  Tex.  162.  See  also 
American  Exchange  Bank  v.  Woodlawn  Cemetery,  194  N.Y.  116,  126. 

See,  contra,  Merchants'  Bank  v,  Williams,  110  Md.  334. 


CLEWS  V.  FRIEDMAN. 

182  Mass.  555.     1903. 

Bill  in  equity,  filed  June  20,  1902,  against  the  trustee  in  bank- 
ruptcy of  A.  H.  Zunz  to  restrain  him  from  enforcing  an  attachment 
against  four  shares  of  the  capital  stock  of  the  Boston  and  Albany 
Railroad  Company,  attached  as  the  property  of  Rosa  W.  Zunz,  who 
sold  the  shares  to  the  plaintiffs. 

The  bill  alleged,  that  the  plaintiffs  were  copartners  carrjdng  on  a 
banking  business  in  the  city  of  New  York,  that  on  March  1  or  2, 
1900,  Rosa  W.  Zunz,  being  the  owner  of  the  certificate  representing 
the  four  shares  of  stock  in  question  and  having  owned  it  since  Octo- 
ber 17,  1899,  sold  and  delivered  it  to  the  plaintiffs,  together  with  a 
written  transfer  of  it  signed  by  her  on  the  back  of  the  certificate,  and 
that  the  plaintiffs  purchased  the  certificate  from  her  in  good  faith 
and  paid  her  for  it  the  full  market  value  of  S239.75  per  share;  that  on 
March  3,  1900,  the  plaintiffs  caused  the  certificate  to  be  presented  to 
the  railroad  company  for  transfer  to  them,  and  the  plaintiffs  then 
for  the  first  time  learned,  that  on  February  20,  1900,  the  defendant, 
Friedman,  as  trustee  in  bankruptcy  of  one  A.  H.  Zunz,  had  brought 
an  action  in  the  Superior  Court  against  Rosa  W.  Zunz,  for  $5,000, 
and  on  February  21,  1900,  had  caused  the  writ  in  that  action  to  be 
served  upon  the  railroad  company  by  an  attachment  of  the  four 
shares  of  stock  standing  in  her  name ;  and  that  the  railroad  company 


898  CLEWS    V.  FRIEDMAN.  [CHAP.   II. 

refused  to  make  the  requested  transfer  to  the  plaintififs  unless  and 
until  the  attachment  should  he  dissolved. 

The  answer  admitted  all  the  alleviations  of  the  bill. 

It  was  agreed  that  the  following  was  a  by-law  of  the  Boston  and 
Albany  Railroad  Company:  "Art.  \ll.  The  directors  shall  be,  and 
they  arc  hereby  authorized  to  determine  the  form  of  the  certificates 
for  the  capital  stock  of  the  corporation,  and  the  manner  of  transfer- 
ring and  recording  the  same.  They  shall  also  establish  a  corporate 
seal,  and  determine  the  form  thereof." 

It  was  also  agreed:  "if  competent  and  material,  that  by  custom  the 
certificates  of  stock  in  Massachusetts  corporations,  when  endorsed  in 
blank  and  delivered  by  the  owner,  are  accepted  by  transferees  like 
negotiable  instruments,  without  inquiry  as  to  the  rights,  if  any,  of 
third  parties." 

The  case  came  on  to  be  heard  before  Hammond,  J.,  who  reserved 
it  for  determination  by  the  full  court. 

Knowlton,  C.J.  This  case  calls  for  a  construction  of  the  St.  1884, 
c.  229  (R.  L.  c.  109,  §  37),  which  is  as  follows:  "The  delivery  of  a 
stock  certificate  of  a  corporation  to  a  bona  fide  purchaser  or  pledgee, 
for  value,  together  with  a  written  transfer  of  the  same,  or  a  written 
power  of  attorney  to  sell,  assign  and  transfer  the  .«ame,  signed  by  the 
owner  of  the  certificate,  shall  be  a  sufficient  deliveiy  to  transfer  the 
title  as  against  all  parties;  but  no  such  transfer  shall  afTect  the  right 
of  the  corporation  to  pay  any  dividend  due  upon  the  stock,  or  treat 
the  holder  of  record  as  the  holder  in  fact,  until  such  transfer  is  re- 
corded upon  the  books  of  the  corporation,  or  a  new  certificate  is 
issued  to  the  person  to  whom  it  has  been  so  transferred."  This  enact- 
ment was  a  new  departure  and  a  change  of  policy  in  the  legislation  of 
this  Commonwealth.  Previously  to  the  St.  1881,  c.  302,  transfers  of 
shares  of  railroad  and  manufacturing  corporations  and  of  many 
others,  could  not  be  made  effectual  against  the  rights  of  subsequent 
attaching  creditors  unless  recorded  on  the  books  of  the  corporation. 
Blanchard  v.  Dedham  Gas  Light  Co.,  12  Gray,  213;  Fisher  v.  Essex 
Bank,  5  Gray,  373;  Pub.  Sts.  c.  112,  §  50.  Except  in  reference  to  the 
small  number  of  corporations  in  which  there  was  no  provision  of 
statute  or  of  the  charter  requiring  a  transfer  to  be  made  on  the  books 
of  the  corporation  (see  Boston  Music  Hall  Association  v.  Cory,  129 
Mass.  435)  a  creditor,  bj'  examining  the  books,  could  be  certain  to 
obtain  a  valid  attachment  against  the  owner  of  record.  No  purchaser 
of  stock  could  be  sure  that  his  title  was  good  against  possible  attach- 
ments without  an  examination  of  the  books  of  the  corporation,  nor 
could  he  be  protected  against  attachments  that  might  be  made  subse- 
quently, unless  he  recorded  his  transfer  immediately.  This  St.  1881, 
c.  302,  was  enacted  at  the  instance  of  purchasers  and  pledgees  of 
stock,  but  it  did  not  give  them  nearly  all  that  they  sought  to  obtain 
from  the  Legislature.  It  was  in  the  nature  of  a  compromise  between 


SECT.  II.]  CLEWS    V.  FRIEDMAN.  899 

the  conflicting  interests  of  creditors  and  of  those  who  desired  that 
stock  might  safely  be  bought  and  sold  by  a  transfer  of  the  certificates 
from  hand  to  hand.  It  left  purchasers  subject  to  the  rights  of  credi- 
tors whose  attachments  had  been  made  previously,  and  it  gave  every 
purchaser  ten  days  in  which  to  record  his  transfer  before  he  could  be 
affected  by  a  subsequent  attachment. 

In  1884  purchasers  and  pledgees  sought  to  obtain  greater  security 
and  convenience,  and  the  result  was  the  statute  now  before  us.  By 
the  language  of  the  act  "Delivery  of  a  stock  certificate  .  .  .  with  a 
written  transfer  .  .  .  signed  by  the  owner  of  the  certificate,  shall  be  a 
sufficient  delivery  to  transfer  the  title  as  against  all  parties."  Here 
the  certificate  is  treated  as  evidence  of  a  title.  The  assignment  is  to 
be  made  by  the  owner  of  the  certificate,  and  the  transfer  of  the  cer- 
tificate transfers  the  title.  What  is  meant  by  title?  Evidently  the 
title  to  the  stock.  A  certificate  in  common  form  purports  to  represent 
a  perfect  title  to  the  stock.  The  transfer  of  the  certificate,  by  virtue 
of  the  statute,  transfers  the  title  referred  to  as  against  all  parties, 
including  attaching  creditors.  The  statute  declares  in  effect  that  an 
attachment  shall  be  of  no  avail  against  a  bona  fide  transaction  of  this 
kind.  To  obtain  legislation  of  this  kind  was  the  purpose  of  the  plain- 
tiffs for  the  enactment,  as  is  shown  by  the  history  of  the  proceedings 
which  appears  in  the  legislative  proceedings.  Russell  v.  American 
Bell  Telephone  Co.,  180  Mass.  467,  discloses  the  existence  of  a  usage 
that  the  possession  of  such  a  certificate,  duly  indorsed,  enables  the 
possessor  to  give  title  to  a  bona  fide  purchaser,  good  against  every- 
body. The  parties  to  this  suit  agree  that  by  custom  such  certificates, 
indorsed  in  blank,  and  delivered  by  the  owner,  are  accepted  by  trans- 
ferees like  negotiable  instruments,  without  inquiry  as  to  the  rights, 
if  any,  of  third  persons.  The  case  of  Andreios  v.  Worcester,  Nashua, 
&  Rochester  Railroad,  159  Mass.  64,  66,  indicates  that  in  the  opinion 
of  this  court  this  usage  is  well  founded  in  law.  That  this  is  the  con- 
struction of  the  commissioners  on  the  last  revision  of  the  statutes 
and  of  the  Legislature  that  enacted  the  revision,  appears  by  the  R.  L. 
c.  109,  §  37,  where  the  words  "signed  by  the  person  named  as  the 
shareholder  in  such  certificate,"  are  substituted  for  the  words, 
"  signed  by  the  owner  of  the  certificate,"  and  the  words  "against  all 
persons"  are  substituted  for  "against  all  parties."  A  hke  construc- 
tion seems  to  be  put  upon  an  identical  statute  by  the  Supreme  Court 
of  Wisconsin  in  Wright  Lumber  Co.  v.  Hixon,  105  Wis.  153,  158. 

Except  as  affected  by  this  statute  the  law  authorizing  the  attach- 
ment of  shares  in  a  corporation  is  left  in  full  force,  and  it  is  not  neces- 
sary now  to  consider  what  remedy,  if  any,  an  attaching  creditor 
would  have,  in  equity  or  otherwise,  to  prevent  the  transfer  of  a 
certificate  after  an  attachment. 

Decree  for  ike  plaintiffs. 


900  CLEWS    V.  FRIEDMAN.  [CHAP.  II. 

■^  Note.  —  If  by  statute  shares  of  stock  are  attachable  by  serving 
specified  papers  at  the  office  of  the  corporation,  and  there  is  no  coun- 
tervaiUng  statute  in  favor  of  bona  fide  purchasers  of  the  certificate, 
a  prior  attaching  creditor  will  prevail  over  the  bona  fide  purchaser  of 
the  certificate.   See  Yoimg  v.  South  Tredegar  Co.,  85  Tenn.  189. 

If,  however,  the  certificate  has  been  intlorsed  and  delivered  to  the 
purchaser  prior  to  the  attachment,  it  is  sul)niitted  that  the  bona  fide 
purchaser  should  be  protected.  A  "transfer  "  of  a  chose  in  action  can, 
it  is  true,  only  be  made  by  way  of  novation,  but  the  corporation  has 
consented  in  advance  to  this  novation,  and  it  is  therefore  to  be  re- 
garded as  completed  when  the  prior  holder  has  delivered  the  certifi- 
cate, so  indorsed,  to  the  new  holder.  Nor  should  a  requirement  in 
the  bj^-laws  of  the  company  that  its  stock  be  "transferable  only  on 
the  books  of  the  corporation,  on  surrender  of  the  certificate"  change 
this  result.  The  corporation  will  of  course  be  protected  in  itself 
treating  the  registered  holder  as  the  owner,  until  it  has  notice  of  the 
transfer;  but  the  reciuirement  of  registry  shouUl  be  interpreted  as 
inserted  only  for  the  protection  of  the  corporation, — just  as  the 
requirement  that  the  certificate  be  surrentlered  on  a  transfer  should 
be  interpreted.  The  cases  on  this  point  are  very  numerous.  The 
weight  of  authority  supports  this  view.  Sec  Smith  v.  American  Coal 
Co.,  7  Lans.  (N.Y.)  317. 

The  law  has  been  frequently  changed  by  statute,  so  as  to  protect 
the  bona  fide  purchaser  even  from  a  prior  attachment. 

This  result  necessarily  limits  the  rights  of  creditors  of  the  regis- 
tered holders  of  stock. 

See  the  Uniform  Stock  Transfer  Act,  sections  13  and  14. 

Section  33  of  No.  141  of  the  Public  Acts  of  Vermont,  1915,  pro- 
vides as  follows:  "The  delivery  of  a  certificate  of  stock  by  the  person 
named  as  the  stockholder  in  such  certificate  or  by  a  person  entrusted 
by  liim  with  its  possession  for  any  purpose  to  a  bona  fide  purchaser  or 
pledgee  for  value,  with  a  written  transfer  thereof,  or  with  a  written 
power  of  attorney  to  sell,  assign  or  transfer  the  same,  signed  by  the 
person  named  as  the  stockholder  in  such  certificate,  shall  be  a  suffi- 
cient delivery  to  transfer  title  as  against  all  persons,  including  credi- 
tors of  the  record  holder;  but  no  such  transfer  shall  affect  the  right 
of  the  corporation  to  pay  any  dividend  due  upon  the  stock  to  the 
holder  of  record,  or  otherwise  to  treat  the  holder  of  record  as  the 
holder  in  fact,  until  it  has  been  recorded  upon  the  books  of  the  cor- 
poration, or  until  a  new  certificate  has  been  issued  to  the  person  to 
whom  it  has  been  transferred.  Such  transferee,  upon  delivery  of  the 
former  certificate  to  the  treasurer  of  the  corporation,  shall  be  en- 
titled to  receive  a  new  certificate.  No  attachment  or  levy  upon  shares 
of  stock  shall  be  valid  until  such  certificate  is  actually  seized  by  the 
officer  making  the  attachment  or  levy.  A  creditor  of  the  stockholder 
shall  be  entitled  to  such  aid  from  courts  of  appropriate  jurisdiction, 


SECT,  II.]  IN    RE    BAHIA    &    SAN    FRANCISCO    RY.   CO.  901 

by  injunction  or  otherwise,  as  is  allowed  in  regard  to  property  which 
cannot  readily  be  attached  or  levied  upon  by  ordinary  legal  pro- 
cess." 


7n  re  BAHIA  &  SAN  FRANCISCO  RY.   CO. 

L.R.  3  Q.B.  584.     1868. 

Miss  Trittin  was  a  shareholder  in  the  Bahia  &  San  Francisco 
Railway  Company.  The  company  accepted  a  transfer  upon  which  her 
name  had  been  forged,  and  issued  new  certificates  to  Stocken  and 
Goldner  which  were  sold  to  bona  fide  purchasers,  Mr.  Burton  and 
Mrs.  Goodburn. 

The  questions  for  the  opinion  of  the  court  were:  1.  Whether,  as 
against  the  company,  Mr.  Burton  and  Mrs.  Goodburn  are  entitled  to 
the  said  shares  in  the  company,  or  an  equivalent  number.  2.  Whether 
they  are  entitled  to  any  and  what  damages  to  be  paid  to  them  by  the 
company  under  the  above  circumstances. 

Blackburn,  J.  When  joint-stock  companies  were  established,  the 
great  object  was  that  the  shares  should  be  capable  of  being  easily 
transferred;  and  the  legislature  has  made  provision  by  25  &  26  Vict. 
c.  89,  §  25,  that  the  company  shall  keep  a  register  of  the  members, 
and  when  the  capital  is  divided  into  shares,  each  share  is  to  be  distin- 
guished by  a  number,  and  the  shares  held  by  each  member  is  to  be 
specified,  and  the  dates  at  which  each  person's  name  was  entered  on 
the  register.  In  order  to  keep  up  such  a  register,  the  compan}^  must 
alter  its  register  whenever  a  transfer  of  shares  is  made,  on  the  appli- 
cation and  pajTTient  of  a  certain  sum  to  them  by  the  person  to  whom 
the  shares  are  alleged  to  be  transferred.  And  the  first  thing  the  com- 
pany would  have  to  do  when  a  transfer  was  tendered  to  them,  would 
be  to  inquire  into  its  validity;  but  a  company  may  be  deceived,  and 
induced,  as  the  company  were  in  the  present  case,  without  an}-  neg- 
ligence, to  receive  as  genuine  a  forged  transfer.  They  accordingly 
made  an  alteration  in  the  register,  and  made  it  in  fact  inaccurate  by 
putting  the  names  of  Stocken  and  Goldner  on  the  register  as  the 
holders  of  particular  shares,  when  in  "fact  they  were  not  so.  The 
statute  (§31)  further  provides  that  the  company  may  give  certifi- 
cates, specifying  the  shares  held  by  any  member;  and  the  object  of 
this  provision  is  expressly  stated  to  be  that  this  certificate  should  be 
'prima  jade  evidence  of  the  title  of  the  person  named  to  the  shares 
specified;  and  the  company,  therefore,  by  granting  the  certificate, 
do  make  a  statement  that  they  have  transferred  the  shares  specified 
to  the  person  to  whom  it  is  given,  and  that  he  is  the  holder  of  the 
shares.  If  they  have  been  deceived  and  the  statement  is  not  perfectly 
true,  they  may  not  be  guilty  of  negUgence,  but  the  company,  and  no 
one  else,  have  power  to  inquire  into  the  matter;  and  it  was  the  in- 


902  BOSTON    &    ALBANY    R.R.  CO.  V.  RICHARDSON.        [cHAP.  II. 

tention  of  the  legislature  that  these  certificates  should  be  documents 
on  which  buyers  might  safely  act.  Now,  on  the  facts  of  this  case,  al- 
though according  to  the  practice  on  the  stock  exchange,  the  claim- 
ants did  not  originally  contract  for  these  particular  shares,  the  money 
was  paid  by  them  or  their  broker  on  the  execution  by  Stocken  and 
Goldner  of  a  transfer,  and  on  the  certificate  under  the  seal  of  the 
company  being  handed  over  to  them  that  Stocken  and  Goldner  were 
the  holders  of  these  particular  shares;  and  it  is  quite  clear  that  a 
statement  of  a  fact  was  made  by  the  company,  on  which  the  com- 
pany, at  the  very  least,  knew  that  persons  wanting  to  purchase  shares 
might  act.  And  the  claimants  having  bona  fide  acted  upon  that 
statement,  and  suffered  damage,  can  they  recover  from  the  com- 
pany? I  think  they  can,  on  the  principle  enunciated  in  Frccjuon  v. 
Cooke,  2  Ex.  654,  18  L.J.  Ex.  1 14.  Suppose  an  action  by  the  claimants 
against  the  company,  asserting  that  the  shares  were  the  plaintiffs' 
and  that  the  company  refused  to  pay  them  the  dividends  and  de- 
prived them  of  the  use  of  the  shares,  in  effect  an  action  of  trover. 
The  only  plea  would  be  that  the  plaintiffs  were  not  the  true  owners 
of  the  shares,  and  there  would  l)e  a  replication  by  way  of  estoppel, 
that  the  company  were  estopped  from  saying  that  the  plaintiffs  were 
not  the  owners,  because  they  had  purchased  on  a  statement  of  title 
made  by  the  company,  and  intended  i)y  them  to  be  acted  upon;  this 
would  clearly  amount  to  an  estoppel  within  the  rule  defined  in  Free- 
man V.  Cooke,  2  Ex.  654,  18  L.J.  Ex.  114.  The  claimants,  therefore, 
would  be  entitled  to  a  verdict,  and  it  follows  that  they  are  entitled 
as  damages  to  the  value  of  the  shares  at  the  time  they  were  con- 
verted; that  is,  at  the  time  when  Miss  Trittin  interfered  and  claimed 
the  shares. 


BOSTON  &  ALBANY   R.R.  CO.   v.   RICHARDSON. 

135  Mass.  473.     1883. 

Morton,  C.J.  This  case,  which  is  an  action  of  contract  with  a 
count  in  tort,  presents  an  important  question,  referred  to,  but  not 
decided,  in  Machinists'  National  Bank  v.  Field,  126  Mass.  345. 

In  January,  1876,  Mrs.  Pratt  owned  five  shares  of  the  stock  of  the 
Boston  and  Albany  Railroad  Company,  and  held  a  certificate  run- 
ning in  her  name.  Her  son  forged  her  name  to  a  blank  power  of  attor- 
ney, printed  upon  the  back  of  the  certificate,  and  delivered  it  to  one 
Field,  a  broker.  Field  sold  the  shares  to  the  defendants,  and  deliv- 
ered to  them  the  certificate  with  the  forged  signature  thereon.  The 
defendants  presented  it  to  the  transfer  clerk  of  the  plaintiff  by 
Brown,  their  clerk,  who  filled  up  the  blanks  so  as  to  make  it  a  power 
of  attorne}^  to  Brown  to  transfer  the  shares  to  Richardson,  Hill  and 
Company,  the  defendants.    Throughout,  Brown  was  acting  as  the 


SECT.  II.]        BOSTON    &    ALBANY    R.B.   CO.  V.  RICHARDSON.  903 

agent  and  on  behalf  of  the  defendants.  Thereupon  the  transfer  clerk 
permitted  Brown  to  transfer  the  shares  upon  the  books  of  the  cor- 
poration, and  issued  a  new  certificate  to  the  defendants.  Subse- 
quentl}^,  and  before  the  discovery  of  the  forgery,  the  defendants  sold 
the  stock  to  a  third  person,  and,  at  their  request,  the  corporation 
issued  a  new  certificate  to  the  purchaser. 

Upon  these  facts,  it  is  clear  that  Mrs.  Pratt  never  parted  with  her 
property  in  the  shares,  and  therefore  the  plaintiff  was  obliged  to 
procure  five  shares  of  its  corporate  stock,  and  issue  a  certificate  to 
her,  and  also  to  pay  her  the  dividends  upon  the  five  shares.  Pratt  v. 
Taunton  Copper  Co.,  123  Mass.  110,  and  cases  cited.  It  is  also  settled 
that  the  corporation  has  no  remedy  against  the  person  who  pur- 
chased of  the  defendants,  because,  as  to  him,  the  corporation  is 
estopped  to  deny  its  certificate  issued  to  the  defendants  and  trans- 
ferred to  the  purchaser.  Machinists'  National  Bank  v.  Field,  ubi 
supra,  and  cases  cited.  The  question  in  this  case  is  whether  it  has  a 
remedy  against  the  person  who  presented  a  forged  transfer  or  power 
of  attorney,  upon  the  faith  of  which  it  issued  to  such  person  a  new 
certificate. 

This  question  has  never  been  directly  decided  in  this  Common- 
wealth, but  the  adjudged  cases  furnish  analogies  which  aid  us  in  its 
solution.  It  is  familiar  law  that,  in  a  sale  of  chattels,  a  warranty  of 
title  is  implied,  unless  the  circumstances  are  such  as  to  give  rise  to  a 
contrary  presumption.  Shattuck  v.  Green,  104  Mass.  42.  The  pos- 
session and  offer  to  sell  a  chattel  is  held  equivalent  to  an  affirmation 
that  the  seller  has  title  to  it.  This  is  founded  upon  the  reason  that 
men  naturally  understand  that  a  seller  who  offers  a  chattel  for  sale 
owns  it. 

The  same  rule  has  been  extended  to  the  case  of  a  sale  of  a  promis- 
sory note.  The  seller  impliedly  warrants  that  the  previous  signa- 
tures are  genuine.  Cabot  Bank  v.  Morton,  4  Gray,  156.  Merriam  v. 
Wolcott,  3  Allen,  258. 

So  it  has  been  held  that,  if  one,  honestly  believing  himself  to  be 
authorized,  acts  as  agent  for  another,  and  procures  money  or  goods 
upon  the  credit  of  his  supposed  principal,  and  it  turns  out  that  he  is 
not  authorized,  he  is  liable  for  the  value  of  the  money  or  goods.  Chief 
Justice  Shaw  says:  "If  one  falsely  represents  that  he  has  an  author- 
ity, by  which  another,  relying  on  the  representation,  is  misled,  he  is 
liable;  and  by  acting  as  agent  for  another,  when  he  is  not,  though  he 
thinks  he  is,  he  tacitly  and  impliedly  represents  himself  authorized 
without  knowing  the  fact  to  be  true,  it  is  in  the  nature  of  a  false  war- 
ranty, and  he  is  liable."  Jefts  v.  York,  10  Cush.  392.  The  chief  jus- 
tice adds :  "  But  in  both  cases  his  liability  is  founded  on  the  ground  of 
deceit,  and  the  remedy  is  by  action  of  tort."  We  do  not  understand 
him  as  intending  to  say  that  the  only  remedy  is  the  technical  action 
of  deceit,  and  that  a  guilty  knowledge  must  be  proved.  He  used  the 


904  BOSTON    A    ALBANY    R.R.  CO.  V.  RICHARDSON.       (CHAP.    II. 

word  "deceit"  in  the  sense  of  tort.  In  numerous  other  cases,  the 
remedy  is  said  to  he  an  action  oh  the  case  for  falsely  a^isuminK  to  l>e 
an  agent.  Barllelt  v.  Tucker,  104  Mass.  330,  and  cases  citc*d.  And 
in  the  recent  ca,se  of  May  v.  Western  Union  Telegraph,  112  Mass.  90, 
it  was  held  that  the  proper  remedy  is  not  an  action  of  deceit ;  but 
"it  is  an  action  in  the  nature  of  a  false  warranty  against  one  act- 
ing as  agent,  who  re[)resents  that  he  has  authority  when  he  has  not. 
Whether  such  representation  is  made  in  terms,  or  tacitly  anil  im- 
pliedly, he  supposing  hut  not  knowing  the  fact  to  be  true,  he  is  liable 
to  the  person  misled."  We  can  see  no  good  rea.son  why  an  action  of 
contract  upon  the  implied  warranty  should  not  he  maintaiiUMi,  in  the 
same  manner  as  it  may  Ix?  upon  the  implied  w;irranty  in  the  sale  of 
chattels.  Rancldl  v.  Trimen,  18  C.B.  780.  liichardson  v.  Williamson, 
L.R.  0  Q.B.  276.  Baltzen  v.  Nicolay,  53  N.Y.  467.  But  it  Ls  not 
necessary  to  discuss  this,  l)ecause  in  the  case  at  bar  there  is  both  a 
count  in  contract  and  a  count  in  tort  in  the  nature  of  case,  for  falsely 
assuming  to  act  as  an  agent. 

Perhaps  these  considerations  are  sufficient  to  dispose  of  this  case; 
but  it  seems  to  us  that  the  result  would  be  the  siune  if  Pratt  had 
signed  the  transfer  on  the  back  of  the  certificate,  instead  of  the  power 
of  attorney.  The  dilTerence  between  the  two  modes  of  effecting  a 
transfer  is  theoretical  rather  than  practical.  There  is  in  either  case  a 
similar  implied  representation  or  warranty. 

If  one  buys  stock  antl  takes  a  transfer,  and  presents  the  certificate 
to  the  corporation  and  demands  a  new  one,  he  thereby  impliedly 
represents  that  he  is  entitled  to  the  new  certificate.  He  demands  it 
as  his  right;  this  implies  that  he  is  the  owner  and  ha.s  a  right  to  it. 
The  corporation  has  the  right  to  understand  him  as  a.sserting  this. 
It  is  not  bounil  to  question  or  investigate  the  genuineness  of  the 
transfer,  and  see  if  the  purchaser  has  not  l)een  defrauded.  When  the 
purchaser  presents  his  transfer  and  certificate,  the  transfer  officer 
naturally  understands  that  he  claims  the  transfer  to  be  valid,  and  to 
have  a  right  to  a  certificate;  he  has  the  right  to  act  as  if  this  had  been 
said  in  terms.  And  if,  relying  upon  such  tacit  antl  implied  represen- 
tations, the  corporation  suffers  a  loss,  the  purchaser  who  misled  it  is 
liable. 

See  also  Clarkson  Home  v.  Missouri  Ry.  Co.,  182  N.Y.  47;  Oliver 
V.  Bank  of  England,  [1902]  1  Ch.  610. 


SECT.  II,]  NEW    ENGLAND    TRUST    CO.  V.  ABBOTT.  905 

NEW  ENGLAND  TRUST  CO.  v.   ABBOTT. 

162  Mass.  148.     1894. 

Morton,  J.  This  is  a  bill  brought  by  the  plaintiff  to  compel  the 
transfer  to  it  by  the  defendant,  as  executor  of  the  will  of  Josiah  G. 
Abbott,  of  certain  shares  in  the  plaintiff  corporation  which  were  held 
by  said  Abbott  at  his  decease,  and  which  it  is  alleged  he  agreed,  when 
the  certificates  were  issued  to  him,  should  be  appraised  at  his  death 
by  the  directors,  and  transferred  to  the  plaintiff  at  the  appraisal,  if 
the  directors  so  elected.  The  bill  also  seeks  to  enjoin  the  defendant 
from  prosecuting  an  action  at  law  brought  by  him  against  the  plain- 
tiff to  recover  certain  dividends  upon  said  shares  that  have  been 
declared  by  it. 

The  plaintiff  was  organized  in  1869  under  a  special  charter  (St. 
1869,  c.  182),  with  a  capital  of  five  hundred  thousand  dollars,  which 
was  afterwards  increased  to  a  million.  The  terms  of  the  alleged 
agreement  are  found  in  the  by-laws,  of  which  all  that  is  now  material 
is  as  follows :  — 

"Article  7.  Any  member  of  this  corporation  who  shall  be  desirous 
of  selling  any  of  his  shares,  the  executor  or  administrator  of  any 
member  deceased,  and  the  grantee  or  assignee  of  any  shares  sold  on 
execution,  shall  cause  such,  their  shares  respectively,  to  be  appraised 
by  the  directors,  which  it  shall  be  their  duty  to  do  on  request,  and 
shall  thereupon  offer  the  same  to  them  for  the  use  of  the  corporation 
at  such  appraised  value;  and  if  said  directors  shall  choose  to  take 
such  shares  for  the  use  of  the  corporation,  such  member,  executor, 
administrator,  or  assignee  shall,  upon  the  payment  or  tender  to  him 
of  such  appraised  value  thereof,  and  the  dividends  due  thereon, 
transfer  and  assign  such  share  or  shares  to  said  corporation;  pro- 
vided, however,  the  said  directors  shall  not  be  obUged  to  take  such 
shares  at  the  appraised  value  aforesaid,  unless  they  shall  think  it  for 
the  interests  of  the  company;  and  if  they  shall  not,  within  ten  days 
after  such  shares  are  offered  to  them  in  writing,  take  the  same,  and 
pay  such  member,  executor,  administrator,  or  assignee  therefor  the 
price  at  which  the  same  shall  have  been  appraised,,  such  member, 
executor,  administrator,  or  assignee  shall  be  at  liberty  to  sell  and  dis- 
pose of  the  same  shares  to  any  person  whatever. 

"Article  8.  The  directors  shall  have  power,  and  it  shall  be  their 
duty,  to  sell  and  dispose  of  the  shares  which  may  be  transferred  as 
aforesaid  to  the  corporation,  whenever,  in  their  judgment,  it  can  be 
done  with  safety  and  advantage  to  the  corporation;  and  in  all  sales 
made  by  the  directors,  under  any  of  the  aforesaid  provisions,  it  shall 
be  their  duty  to  sell  the  shares  to  such  persons  as  shall  appear  to 
them,  from  their  situation  and  character,  most  likely  to  promote 
confidence  in  the  stability  of  the  institution;  no  greater  number  than 


90G  NEW    ENGLAND    THUST    CO.  I'.  ABBOTT.  [cHAP.  II. 

one  hundred  shares  being  assigned  to  any  one  person;  nor,  in  the  case 
of  a  person  aheady  a  member,  a  greater  number  than  will  be  suffi- 
cient to  increase  his  previous  number  to  one  hundred  shares." 

These  by-laws  were  adopted  before  any  certificates  of  stock  were 
issued.  Afterwards,  but  before  the  capital  was  increased,  Article  7 
was  duly  amended  by  adding  to  it  the  following: 

"It  shall  Ix;  the  duty  of  such  executor,  administrator,  grantee,  or 
assignee  to  offer  said  shares  for  apprai.sal  and  to  be  taken  liy  the 
corporation,  if  it  shall  so  elect,  whenever  reciuested  by  the  actuary 
or  sccretaiy,  and  no  dividends  or  inte-est  shall  be  paid  or  allowed 
after  a  failure  to  comply  w  ith  such  reciuest ;  provided  tliat  such  re- 
quest shall  not  be  made  until  after  the  j^ayment  of  one  dividend  and 
the  expiration  of  sLx  months  from  the  death  of  the  owner  or  sale  as 
aforesaitl;  but  the  offer  may  be  made  at  any  earlier  period  if  the 
party  shall  prefer." 

Every  certificate  contained  on  its  face,  as  part  of  the  certificate, 
the  provision  that  "said  shares  are  transferai)le  only  in  pei-son,  or  by 
attorney  duly  constituted,  on  the  books  of  the  company,  and  in  the 
manner  and  upon  the  conditions  expressed  in  the  by-laws  of  the 
company  printed  upon  the  back  of  this  certificate."  On  the  l)acks  of 
the  certificates  were  printed  By-laws  7  and  8.  By-law  7  was  printed 
as  amended  on  the  backs  of  those  i.svsued  after  the  increase.  There 
were  also  on  the  stubs  from  which  the  certificates  were  detached  in 
the  certificate-books  two  receipts  given  and  signed  by  the  defend- 
ant's testator  at  the  time  the  two  certificates  were  issued  to  him  in 
the  original  and  increased  capital,  which  were  each  as  follows:  "Re- 
ceived the  above  certificate  subject  to  the  conditions  and  restrictions 
therein  referred  to,  and  to  the  by-laws  of  the  company,  to  which  I 
agree  to  conform." 

The  defendant  contends  that  these  by-laws  are  void.  We  have  not 
found  it  necessaiy  to  consider  that  question,  and  we  express  no  oi)in- 
ion  upon  it.  We  think  that  the  case  well  may  stand  on  the  ground 
that  the  defendant's  testator  entereil  into  an  agreement  with  the 
plaintiff  to  do  what  the  plaintiff  now  seeks  to  compel  his  executor 
to  do. 

It  is  manifest  that  a  stockholder  may  make  a  contract  with  a  cor- 
poration to  do  or  not  to  do  certain  things  in  regard  to  his  stock,  or 
to  waive  certain  rights,  or  to  sul^mit  to  certain  restrictions  respecting 
which  the  stockholdei-s  might  have  no  power  of  compulsion  over  hmi. 
In  Adley  v.  Whitstable  Co.,  17  Ves.  315,  323,  Lord  Eldon  says:  "It 
has  been  frequently  determined,  that  what  may  very  well  be  made 
the  subject  of  contract  between  the  different  interests  in  a  partner- 
ship would  not  be  good  as  a  by-law;  for  instance,  an  agreement 
among  the  citizens  of  London,  who  have  as  extensive  a  power  of 
making  by-laws  as  any  corporation,  that  they  would  not  sell,  ex- 
cept in  the  markets  of  London,  would  be  good;  yet  it  has  been 


SECT.  II.]  NEW    ENGLAND    TRUST    CO.  V.  ABBOTT.  907 

declared  by  the  legislature,  that  a  by-law  to  that  effect  is  bad."  See 
also  Davis  v.  Second  Universalist  Meeting-House,  8  Met.  321;  Bank  of 
Attica  V.  Manufacturers  &  Traders^  Bank,  20  N.Y.  501,  505,  506; 
Cook,  Stock  &  Stockholders,  §  408. 

In  the  present  case  the  certificates  were  issued  to  the  defendant's 
testator  in  consideration  of  the  payment  by  him  to  the  corporation 
of  the  amount  due  for  the  stock,  and  of  the  agreements  with  it  on  his 
part  which  they  contained.  By  accepting  them  without  objection, 
and  by  signing  the  receipts,  he  agreed  to  the  conditions  printed  on 
the  backs  of  the  certificates.  The  fact  that  the  conditions  were  con- 
tained in  by-laws  which  may  have  been  invalid  as  such,  does  not 
render  his  agreement  void,  if  the  contract  was  in  substance  one  which 
the  corporation  had  power  to  make. 

We  think  that  it  had  such  power.  It  is  held  in  this  State  that  a 
corporation  unless  prohibited  may  purchase  its  own  stock  (Dupee  v. 
Boston  Water  Power  Co.,  114  Mass.  37),  and  we  see  nothing  opposed 
to  public  policy  in  such  an  agreement  as  this  with  corporations  like 
this.  If  honestly  carried  out  by  the  directors  it  tends  to  secure  a 
trustworthy  body  of  stockholders,  from  which  those  having  the  care 
and  management  of  the  affairs  of  the  corporation  naturally  would  be 
selected.  It  certainly  cannot  be  contrary  to  public  policy  that  the 
managers  of  this  and  similar  institutions  should  be  persons  of  skill, 
who  possess  the  confidence  of  the  public,  and  the  restraint  upon 
alienation  is  no  greater  than  is  often  agreed  to. 

In  England  it  is  not  unusual  to  find  in  the  deeds  of  settlement  or 
articles  of  association  under  which  corporations  or  joint-stock  com- 
panies have  been  organized,  and  which  correspond  to  the  charter  and 
by-laws  here,  provisions  requiring  the  stockholder,  in  case  he  wishes 
to  transfer  his  stock,  to  offer  it  to  the  directors,  or  to  submit  to  them 
the  name  of  the  transferee  for  approval.  Bargate  v.  Shortridge,  5 
H.L.  Cas.  297;  Poole  v.  Middleton,  29  Beav.  646;  ChappeU's  case, 
L.R.  6  Ch.  902;  Ex  parte  Penney,  L.R.  8  Ch.  446;  Moffatt  v.  Farquhar, 
7  Ch.D.  591.  No  objection  seems  to  have  been  made  to  these 
provisions. 

In  this  State  the  Legislature  in  numerous  instances  has  provided 
in  the  charters  of  corporations  like  this,  that  the  shares  shall  be 
transferable  according  to  such  rules  and  regulations  as  the  stock- 
holders shall  establish,  and  not  otherwise.  It  is  hardly  possible  that 
the  Legislature  was  ignorant  of  the  construction  which  has  been  put 
upon  the  power  thus  conferred,  and  which  in  the  case  of  the  first 
corporation  of  the  kind  chartered  in  this  Commonwealth,  the  Massa- 
chusetts Hospital  Life  Insurance  Company  (St.  1818,  c.  180),  was 
shown,  it  is  said,  by  the  adoption  of  by-laws  from  which  those  in  this 
case  were  copied.  It  is  true  that  this  charter  contains  no  provision  in 
regard  to  by-laws,  or  to  the  transfer  of  shares.  But  the  policy  of  the 
Legislatm-e  cannot  be  affected  by  such  an  omission,  in  view  of  the 


908  MCDONALD    I'.  DEWEY.  [CHAP.  II. 

fact  that  many  of  the  charters  since  granted  contain  this  provi- 
sion. 

Note.  —  A  stockholder  may  transfer  his  stock  to  whomsoever  he 
pleases,  a  by-law  to  the  contrar\'  notwithstandinR,  McXuUa  v.  Coim 
Belt  Bank,  lOl  111.  427,  447;  Bloede  Co.  v.  Bloeile,  K{  Md.  120;  Trmt 
&  Sarings  Co.  v.  Home  Lumber  Co.,  1  IS  Mo.  447;  .\filler  v.  Farmers 
Co.,  78  Neb.  441 ;  Ireland  v.  Globe  Milling  Co.,  21  R.I.  I);  In  re  Kliwi, 
67  Wis.  401.  See  also  Third  National  Bank  v.  Buffalo  German  Ins. 
Co.,  193  U.S.  581.  See,  contra,  Star  Telephone  Co.  v.  Longfellow;  85 
Kan.  353;  Nicholson  v.  Franklin  Breieing  Co.,  82  Ohio,  94. 

There  is  authority  that  the  stockholder's  rinht  to  transfer  is  un- 
affected, even  if  the  declared  restriction  appears  on  the  certificate  of 
stock.  Finch  v.  MaCoupin  Tel.  Co.,  14()  111.  App.  158;  Herring  v. 
Rushin  Co.-op.  Ass'n,  52  S.W.  (Tenn.)  327;  Feckheimer  v.  National 
Exchange  Bank,  79  Va.  80. 

But  restrictions  on  the  ri^ht  to  transfer  may  l)e  made  by  contract. 
See  Lindsai/s  Estate,  210  Pa.  224;  Garrett  v.  Philadelphia  Lawn 
Mower  Co.,  39  Pa.  Sup.  Ct.  78.  And  it  is  submittal  that,  if  the  stock 
certificate  contains  a  statement  of  the  restriction,  this  is  a  sufficient 
basis  from  which  to  pretlicate  a  contract  to  transfer  the  stock  only 
in  accordance  with  the  restriction.  For  authorities  in  support  of  this 
proposition  sec  Jennings  v.  Bank  of  California,  79  Cal.  323;  Barrett  v. 
King,  181  Mass.  470;  Farmers'  Co.  v.  Laun,  140  Wis.  252.  See  also 
Bank  v.  Kerdolff,  75  Mo.  App.  297;  Stafford  v.  Produce  Exchange  Co., 
61  Ohio  St.  100. 

As  a  share  of  stock  is  a  cho-se  in  action  against  the  corporation,  and 
as  cver>'  cho.se  in  action  is  created  bv  contract,  effect  may  be  given  to 
such  restriction  on  the  short  ground  that  this  restriction  was  inherent 
in  the  chose  in  action  as  and  when  created.  See  Barrett  v.  King,  181 
Mass.  470;  Nicholson  v.  Franklin  Breu-ing  Co.,  82  Ohio,  94;  Farmers' 
Co.  V.  Laun,  140  Wis.  252;  Borland  v.  Steel  Brothers  d'  Co.,  Ltd., 
[1901]  1  Ch.  279. 

The  corporation's  right  must  be  exercised  with  fairness.  Adams  v. 
Protective  Union  Co.,  210  Mass.  172. 


McDonald  v.  dewey. 

202  U.S.  510.     lOOn. 

Section  5151  of  the  National  Bank  Act  provides:  "The sharehold- 
ers of  every  national  banking  association  shall  be  held  individually 
responsible,  equally  and  ratably,  and  not  one  for  another,  for  all 
contracts,  debts,  and  engagements  of  such  association,  to  the  extent 
of  the  amount  of  their  stock  therein,  at  the  par  value  thereof,  in  ad- 
dition to  the  amount  invested  in  such  shares." 


SECT.  II.]  MCDONALD    V.  DEWEY.  909 

The  defendant  transferred  some  of  his  shares  in  a  national  bank  at 
a  time  when  the  bank  was  insolvent,  and  when  he  knew  or  ought  to 
have  known  the  fact.  The  Circuit  Court  of  Appeals  held  there  could 
be  no  recovery  against  the  defendant  without  proof  of  the  additional 
fact  that  the  several  transferees  were  likewise  insolvent. 

Mr.  Justice  Brown.  That  the  transfer  of  stock  in  corporations, 
even  when  in  failing  circumstances,  should  not  be  unduly  impeded,  is 
essential  not  only  to  the  prosperity  of  such  corporations  and  the  value 
of  their  stock,  but  to  the  interest  of  stockholders  who  may  desire  for 
legitimate  reasons  to  change  their  investments  or  to  raise  money  for 
debts  incurred  outside  the  business  of  such  corporation.  Bank  v. 
Lanier,  11  Wall.  369,  377.  At  the  same  time  the  frequency  with 
which  such  transfers  are  made  for  the  purpose  of  evading  the  double 
liability  imposed  by  the  National  Banking  Act,  has  given  rise  to  a 
large  amount  of  litigation  turning  upon  their  legality.  In  this  con- 
nection certain  propositions  have  been  laid  down  by  so  many  courts 
and  in  so  many  cases  that  they  may  be  regarded  as  fundamental  prin- 
ciples of  law  applicable  to  all  cases  of  this  character. 

(1)  That  a  party,  who  by  way  of  pledge  or  collateral  security  for  a 
loan  of  money,  accepts  stock  of  a  national  bank  and  puts  his  name  on 
the  registry  as  owner,  incurs  an  immediate  hability  as  a  stockholder, 
and  cannot  relieve  himself  therefrom  by  making  a  colorable  transfer 
of  his  stock  to  another  person  for  his  own  benefit,  as  was  done  by  the 
sale  to  Jewett  in  this  case.  National  Bank  v.  Case,  99  U.S.  628; 
Marcij  V.  Clark,  17  Mass.  329;  Nathan  v.  Whitlock,  9  Paige,  152; 
Cook  on  Stockholders,  §  263. 

(2)  The  same  result  follows  if  the  stockholder,  knowing,  or  having 
good  reason  to  know,  the  insolvency  of  the  bank,  colludes  with  an  ir- 
responsible person  with  design  to  substitute  the  latter  in  his  place, 
and  thus  escape  individual  liabihty,  and  transfers  his  stock  to  such 
person.  It  is  immaterial  in  such  case  that  he  may  be  able  to  show  a 
full  or  partial  consideration  for  the  transfer  as  between  himself  and 
the  transferee.  Bowden  v.  Johnson,  107  U.S.  251. 

Upon  the  other  hand,  in  Whitney  v.  Butler,  118  U.S.  655,  certain 
stockholders  employed  an  auctioneer  to  sell  their  shares  at  public 
auction.  They  were  bidden  in  by  a  purchaser  who  paid  the  auction- 
eer for  them  and  received  from  him  the  certificate  of  stock  with  a 
power  of  attorney  to  transfer  the  same  in  blank.  The  auctioneer  paid 
the  money  to  the  original  owner  of  stock,  but  no  formal  transfer  was 
made  on  the  books  of  the  bank.  Shortly  afterwards  the  bank  became 
insolvent  and  went  into  the  hands  of  a  receiver,  who  made  an  assess- 
ment upon  the  original  stockholders.  We  held  that  the  responsibility 
of  the  stockholders  ceased  upon  the  surrender  of  the  certificate  to  the 
bank,  and  the  delivery  to  its  president  of  a  power  of  attorney  to 
transfer  the  stock  on  the  books  of  the  bank.  The  controlling  consid- 
erations were  the  good  faith  of  the  stockholders  in  making  the  sale, 


910  Mcdonald  v.  dewey.  (chap.  ii. 

believing  the  bank  to  be  solvent,  and  the  fact  that  they  hatl  done  all 
that  they  could  reasonably  Ih»  cxjK'cted  to  do  to  make  a  vali<l  sale  of 
the  stock  and  a  transfer  of  the  certihcate  on  the  stock  register. 

Under  the  English  law  a  shareholder  may  transfer  his  share's  to  an 
irres|)onsil)le  party  for  a  nominal  consideration,  though  tlu'  sole  pur- 
pose of  the  transfer  be  to  esca|H>  liability,  provided  the  transfer  Ix; 
out  and  out,  and  not  merely  colorable  or  collusive,  with  a  secret  trust 
attached.  Tntler  such  circumstances  the  fx^rson  making  the  transfer 
is  relea.sed  from  liability,  Ixith  as  to  corjxjrate  creditors  and  the  other 
shareholders.  Cook  on  Stockliolders,  §  200;  2  Morawetz  on  Private 
Corporations,  §  Hoi). 

The  law  is  quite  different  in  this  countn'.  At  the  same  time  the 
original  stockholder  cannot  Im*  held  liable,  unless  the  bank  were  prac- 
tically insolvent  at  the  time  the  transfer  was  made,  and  its  condition 
was  known  or  ought  to  have  Ikhmj  known  to  the  stockliolder  making 
the  transfer.  If  the  bank  were  in  fact  .solvent  and  able  to  pay  its 
debts  as  they  matured  when  the  transfer  was  made,  the  creditors 
having  ample  si'curity  in  the  .solvency  of  the  bank,  have  no  siKH-ial 
intcri'st  in  knowing  who  the  stockholtlei-s  are,  since  their  only  re- 
course to  them  would  l)e  in  the  remote  contingency  of  the  insolvency 
of  the  bank.  The  transferrer  can  only  l)e  held  liable  if  the  bank  \)C 
insolvent,  and  such  insolvency  Ik*  known,  or  ought  to  have  l>ecn 
kn(nvn,  to  him  from  his  relations  to  the  bank,  since  the  transfer  is 
prima  Jacic  valid,  and  shifts  to  the  transferee  the  burden  of  the  re- 
sponsibility, which  can  be  laid  upon  the  original  stockholder  only  in 
ca.se  of  batl  faith,  or  evidence  of  a  purpos**  to  evade  lial»ility. 

This  bad  faith  may  be  shown  by  the  fact  that  the  bank  was  known 
to  him  to  be  in.solvent;  but  notwithstanding  this  the  transfer  would 
be  valid  if  made  to  a  jx^rson  of  kn<)wn  Hnancial  resix)nsibility,  since 
the  creditors  could  not  suffer  by  the  substitution  of  one  solvent  stock- 
holder in  place  of  another.  The  Court  of  .\ppeals.  however,  went 
further  and  held  that  the  transfer  would  l>e  valid  unless  made  to  an 
irrespon.sible  person  unable  to  respond  to  an  assessment,  whose  finan- 
cial condition  was  known,  or  ought  to  have  Ix^en  known,  to  him. 

[After  reviewing  the  authorities.]  We  think  it  a  projx^r  deduction 
from  the  prior  ca.ses,  and  such  we  hold  to  Ix'  the  law,  that  the  gist  of 
the  liability  is  the  fraud  implied  in  selling,  with  notice  of  the  in.sol- 
vency  of  the  bank  and  with  intent  to  evade  the  double  liability  im- 
posed upon  the  stockholder  by  the  National  Ranking  Act.  In  .short, 
the  question  of  lial)ility  is  largely  determinable  by  the  presence  or 
absence  of  an  intent  to  evade  lial)ility.  The  fact  that  the  sale  was 
made  to  an  insolvent  buyer  is  doubtless  additional  evidence  of  the 
original  fraudulent  intent,  but  would  not  be  in  it.self  sufficient  to  con- 
stitute fraud  without  notice  of  the  insolvency  of  the  bank.  The 
stockholder  is  not  deprived  of  his  right  to  .sell  his  stock  by  the  fact 
that  the  sale  is  made  to  an  insolvent  person,  unless  it  be  made  with 


SECT.  II.]  MCDONALD    V.  DEWEY.  911 

knowledge  of  the  insolvency  of  the  bank.  This  was  practically  the 
ruling  in  Earle  v.  Carson,  in  which  we  held  that  a  bona  fide  sale 
would  not  be  void,  though  the  vendee  were  insolvent,  if  the  fact  of 
such  insolvency  were  at  the  time  unknown  to  the  seller.  The  case 
of  Earle  v.  Carson,  so  far  from  lending  countenance  to  the  argument 
of  the  appellees,  bears  strongly  in  the  opposite  direction. 

The  solvency  of  the  vendee,  however,  is  pertinent  in  showing  that 
no  damage  could  have  resulted  to  the  creditors  of  the  bank  by  the 
transfer.  Though  not  a  necessary  part  of  the  plaintiff's  case,  it  may 
be  a  complete  defense,  if  it  be  shown  that  the  sale,  however  fraudu- 
lent, was  made  to  a  vendee  who  was  as  able  to  respond  to  the  double 
liability  as  was  the  vendor.  The  proposition  that  the  executors  are 
not  responsible  because  the  sales  were  made  to  solvent  vendees,  being 
defensive  in  its  character,  the  burden  of  proof  was  upon  them.  In 
this  particular  the  case  is  not  unlike  that  of  an  ordinary  action  upon 
a  contract,  where  the  plaintiff  relies  upon  the  contract  and  the  breach, 
and  sues  for  such  damages  as  may  be  reasonably  supposed  to  follow 
therefrom.  But  it  may  be  shown  in  defense  that  no  damages  really 
resulted,  as,  for  instance,  in  an  action  for  services,  that  plaintiff  might 
have  obtained  other  employment  at  the  same  wages,  or,  in  an  action 
for  a  failure  to  deliver  goods,  that  plaintiff  might  have  gone  into  the 
market  and  purchased  other  goods  at  the  same  price  at  which  the  de- 
fendant had  agreed  to  sell  them.  In  such  case  defendant  assumes  the 
burden  of  proving  that  no  damage  in  fact  resulted.  The  argument  in 
this  case  really  is  that  the  receiver  was  bound  to  show,  not  only  that 
Dewey  was  guilty  of  fraud,  but  that  damages  necessarily  resulted 
and  that  he  knew  that  fact.  The  reply  is  that  the  fraud  was  consum- 
mated by  the  sale  of  the  stock  of  a  bank  known  to  be  insolvent,  with 
intent  to  evade  liability,  and  that  the  fraud  is  not  less  though  the 
transferees  happened  to  be  solvent,  but  that  their  solvency  may  be 
proved  to  rebut  the  presumption  that  injury  resulted  to  the  creditors 
from  the  transfers. 

While  there  is  no  express  finding  of  the  Court  of  Appeals  (though 
there  was  in  the  Circuit  Court)  that  Dewey  knew,  or  should  have 
known,  of  the  insolvency  of  the  bank  at  the  time  of  the  transfer,  and 
that  the  transfer  was  made  with  the  intent  to  evade  his  double  lia- 
bility as  stockholder,  the  decree  of  both  courts  is  based  upon  this 
assumption;  and  as  stated  in  the  dissenting  opinion  "that  the  final 
suspension  of  the  bank,  though  it  occurred  two  years  and  five  months 
after  Dewey's  transfer  of  stock,  is  traceable,  in  the  line  of  cause  and 
effect,  to  the  insolvency  of  the  bank  at  the  time  of  the  transfer."  We 
do  not  understand  these  facts  to  be  seriously  disputed. 

Note.  —  For  a  statement  of  the  English  law,  see  In  re  Discoverers 
Fina7ice  Corporation,  Ltd.,  [1910]  1  Ch.  312. 


912  LUTHY    V.  REAM.  (CIIAP.  II. 

SECTION  3. 
VOTING   TRUSTS. 


LUTHY  t.   UE.VM. 

IION.E.  (lU.)  373.     1915. 

The  complainant.s  sought  the  eancollution  of  the  voting  trust  agrce- 
inont  .sot  forth  in  tlio  opinion. 

DiN.N,  J.  Tlio  IVru  riow  &  Wheel  Company  i.s  a  corporation  or- 
pjiiii/.cd  under  the  la\v.s  of  lUinoi.s,  having  a  capital  .stork  of  $^l(H).(HK), 
enga^;e(l  in  the  manufacture  of  plow.s,  metal  whei'l.s,  and  farm  imple- 
ments. The  complainants  are  the  owners  of  2.027  of  the  4.0(K)  shares 
of  its  stock;  Thomas  Cahill  Ix-in^j  the  owner  of  70  shares  purchased  in 
NovemlKT,  1912.  In  Se|)temlK'r,  11)12,  U  of  the  stockholders,  owning 
2,001  shares  of  the  stock,  entered  into  the  trust  agreement  in  con- 
troversy. After  reciting  that  the  stockholders  de<Mned  it  to  their  in- 
terest that  all  of  their  stock  should  U'  voted  as  a  unit  u|M»n  all  (|ues- 
tions  atTectinn  the  business  and  management  of  the  company,  and 
that  Henry  Ileum  had  cons<'nted  to  hold  and  vote  such  stock  on 
behalf  of  the  stockholilers,  the  agreement  provided:  — 

"That  for  a  valuable  consideration,  the  recei|)t  whereof  is  hereby 
acknowledged,  and  in  further  c(jnsideration  of  the  mutual  covenants 
and  agreements  expressed  in  this  agreement,  the  stockholdei-s  hereby 
a.ssign.  convey,  and  transfer  unto  the  trustee  above  name<l  the  num- 
ber of  shares  oi  stock  of  the  Peru  Plow  &  Wheel  Com|)any.  a  corpora- 
tion of  the  state  of  Illinois,  as  set  opjmsite  their  resp<'ctive  names,  to 
be  held  in  trust  by  the  said  trustee  for  the  respective  stockholders 
by  whom  it  is  severally  assignetl,  their  personal  representatives  and 
assigns,  upon  the  following  terms  and  conditions: 

"(1)  The  .said  trustee  shall  hold,  control,  and  vote  said  stock  as  if 
he  was  the  owner  of  all  of  said  stock. 

"  (2)  Said  trustee  shall  determine  how  said  stock  shall  be  voted 
upon  any  question,  at  any  time  and  every  meeting  of  the  stock- 
holders. 

"(3)  All  of  said  stock  so  held  by  the  trustees  shall  Ix;  voted  as  a 
unit. 

"  (4)  At  all  elections  of  directors  of  the  Peru  Plow  &  Wheel  Com- 
pany said  trustee  shall  nominate  three  directors  to  Ije  voted  for  at 
such  election,  and  said  trustee  shall  vote  all  .said  stock  held  by  him  as 
a  unit  for  each  and  all  of  the  directors  so  nominated  by  him. 

"  (5)  A  vacancy  in  the  office  of  trustee,  as  herein  provided  for,  shall 
be  filled  in  the  following  manner,  viz. :  In  the  event  of  the  death,  res- 


SECT.  III.]  LUTHY    V.  REAM.  913 

ignation,  or  removal,  for  any  cause  whatever,  of  said  trustee  herein, 
the  vacancy  in  the  office  of  trustee  shall  be  filled  by  a  majority  in 
amount  of  the  then  holders  of  the  stock  now  owned  by  the  following 
stockholders  [here  appear  the  names  of  the  signers  of  the  agreement], 
parties  to  this  agreement,  as  appears  set  opposite  their  respective 
names  subscribed  hereto.  - 

"  (6)  Said  trustee  shall  prepare,  and  issue  to  the  stockholders,  cer- 
tificates showing  the  amount  of  stock  held  on  behalf  of  each  stock- 
holder, respectively,  and  the  stock  so  held  may  be  divided  and  trans- 
ferred in  like  manner  as  if  it  had  not  been  assigned  in  trust,  subject 
to  the  rights  and  powers  of  the  trustee  under  this  agreement.  But  no 
such  assignment  or  transfer  of  stock  shall  be  effective  for  any  purpose 
until  surrender  of  the  certificate  issued  by  said  trustee  and  the  issue 
of  a  new  certificate  to  the  purchaser  or  assignee  thereof. 

"  (7)  No  fees  shall  be  charged  by  such  trustee  herein  designated 
for  any  services  performed  in  connection  with  the  trust  hereby 
created. 

"(8)  Said  trustee  shall  collect  and  receive  all  dividends  on  the 
stock  transferred  to  and  held  by  him,  and  shall  immediately  pay  over 
the  same  to  the  holders  of  trust  certificates  representing  such  stock 
as  their  respective  interests  appear.  The  trustee  shall  not  demand 
or  receive  any  compensation  for  receiving  and  paying  over  such 
dividends. 

"  (9)  The  rights,  duties,  and  powers  hereby  conferred  upon  said 
trustee  shall  expire  and  wholly  cease  on  the  1st  day  of  September, 
A.D.  1922,  and  the  trustee  shall  at  said  time  assign  and  transfer  to  the 
persons  who  then  hold  trustee's  certificates  evidencing  their  owner- 
ship of  shares  of  stock  the  amount  of  stock  to  which  each  holder 
thereof  is  shown  by  his  trustee's  certificate  to  be  entitled. 

"(10)  Said  trustee  hereby  accepts  the  trust  hereby  created  by  the 
above  and  foregoing  instrument,  and  hereby  undertakes  to  hold, 
own,  and  vote  said  stock  as  therein  provided,  and  to  retransfer  the 
same  on  the  1st  day  of  September,  a.d.  1922,  to  the  holders  of  trus- 
tee's certificates  evidencing  their  right  to  receive  the  same.  Said 
trustee  further  undertakes  at  all  times  to  vote  the  said  stock  by  him- 
self or  by  proxy,  and  exercise  his  powers  as  trustee  in  such  manner  as 
he  shall  deem  to  be  for  the  best  interests  of  the  stockholders  of  the 
Peru  Plow  &  Wheel  Company.  Said  trustee  further  undertakes  to 
accept  additional  assignments  of  stock  from  any  and  all  stockholders 
of  the  Peru  Plow  &  Wheel  Company,  and  to  permit  any  stockholder 
thereof  to  become  a  subscriber  to  this  agreement.  It  is  expressly 
understood  and  agreed  that  Henry  Ream,  trustee  herein  referred  to, 
shall  not  be  hable,  either  directly  or  indirectly,  to  any  person,  firm, 
or  corporation  for  any  loss  or  damage  whatever  occurring  on  account 
of  the  trusteeship,  or  from  any  act  done  by  the  said  trustee  in  con- 
nection with  the  duties  and  trusts  herein  imposed  upon  him." 


914  LUTIIY    I'.  REJiM.  (chap.  II. 

The  certificates  of  stock  of  the  stockholders  signing  the  agreement 
were  canceled,  and  two  certificates,  for  2,0()1  shares  in  the  aKKn'n;ate, 
were  issued  to  Ream  as  trustee.  He  issued  to  eacli  stockhoUler  a 
trustee's  certificate  stating  that  the  stockholder  to  whom  it  was 
issued  was  the  owner  of  a  certain  number  of  shares  of  the  ca{)ital 
stock  of  the  Peru  Plow  &  Wlurl  Company  held  l)y  him  as  trastcr, 
subject  and  pursuant  to  the  tenns,  conditions,  and  stipulations  of  a 
certain  agreement  between  him,  as  trustee,  and  certain  stocklujlders 
of  the  said- Peru  Plow  &  Wheel  Company  joining  in  the  said  agree- 
ment of  date  September  4,  1912,  a  copy  of  which  agrt'cmcnt  was  on 
file  with  the  trustee,  and  reference  was  had  to  it  as  to  all  the  terms, 
conditions,  and  requirements  of  the  trust.  The  certificates  were 
stated  to  be  transferable  only  on  the  books  of  the  trustee  by  the 
owner  thereof  in  person  or  l)y  attorney,  upon  its  surreniler  properly 
indorsed,  when  like  new  certifieates  would  be  issued  to  the  proper 
owner  of  record.  On  the  back  of  each  certificate  was  a  form  for  its 
assignment. 

Among  the  stockholders  signing  the  agreement  were  Kate  Cahill, 
John  D.  Cahill,  and  Cornelius  J.  Cahill,  who  together  owned  70 
shares  of  stock.  They  sold  their  shares  to  the  ai)pellant  Thomas 
Cahill,  and  assigned  to  him  their  trust  certificate.  He  presented  the 
certificate  so  assigned  to  him  to  Henry  Ream,  who  was  president  of 
the  corporation,  and  demanded  that  a  certificate  should  be  issued  to 
him  by  the  president  and  secretaiy  of  the  corporation  for  70  shares 
of  its  capital  stock ;  but  the  said  Henry  Ream  refused  to  issue  such 
certificate,  and  stated  that  said  70  shares  of  stock  were  included  in 
the  trust  agreement,  and  that  he  could  not  and  would  not  issue  a 
certificate  for  them  to  Thomas  Cahill  for  that  reason.  Thomas 
Cahill  thereupon  notified  hhn  that  as  the  owner  of  70  shares  he  with- 
drew the  same  from  the  said  trust  agreement  and  would  no  longer  be 
bound  thereby,  antl  demanded  that  a  certificate  be  i.ssued  to  him  free 
from  any  restraint,  oljligation,  or  contlition  under  said  trust  agree- 
ment; but  said  Heniy  Ream  refused  to  issue  such  certificate. 

The  effect  of  the  agreement  was  to  place  the  legal  title  of  the  ma- 
jority of  the  stock  in  Henr\'  Ream,  who  was  given  the  power  to  vote 
the  stock  for  10  years  upon  all  questions  and  at  every  meeting  of  the 
stockholders  according  to  his  own  discretion,  uncontrolled  by  the 
stockholders  in  any  way.  He  then  owned  37  shares  of  stock,  and  thus 
the  entire  control  of  the  corporation  was  conferred  upon  the  owner  of 
less  than  1  per  cent,  of  the  stock,  with  no  power  in  the  owners  of  the 
remaining  99  per  cent,  to  interfere  in  any  wa}'.  We  have  held  that  it 
is  legitimate  for  the  owners  of  a  majority  of  the  stock  of  a  corporation 
to  combine  for  the  purpose  of  controlling  the  corporation.  Faulds  v. 
Yates,  57  111.  416,  11  Am.  Rep.  24;  Venner  v.  Chicago  City  Railway 
Co.,  258  111.  523,  101  N.E.  949.  In  this  case,  however,  the  agreement 
goes  much  farther  than  any  case  which  has  heretofore  arisen  in  this 


SECT.  III.]  LUTHY    V.  REAM.  915 

court.  The  voting  power  of  the  stock  is  absokitely  separated  from 
its  ownership  for  a  term  of  years,  so  that  the  real  owners  of  the  prop- 
erty are  during  that  time  entirely  divested  of  its  management  and 
control,  or  of  any  participation  therein.  Our  law  contemplates  that 
corporations  shall  be  controlled  by  a  majority  of  the  stockholders, 
acting  through  directors  elected  by  them  in  person  or  by  proxy,  and 
it  has  been  held  that  a  by-law  of  a  corporation  which  authorizes 
bondholders  to  vote  for  directors  at  stockholders'  meetings  is  in  vio- 
lation of  both  the  constitutional  and  statutory  provisions  requiring 
directors  to  be  elected  by  a  majority  of  the  shares  of  stock  of  the  cor- 
poration. Durkee  v.  People,  155  111.  354,  40  N.E.  626,  46  Am.  St. 
Rep.  340.  The  power  to  vote  for  directors  can  be  exercised  only  by 
stockholders  in  person  or  by  proxy,  and  they  cannot  be  deprived  or 
deprive  themselves  of  this  power.  Stockholders  cannot  evade  the 
duty  imposed  upon  them  by  law  of  using  their  power  as  stockholders 
for  the  welfare  of  the  corporation  and  the  general  interest  of  its 
stockholders.  A  stockholder  may  refuse  to  exercise  his  right  to  vote 
and  participate  in  stockholders'  meetings,  but  he  cannot  deprive 
himself  of  the  power  to  do  so.  [The  court  quoted  from  the  Shepaug 
Voting  Trust  Cases,  60  Conn.  579.] 

A  stockholder  may  ordinarily  withdraw  from  a  combination  to 
control  the  majority  of  the  stock  of  a  corporation,  and  a  contract  not 
to  transfer  his  shares  to  the  opposition  or  vote  against  the  combina- 
tion, although  it  is  expressly  agreed  that  the  contract  shall  be  irre- 
vocable. 1  Beach  on  Corporations,  §  305.  In  §  306  of  the  same  work 
it  is  said:  "On  general  principles,  the  right  to  vote  on  stock  cannot 
be  separated  from  the  ownership  in  such  sense  that  the  elective 
franchise  shall  be  in  one  man  and  the  entu'e  beneficial  interest  in 
another,  nor  to  any  extent  unless  the  circumstances  take  the  case 
out  of  the  general  rule.  It  matters  not  that  the  end  is  beneficial  and 
the  motive  good,  because  it  is  not  always  possible  to  ascertain  objects 
and  motives,  and  if  such  a  severance  were  permissible  it  might  be 
abused." 

While  the  pooling  of  stock  for  the  purpose  of  electing  directors  and 
officers  and  controlling  the  management  and  business  of  the  corpora- 
tion is  not  necessarily  illegal,  an  agreement  the  purpose  and  effect  of 
which  are  to  permit  the  affairs  of  the  corporation  to  be  managed  by 
the  determination  of  persons  other  than  its  stockholders  or  by  a 
minority  of  its  own  stockholders  is  invalid.  Shepaug  Voting  Trust 
Cases,  supra;  Kreissl  v.  Distilling  Co.  of  America,  61  N.J.  Eq.  5,  47 
Atl.  471;  White  v.  Thomas  Inflatable  Tire  Co.,  52  N.J.  Eq.  178,  28 
Atl.  75;  Warren  v.  Pim,  66  N.J.  Eq.  353,  59  Atl.  773;  Bache  v.  Cen- 
tral Leather  Co.,  78  N.J.  Eq.  484,  81  Atl.  571;  Morel  v.  Hoge,  130  Ga. 
625,  61  S.E.  487,  16  L.R.A.  (N.S.)  1136,  14  Ann.  Cas.  935;  Harveij  v. 
Li7iville  Improvement  Co.,  118  N.C.  693,  24  S.E.  489,  32  L.R.A.  265, 
54  Am.  St.  Rep.  749;  Bridgers  v.  First  Nat.  Bank  of  Tarboro,  152  N.C. 


916  LUTHY    V.  REAM.  [CHAP.  II. 

293,  67  S.E.  770,  31  L.R.A.  (N.S.)  1 199.  The  principle  to  be  deduced 
from  these  cases  is  that  the  holders  of  the  majority  of  the  shares  of 
stock  in  a  corporation  may  control  its  manaKcmont,  and  every  person 
who  becomes  an  owner  of  stock  has  a  riglit  to  believe  that  the  cor- 
poration will,  and  to  insist  that  it  shall,  Ix;  managed  by  the  majority; 
that  the  power  to  vote  is  inherently  attached  to  and  inseparable  fiom 
the  real  ownership  of  each  share,  and  can  only  l^  delegated  by  proxy, 
with  power  of  revocation;  that  each  stockholder  must  be  free  to  cast 
his  vote,  whether  by  himself  or  by  proxy,  for  the  best  interest  of  the 
corporation;  and  that  each  stockholder  has  the  right  to  demand  that 
every  other  stockholder,  if  he  desires  to  do  so,  shall  have  the  right  to 
exercise  at  each  annual  meeting  his  own  judgment  as  to  the  best 
interest  of  all  the  stockholders,  untrammeled  by  dictation,  antl  un- 
fettered by  the  obligation  of  any  contract. 

We  held  in  Venner  v.  Chicago  City  Railway  Co.,  supra,  that  the 
election  of  directors  under  the  provisions  of  the  trust  agreement  there 
involved,  in  the  manner  therein  provided,  was  really  an  election  by 
the  stockholders  through  their  proxies,  and  so  was  not  in  violation  of 
any  constitutional  or  statutory  provi.sions.  There  is  no  such  thing  as 
an  irrevocable  proxy  to  vote  stock  not  coupled  with  any  interest  in 
the  stock  itself  other  than  the  right  to  vote  it.  A  proxy,  though 
stated  to  be  irrevocai)le,  may  be  revoked  at  any  time.  1  Cook  on 
Corporations,  §  610.  This  contract  gave  to  Henry  Ream  alone  the 
power  for  ten  years  to  elect  three  of  the  five  directors  of  the  corpora- 
tion and  to  formulate  and  determine  its  policy,  unrestrained  and  un- 
influenced by  all  the  other  stockholders  or  any  of  them.  The  surren- 
der of  their  duties  by  the  stockholders  is  complete,  and  the  majority 
have  no  power  to  direct  the  trustee;  for  he  alone  is  to  determine  how 
the  stock  shall  be  voted,  and  to  vote  it,  upon  any  question,  at  any 
time  and  every  meeting  of  the  stockholders.  He  no  longer  represents 
the  majority  of  the  stock,  for  70  shares  have  been  sold  to  the  com- 
plainant Cahill,  who  has  the  entire  beneficial  interest  therein.  Other 
shares  may  be  sold,  so  that  before  the  expiration  of  the  trust  the 
trustee,  who  originally  represented  a  majority  of  the  stock,  but  now 
represents  only  a  minority,  may  represent  only  his  own  37  shares,  and 
yet,  if  the  trust  agreement  is  to  be  enforced,  have  absolute  manage- 
ment and  control  of  the  corporation. 

In  Smith  v.  San  Francisco  &  North  Pacific  Railroad  Co.,  115  Cal. 
584, 47  Pac.  582,  35  L.R.A.  309,  56  Am.  St.  Rep.  119,  it  was  held  that 
an  agreement  by  several  purchasers  of  stock  in  a  corporation  to  vote 
it  as  a  unit  for  five  years,  in  accordance  with  the  decision  of  the  ma- 
jority, is  binding  upon  the  parties  and  irrevocable.  In  Carnegie  Trust 
Co.  V.  Security  Life  Ins.  Co.  of  America,  111  Va.  1,  68  S.E.  412,  31 
L.R.A.  (N.S.)  1186,  21  Ann.  Cas.  1287,  the  Supreme  Court  of  Vir- 
ginia held  that  an  agreement  among  stockholders  to  place  their  stock 
in  the  hands  of  trustees  for  25  years,  to  enable  the  trustees  to  manage 


SECT.  III.]  MOBILE    &    OHIO    R.R.  CO.  V.  NICHOLAS.  917 

the  corporation,  constitute  a  valid  trust.  These  cases  are  inconsistent 
with  the  views  which  we  have  expressed  and  the  cases  cited  in  sup- 
port of  them,  but  in  our  judgment  the  latter  cases  state  the  true  rule. 
Although  Thomas  Cahill  purchased  his  stock  with  notice  of  the 
agreement,  that  agreement  was  not  binding  upon  him  or  his  vendors 
if  he  or  they  wished  to  withdraw  from  it,  and  upon  his  demand  for  a 
certificate  of  stock  he  was  entitled  to  receive  it. 


MOBILE  &  OHIO  R.R.  CO.  v.  NICHOLAS, 

98  Ala.  92.     1893. 

Bill  in  equity  by  stockholder  in  Mobile  &  Ohio  R.R.  Co.  against 
the  railroad  company,  the  Farmers'  Loan  &  Trust  Co.,  ei  al. 

In  1876,  the  railroad  company  was  in  the  hands  of  a  receiver;  de- 
crees of  foreclosure  had  been  rendered  in  suits  on  mortgages;  and  its 
total  indebtedness  largely  exceeded  the  value  of  the  entire  railroad 
property.  An  arrangement  was  made  between  the  creditors  and  the 
company  whereby  the  creditors  accepted  debentures  in  lieu  of  their 
original  evidences  of  debt ;  and  the  great  majority  of  the  stockholders, 
in  effect,  conferred  upon  a  trustee  irrevocable  power  to  vote  upon  the 
shares  so  long  as  any  of  the  debentures  should  be  outstanding.  The 
shareholders  assigned  their  stock  to  the  committee  of  reorganization; 
the  committee  gave  the  Farmers'  Loan  &  Trust  Company  an  irre- 
vocable power  of  attorney  to  vote  upon  the  stock  so  long  as  any  of 
the  debentures  should  be  outstanding.  The  shareholders  who  had 
thus  assigned  their  stock  to  the  committee  received  in  exchange  new 
certificates  entitling  them  to  all  the  rights  and  privileges  which  per- 
tain to  the  ownership  of  the  said  shares,  saving  and  excepting  that 
such  ownership  is  subject  to  the  power  heretofore  granted  by  the 
owners  of  said  shares  to  the  Farmers'  Loan  &  Trust  Company,  in 
trust  for  the  security  of  the  debentures,  to  vote  upon  said  shares. 

Under  the  foregoing  adjustment,  all  the  creditors,  except  those 
secured  by  newly  issued  first  mortgage  bonds,  accepted  the  deben- 
tures provided  for,  in  Ueu  of  their  former  evidence  of  debt;  the  fore- 
closure decrees  were  assigned  to  the  Farmers'  Trust  Company;  the 
receiver,  under  the  orders  of  the  court,  turned  the  property  over  to 
the  railroad  company;  and  the  corporation  resumed  its  control  and 
management  of  its  property  and  business. 

In  1892,  the  plaintiffs  denied  the  authority  of  the  Trust  Company, 
under  the  power  of  attorney  held  by  it  to  vote  their  stock,  and 
claimed  for  themselves  the  right  to  vote  their  own  stock.  The  right 
of  plaintiffs  to  vote  at  the  stockholders'  meeting  was  denied.  There- 
upon plaintiffs  filed  the  present  bill;  praying,  among  other  things, 
that  the  Farmers'  Loan  &  Trust  Company  be  enjoined  from  voting 


918  MOBILE    &    OHIO    R.R.  CO.  V.  NICHOLAS.  [ciIAP.  II. 

on  the  stock  under  the  power  of  attorney;  and  that  the  raih'oad  com- 
pany be  enjoined  from  refusing  to  accept  the  votes  of  plaintiiTs  and 
of  other  stockholders. 

A  prehminary  injunction  was  gi-anted.  The  defendants  moved  to 
dismiss  tlic  l)ill  for  want  of  ecjuity,  and  to  dissolve  the  injunction. 
The  Chancellor  overruled  the  motions.  From  his  decrees  an  appeal 
was  taken. 

Coleman,  J.  The  facts  stated  in  the  bill  show,  that  by  the  reor- 
ganization and  compromise  of  1870,  perfected  in  1879,  the  voting 
power  was  severed  from  the  stockholder,  and  until  the  payment  of 
the  debentures,  irrevocably  vested  in  the  Farmers'  Trust  Company 
and  the  debenture  holders.  It  is  contended  for  complainants  that 
the  agreement  was,  and  "is  void  per  se,"  because  1st :  "  It  contravenes 
the  language  of  the  charter  of  tlie  railroad  company;  and  2d,  because 
it  is  against  public  policy." 

The  charter  expressly  provides,  "Each  share  shall  entitle  the 
holder  thereof  to  one  vote,  which  vote  may  be  given  by  said  stock- 
holder in  person,  or  by  lawful  proxy." 

So  far,  then,  a.s  the  right  to  vote  by  proxy  is  questioned,  the  charter 
expressly  grants  the  power,  and  the  legislature  has  thus  declared  that 
it  is  not  unlawful,  per  se,  to  separate  the  voting  power  from  the  stock- 
holder, so  far  as  the  appointment  of  a  proxy  may  i)e  considered  a  sev- 
erance of  the  voting  power.  "Where  a  proxy  is  duly  constituted,  and 
the  power  of  the  appointment  is  without  limitation,  a  vote  cast  by 
the  proxy  binds  the  stockholder,  whether  exercised  in  behalf  of  his 
interest  or  not,  to  the  same  extent  as  if  the  vote  had  been  cast  by  the 
stockholder  in  person.  We  do  not  hold  that  a  power  of  attorney, 
absolute  in  its  terms,  will  authorize  the  agent  or  pro.xy,  to  effect  con- 
tracts, or  legalize  acts,  outside  of  the  scope  of  his  authority,  or  con- 
trary to  law  or  public  policy,  neither  could  the  stockliolder  in  person 
by  his  vote  effectuate  such  a  result.  The  invalidity  of  acts  of  this 
character  by  a  proxy,  rightly  understood,  is  not  made  to  rest  upon 
the  ground  that  there  has  been  a  separation  of  the  voting  power  from 
the  stockholders,  but  because  of  the  unlawful  purpose  for  which  the 
proxy  was  appointed,  or  the  unlawful  end,  attempted  to  be  effected 
by  the  exercise  of  the  voting  power.  The  distinction  should  be  kept 
in  view.  .  .  . 

Take  the  case  of  Hafer  v.  New  York,  Lake  Erie  &  Western  R.R.  Co., 
14  Weekly  Law  Bulletin,  p.  68.  The  case  is  thus  stated:  "A  control- 
ling interest  in  the  stock  of  the  Cincinnati,  Hamilton,  and  Dayton 
Railroad  Company  was  bought  up  in  1882,  and  placed  in  the  name  of 
H.  I.  Jewett,  who  was  Vice-President  of  the  New  York,  Lake  Erie, 
and  Western  Railway  Company,  under  the  agreement  that  he  should 
give  irrevocable  proxy  to  such  persons  as  the  Erie  should  appoint  to 
vote  on  the  stock;  that  his  stock  certificates  should  be  left  in  the 
hands  of  trustees,  and  that  they  should  issue  to  the  respective  owners 


SECT.  III.]  MOBILE    &    OHIO    R.R.  CO.  V.  NICHOLAS.  919 

of  the  stock  trust,  or  pool  certificates  for  amounts  equal  to  their 
respective  equitable  interest.  On  all  stock  thus  pooled,  the  Erie 
agreed  to  guarantee  a  certain  dividend." 

The  court  declared  the  contract  void  "both  on  the  ground  that  the 
power  is  denied  to  one  corporation  thus  to  acquire  control  of  another, 
and  that  the  stockholder  can  not  barter  away  the  right  to  vote  upon 
his  stock."  True  the  opinion  declares  as  an  independent  proposition, 
"that  the  stockholder  can  not  barter  away  the  right  to  vote  upon  his 
stock,"  and  yet  it  is  shown,  by  the  facts  of  the  case  and  the  opinion, 
that  the  purpose  to  be  effected  by  the  barter  of  the  right  to  vote,  to 
wit,  the  placing  "of  an  Ohio  corporation  into  the  hands  of  a  New 
York  corporation,"  the  enabling  "one  corporation  to  acquire  control 
over  another"  was  illegal.  Speaking  of  the  facts  of  the  case  the  opin- 
ion proceeds  as  follows:  "It  is  obvious  that  the  rule  as  to  executed 
contracts  can  not  be  applied  to  the  plaintiff  for  any  such  reason  as 
that  last  mentioned,  for  he  was  not  a  party  to  the  contract.  There  are 
other  cases  wherein  special  circumstances  made  it  imperative,  as  a 
matter  of  good  faith,  that  the  contract  should  not  be  interfered  with, 
and  others,  when  the  protection  of  interests  acquired  by  innocent 
parties  caused  the  court  to  refrain."  There  is  no  rule  of  law  which 
requires  contracts  to  be  upheld  which  are  void  as  against  pubUc 
policy,  in  order  to  preserve  "good  faith"  or  "innocent  parties."  The 
rule  of  estoppel  is  often  applied  to  prevent  undue  advantage  by  one 
person  over  another,  but  the  rule  does  not  extend  to  contracts  wliich 
are  void  because  contravening  public  policy.  Considering  the  opin- 
ion as  an  entirety,  we  do  not  regard  it  as  authority  to  the  proposition, 
that  an  agreement  which  provides  for  a  separation  of  the  right  to 
vote  from  the  holder  of  the  stock  is  "per  se,"  at  all  times  and  under 
all  circumstances  contrary  to  public  policy  and  void.  We  have  ex- 
amined case  after  case  and  find  generally  that  the  agreements  de- 
clared void  by  the  courts,  where  the  power  to  vote  was  separated 
from  the  stockholder  and  vested  in  third  persons,  were  under  circum- 
stances which  showed  that  the  purpose  to  be  accomplished  was  un- 
lawful, such  as  the  courts  would  not  sanction  if  the  principal  had 
voted  and  not  a  proxy;  and  in  cases  of  a  mere  dry  trust,  it  is  held  that 
the  stockholder  might  revoke  a  power  of  attorney  in  form  irrevocable. 
The  doctrine  as  to  dry  trust  does  not  arise  in  this  case.  ...  If  there 
were  no  precedents,  upon  principle,  we  would  hold  that  in  determin- 
ing the  validity  of  an  agreement,  which  provides  for  the  vesting 
of  the  voting  power  in  a  person  other  than  the  stockholder,  regard 
should  be  had  to  the  condition  of  the  parties,  the  purpose  to  be  ac- 
complished, the  consideration  of  the  undertaking,  interests  which 
have  been  surrendered,  rights  acquired,  and  the  consequences  to  re- 
sult. The  law  does  not  make  contracts  for  parties,  neither  will  it 
annul  them  except  to  preserve  its  own  majesty,  and  to  conserve  the 
greater  interest  of  the  public.  Let  us  examine  the  conditions  of  the 


920  MOBILE    4    OHIO    R.R.  CO.  V.  NICH0L.A.3.  (CKAP.  II. 

parties,  the  purpose  in  view  and  effect  of  the  agreement  of  1876, 
consummated  in  1879,  the  consideration  and  interest  surrendered 
and  rights  acquired  l)y  the  readjustment,  and  issue  of  the  debentures, 
the  position  of  tlie  compUiinants  thereto,  and  the  results  of  holding 
that  reorganization,  per  se,  void. 

The  complainants  belong  to  the  class  known  as  "Assenting  Stock- 
holders." They  surrendered  their  stock  to  the  committee  of  reor- 
ganization in  order  that  the  power  of  attorney,  executed  to  the  trust 
company  by  tiie  committee  of  reorganization,  might  be  executed,  and 
that  the  debentures  should  be  issued  to  the  creditors  of  the  raihoad 
corporation.  The  certificates  of  stock  held  by  them  show,  upon  their 
face,  that  they  are  sul)ject  to  the  power  of  attorney  and  to  tlie  rights 
of  the  debenture-holders.  At  the  time  the  plan  of  adjustment  was 
agreed  upon  the  railroad  company  was  in  the  hands  of  a  receiver. 
Decrees  of  foreclosure  rendered  against  the  company.  The  indebted- 
ness far  exceeded  the  value  of  the  raihoad  company's  pro{)crty.  The 
execution  of  the  decrees  of  foreclosure,  by  a  .sale  of  the  jiroperty,  and 
the  prosecutions  of  the  admitted  claims  against  the  railroad  com- 
pany, would  necessarily  have  transferred  the  property  to  other  parties 
and  wiped  out  every  vestige  of  present  available  interest  or  right  of 
the  stockhokler,  or  hope  of  future  profit.  The  creilitors  helil  the  van- 
tage ground,  and  in  law  their  rights  and  interest  were  paramount  to 
the  stockholders.  The  latter  might  accept  propositions  Ijut  were  in  no 
position  to  dictate  terms.  These  were  the  circumstances  under  which 
the  settlement  and  agreement  was  made.  Stated  in  short,  the  com- 
promise and  settlement  led  to  the  issue  of  the  del)entures  to  the  cred- 
itors in  lieu  of  their  original  evidences  of  debt,  and  a  mortgage  upon 
certain  property  to  secure  them,  a  plan  for  a  sinking  fund  for  their 
benefit,  and  the  right  and  privilege  under  an  irrevocable  jiower  of 
attorney  to  vote  the  stock  until  the  debentures  were  paid.  The  power 
of  attorney  was  not  in  perpetuity,  or  absolute,  but  only  until  the 
debentures  were  paid,  and  a  fair  construction  under  the  circum- 
stances required  that  the  voting  power  should  be  used  fairly  and 
honestly  to  this  end,  or  as  stated  in  the  agreement  itself,  "for  the 
uses  and  purposes  declared  in  said  memorandum,  and  until  the  same 
are  fully  accomplished."  In  consideration  therefor  the  decrees  of 
foreclosure,  at  first  suspended,  were  transferred  to  the  trust  com- 
pany, creditors  surrendered  their  claims  and  accepted  in  lieu  thereof 
the  debentures,  the  receiver  under  the  orders  of  the  court  restored  the 
property  to  the  Mobile  &  Ohio  Railroad  Company,  which  resumed 
management  and  control  of  its  property  and  affairs,  and  the  stock 
preserved  to  the  stockholder. 

To  this  agi-eement  over  forty-five  thousand  out  of  a  total  of  about 
fifty-three  thousand  of  shares  of  stock  assented,  and  among  those 
which  assented  were  complainants.  The  creditors  had  the  right  to 
accept  debentures  for  their  debts.   The  agreement  continued  in  ex- 


SECT.  III.]  BRIGHTMAN    V.  BATES.  921 

istence  the  corporation  and  preserved  to  the  stockholders  their  stock. 
It  did  not  violate  the  charter  of  the  railroad  corporation.  The  pur- 
pose was  legal,  the  means  used  did  not  contravene  any  statute  of  the 
State  or  principle  of  public  policy,  and  was  within  the  scope  of  the 
power  of  the  contracting  parties.  Good  faith  on  the  part  of  the  as- 
senting stockholders,  whose  interests  were  thus  preserved,  and  to 
those  who  accepted  the  debentures  in  lieu  of  other  evidences  of  debt 
and  securities,  and  to  those  who  have  since  purchased  them  upon  the 
faith  of  the  plan  of  compromise  demand  that  the  terms  of  the  con- 
tract be  fulfilled. 


BRIGHTMAN  v.  BATES. 

175  Mass.  105.     1900. 

Holmes,  C.J.  These  are  actions  upon  a  covenant  executed  by  the 
defendants.  The  covenant  recites  that  1,360  shares  of  the  stock  of 
the  Union  Street  Railway  Company  in  New  Bedford  have  been  or  are 
about  to  be  purchased  by  a  syndicate,  under  an  agreement  of  Sep- 
tember 4,  1894,  that  the  plaintiff  has  been  largely  instrumental  in 
organizing  the  syndicate,  and  that  ''he  considers  that  for  his  services 
therein  in  case  the  syndicate  is  formed,  and  the  aforesaid  shares  pur- 
chased, he  should  receive  for  his  compensation"  a  certain  amount  of 
stock.  These  recitals  are  followed  by  several  covenants  on  the  part 
of  the  defendants  and  one  other  to  give  the  plaintiff,  in  stock  of  the 
company  at  $169  a  share,  a  commission  of  $4  a  share  "upon  the 
number  of  shares  of  said  stock  we  sell  to  said  syndicate,  less  the  num- 
ber of  shares  we  have  severally  subscribed  as  members  of  said  syndi- 
cate," and  certain  other  deductions,  in  case  the  compensation  was 
not  got  from  the  syndicate.  The  judge  before  whom  the  case  was 
tried  found  for  the  plaintiff,  and  the  case  is  here  upon  a  report  of 
requests  for  rulings  which  in  various  forms  raise  the  question  whether 
such  a  finding  can  be  justified  in  law.  .  .  . 

The  syndicate  referred  to  was  formed  under  another  written  agree- 
ment, whereby  the  subscribers  recite  their  desire  to  become  members 
of  it  to  the  end  that  control  of  the  railway  company  and  advantage 
to  them  may  be  gained,  agree  to  take  the  shares  set  against  their 
names  at  $169  a  share,  and  further  agree  after  the  purchase  to  enter 
into  a  pooling  contract  whereby  all  the  syndicate  stock  "shall  be 
voted  at  each  annual  meeting  for  a  period  of  not  less  than  three  years, 
for  such  board  of  directors  as  shall  be  named"  by  a  committee  of  five 
of  the  subscribers,  with  power  to  a  majority  of  them  to  fill  any  va- 
cancy in  the  committee.  It  is  said  that  this  agreement  was  illegal, 
and  that  the  covenant  sued  upon  was  so  directly  aimed  at  helping  to 
bring  the  unlawful  arrangement  about  that  it  must  fall  with  the 


922  BRIGIITMAN    V.  BATES.  (CHAP.  II. 

other.  Barnes  v.  Smith,  lo9  Mass.  344,  347;  Gibbs  v.  Consolidated 
Gas  Co.,  130  U.S.  390. 

Wityiout  cUuitlinK  whether,  if  the  covenant  was  deiKMulent  upon 
the  rendering  of  further  aerviee.s,  it  was  .so  elost^ly  connected  with  the 
syndicate  agreement  its  to  fall  if  the  latter  cannot  Ix?  su.stained,  we 
pas.s  to  the  (jucstion  whether  the  latter  aKreenient  is  unlawful  on  its 
face,  U'aring  in  mind  that  unles.s  it  i.s  unlawful  on  it.s  face  it  h:us  the 
advantage  of  a  finding  in  favor  of  the  plaintiff.  In  dealing  with  this 
question  it  does  not  need  to  Ijc  .said  that  combination  of  common  in- 
terests is  necessary,  and  constantly  is  taking  place.  It  is  as  legitimate 
for  a  majority  of  stockholders  to  comhine  as  for  other  |)oople.  The 
fact  that  they  exjx^ct  "gain  and  adv.iiitage"  —  in  the  words  of  the 
.siyndicate  agreement  —  to  accrue  to  them,  does  not  make  the  combi- 
nation unlawful.  That  expectation  and  intent  would  have  that  efTect 
only  if  the  gain  w:us  to  Iw  at  the  exix«nse  of  the  corporation,  or  in 
.some  way  w:us  intended  to  work  a  wrong  to  the  other  stockholders. 
No  such  intent  app<'ai's,  and  although  it  is  impossible  not  to  view 
such  an  arrangement  with  suspicion,  it  is  also  impossible  to  let  suspi- 
cion take  the  place  of  proof. 

The  only  .serious  gi-ound  of  objection  is  the  agreement  that  the 
stock  "shall  Ik'  voted  at  each  annual  m«'<'ting"  for  thre<*  years,  for  a 
board  of  directoi-s  named  by  the  committee.  It  is  suggested  that  this 
was  an  unlawful  attempt  i)y  the  contracting  parties  to  deprive  them- 
selves in  advance  of  their  delil)erative  power  and  duty  as  stockhold- 
ei-s,  and  to  sul>mit  tluMiLselves  to  the  dictation  of  five  men  who  in 
the  future  might  not  be  even  meml)ers  of  the  cor|K)ration.  Perhaps 
the  notion  upon  which  the.se  suggestions  are  founded  has  lxK}n  pressed 
somewhat  further  than  would  l)e  warranted  by  more  far-.seeing  views, 
but  we  have  no  occasion  to  eliscu.>NS  it  in  this  broad  form.  The  (jues- 
tion  before  us  is  not  whether  it  would  be  po.<sible  to  carry  out  the 
contract  in  a  way  which  woukl  have  nuule  the  contract  bad  if  speci- 
fied in  it,  but  whether  it  was  impossible  to  carr>'  out  the  contract  in  a 
way  which  might  lawfully  have  be<'n  specified  in  advance.  We  put 
the  question  in  this  form  i)ecau.se  there  is  no  doubt  that  the  sub- 
scribers might  actually  have  done  the  things  stipulated  without  giv- 
ing any  one  a  right  to  complain.  That  is  to  say,  they  might  have  held 
their  stock  and  voted  by  previous  understanding  according  to  the 
advice  of  the  committee,  as  long  as  they  chose.  The  question  is  what 
they  might  contract  to  do;  for  this  is  supposed  to  be  a  case  where  a 
contract  to  do  lawful  acts  is  unlawful. 

The  syndicate  agreement  does  not  specify  how  it  is  to  be  carried 
out.  It  contemplates  the  making  of  another  contract.  As  the  later 
contract  is  to  be  a  pooling  contract,  it  was  possible,  if  not  probable, 
that  one  element  of  the  arrangement  would  be  that  the  title  to  the 
stock  should  be  given  to  a  trustee,  and  this  happened  in  fact.  During 
the  three  years  the  stock  seems  to  have  been  held  by  a  bank.  The 


SECT.  III.]  BRIGHTMAN    V.  BATES.  923 

stock  was  transferred  to  it,  and  was  not  transferred  to  the  members 
of  the  syndicate.  But  it  would  have  been  possible,  consistently  with 
the  terms  of  the  syndicate  agreement,  that  the  committee  who  were 
to  name  the  board  of  directors  themselves  should  be  the  trustees.  In 
that  case  the  trustees,  of  course,  would  have  voted  on  the  stock. 
They,  not  their  cestuis  que  trust,  would  have  been  the  stockholders  for 
the  time  being.  We  know  notliing  in  the  policy  of  our  law  to  prevent 
a  majority  of  stockholders  from  transferring  their  stock  to  a  trustee 
with  unrestricted  power  to  vote  upon  it.  Brown  v.  Pacific  Mail 
Steamship  Co.,  5  Blatchf.  525,  527.  See  Greene  v.  Nash,  85  Maine, 
148. 

Supposing  that  the  committee  had  been  trustees,  what  would  the 
syndicate  agreement  have  amounted  to  then?  Merely  an  agreement 
by  each  of  the  trustees  to  vote  as  they  should  jointly  agree  to  vote, 
and  an  agreement  by  the  subscribers  not  to  demand  back  their  shares 
for  three  years.  The  latter  term  certainly  is  not  illegal,  whether 
valid  or  not.  A  stockholder  has  a  right  to  put  his  shares  in  trust, 
whatever  his  motive.  If  the  trust  is  an  active  one  he  cannot  termi- 
nate it  at  will,  and  the  attempt  to  cut  himself  off  by  contract,  instead 
of  by  the  imposition  of  duties,  from  ending  it,  certainly  is  not  enough 
to  poison  the  covenant  with  the  plaintiff.  See  Williams  v.  Mont- 
gomery, 148  N.Y.  519,  525.  It  might  be  held  that  the  duty  of  voting 
incident  to  the  legal  title  made  such  a  trust  an  active  one  in  all  cases. 
As  to  the  arrangement  for  the  trustees  uniting  to  elect  their  candi- 
dates, the  decisions  of  other  States  show  that  such  arrangements 
have  been  upheld,  and  we  do  not  think  that  it  needs  argument  to 
prove  that  they  are  lawful.  If  stockholders  want  to  make  their  power 
felt,  they  must  unite.  There  is  no  reason  why  a  majority  should  not 
agree  to  keep  together.  Faulds  v.  Yates,  57  111.  416;  Smith  v.  San 
Francisco  &  North  Pacific  Railway,  115  Cal,  584;  Havemeyer  v.  Have- 
meyer,  11  Jones  and  Spen.  506,  512,  513,  affirmed,  according  to 
Beach,  Corporations,  §  304,  n.  6,  and  Fisher  v.  Bush,  35  Hun,  641,  in 
86  N.Y.  618.  See  Brown  v.  Pacific  Mail  Steamship  Co.,  5  Blatchf. 
525,  527. 

We  have  considered  such  decisions  elsewhere  as  have  been  called 
to  our  attention  or  found  by  us.  Few  of  them  are  by  courts  of  final 
resort.  Nothing  that  we  have  found  in  them  satisfies  us  that  the 
judge  below  was  not  warranted  in  finding  for  the  plaintiff. 

Judgment  for  the  plaintiff. 

Note.  —  See  also  Smith  v.  San  Francisco  Ry.  Co.,  115  Cal.  584; 
Greene  v.  Nash,  85  :Me.  148;  Bowditch  v.  Jackson  Co.,  76  N.H.  351; 
Boyer  v.  Nesbitt,  227  Pa.  398  (c/.  Commonwealth  v.  Roydhouse,  233 
Pa.  234);  Thompson-Starrett  Co.  v.  Ellis  Granite  Co.,  86  Vt.'282; 
Carnegie  Trust  Co.  v.  Security  Insurance  Co.,  Ill  Va.  1;  Winscyr  v. 
Commonwealth  Coal  Co.,  63  Wash.  62. 


924  BRIGHTMAN    V.  BATES.  [ciUP.  II. 

New  York  Consolidated  Laws,  1909,  chapter  28,  section  25  (p. 
1327),  authorizes  voting  trusts  on  the  terms  there  stated,  one  of  which 
is  that  "every  other  stockholder,  upon  his  request  therefor,  may,  by  a 
like  agreement  in  writing,  also  transfer  his  stock  to  the  same  person 
or  persons  and  thereupon  may  participate  in  the  terms,  conditions 
and  privileges  of  such  agreement." 


CHAP.  III.]  SAWYER   V.  HOAG.  925 


CEL\PTER  III. 
CREDITORS.  1 


SAWYER  V.   HOAG. 

17  Wall.  (U.S.)  610.     1S73. 

Appeal  from  the  U.S.  Circuit  Court  for  the  Northern  District  of 
IlHnois. 

Bill  in  equity  by  Sawyer  against  Hoag,  assignee  of  the  Lumber- 
man's Insurance  Company  of  Chicago,  to  enforce  an  alleged  right  of 
set-off.  In  1865  the  company  was  incorporated  and  authorized  to 
begin  business  on  a  capital  of  S100,000,  of  which  not  less  than  one- 
tenth  should  be  paid  in,  the  residue  to  be  secured.  The  directors 
stated  to  most  of  those  invited  to  subscribe  that  only  15  per  cent 
would  be  required  to  be  paid  down  in  cash,  and  that  the  remaining  85 
per  cent  would  be  lent  back  to  the  subscriber,  and  a  note  taken  there- 
for payable  in  five  years,  with  seven  per  cent  interest,  secured  by  col- 
lateral. In  1865  Sawyer,  upon  the  above  understanding,  subscribed 
for  fifty  shares  of  the  par  value  of  $100  each.  He  gave  his  check  to  the 
company  for  $5000,  and  his  note  payable  to  it  in  five  j^ears  for  $4250 
(85  per  cent  of  the  par  value  of  the  stock)  with  interest;  delivered  to 
the  company  satisfactory  collateral  security;  and  received  from  the 
company  a  check  for  $4250,  by  way  of,  and  as  for  a  loan  thereof, 
from  the  company.  He  also  gave  the  company  authority  to  sell  the 
securities  in  case  of  default  in  payment  of  the  note  or  the  interest 
thereon. 

Subsequently  Sawyer  took  up  the  above  note,  and  gave  in  substi- 
tution another  note. 

The  original  transaction  was  treated  by  the  company  and  by 
Sawyer  as  a  loan  by  the  company  to  him,  and  his  stock  was  treated  as 
fully  paid  for.  At  various  times  after  the  giving  of  the  note,  the  com- 
pany reported  to  the  authorities  of  the  State  of  Illinois  and  of  other 
States  that  its  capital  stock  was  fully  paid. 

In  October,  1871,  the  company  was  rendered  insolvent  by  the 
great  fire  in  Chicago. 

In  January,  1872,  Sawyer,  having  then  good  reason  to  believe  that 
the  company  was  insolvent,  purchased  of  one  Hayes,  for  33  per  cent 

'  See  also  the  Chapter  on  Issues  of  Stock  at  a  Discount  or  for  Overs-alued  Property, 
supra,  and  the  Chapter  on  the  Rights  of  Creditors  as  affected  by  Reorganizations, 

infra. 


926  SAWYER    V.  HOAG.  [CHAP.   III. 

of  its  par  value,  a  certificate  of  an  adjusted  loss  for  $5000  against  the 
company. 

In  June,  1872,  a  petition  in  l)ankruptcy  was  filed  against  the  com- 
pany; and,  it  having  been  adjudicated  a  bankrupt,  Hoag  was  ap- 
pointed its  assignee. 

Hoag  tlcmanded  of  Sawyer  payment  of  the  note  for  $4250.  Sawyer 
insisted  that,  under  Section  20  of  the  Bankrupt  Act,  he  had  a  right 
to  set  off  the  certificate  of  adjusted  loss  for  S5000.  Hoag  refused  to 
allow  the  set-off,  and  was  about  to  sell  the  collateral  securities  in  ac- 
cordance with  the  authority  given  by  Sawyer  to  the  company.  There- 
upon Sawyer  filed  the  present  bill  to  enforce  tiie  .set-olT;  alleging, 
among  other  things,  that  the  note  given  i)y  him  to  the  company  was 
for  money  lent  to  him.  The  assignee,  in  his  answer,  denied  that  the 
note  was  for  money  lent,  and  averred  that  it  wius  in  fact  for  a  balance 
due  by  Sawyer  for  his  stock  subscription  which  had  nevi-r  been  paid. 

The  case  was  submitted  to  the  court  below  on  an  agreetl  statement 
of  facts.  That  court  decreed  against  the  complainant,  Sawj'er,  who 
appealed  to  this  court. 

Miller,  J.  The  first  and  most  important  question  to  be  decided  in 
this  case  is  whether  the  indebtedness  of  the  ajipi'llant  to  the  insurance 
company  is  to  be  treated,  for  the  purposes  of  this  suit,  as  really  based 
on  a  loan  of  money  by  the  company  to  him,  or  as  representing  his 
unpaid  stock  suljscription. 

The  charter  under  which  the  company  was  organized  authorized  it 
to  commence  business  upon  a  capital  stock  of  $100,000,  with  ten 
thousand  paid  in,  and  the  remainder  secured  by  notes  with  mortgages 
on  real  estate  or  otherwise.  The  transaction  by  which  the  appellant 
professes  to  have  paid  up  his  stock  subscription  is,  shortly,  this:  He 
gave  to  the  company  his  check  for  the  full  amount  of  his  subscrip- 
tion, namely,  $5000.  He  took  the  check  of  the  company  for  $4250, 
being  the  amount  of  his  subscription  less  the  15  per  cent  required  of 
each  stockholder  to  be  paid  in  cash,  and  he  gave  his  note  for  the 
amount  of  the  latter  check,  with  good  collateral  security  for  its  pay- 
ment, with  interest  at  7  per  cent  per  annum.  The  appellant  and  the 
company,  by  its  officers,  agreed  to  call  this  latter  transaction  a  loan, 
and  the  check  of  the  appellant  payment  in  full  of  his  stock;  and  on 
the  books  of  the  company,  and  in  all  other  respects  as  between  them- 
selves, it  was  treated  as  payment  of  the  subscription  antl  a  loan  of 
money.  It  is  agreed  that  at  this  time  the  current  rate  of  interest  in 
Chicago  was  greater  than  7  per  cent,  and  it  is  not  stated  as  a  fact 
whether  these  checks  were  ever  presented  and  paid  at  any  bank,  or 
that  any  money  was  actually  paid  or  received  by  either  party  in  the 
transaction.  It  must,  therefore,  be  treated  as  an  agreement  between 
the  corporation,  by  its  officers,  on  the  one  part,  and  the  appellant,  as 
a  subscriber  to  the  stock  of  the  company,  on  the  other  part,  to  con- 
vert the  debt  which  the  latter  owed  to  the  company  for  his  stock  into 


CHAP.  III.]  SAWYER    V.  HOAG.  927 

a  debt  for  the  loan  of  money,  thereby  extinguishing  the  stock 
debt. 

Undoubtedly  this  transaction,  if  nothing  unfair  was  intended,  was 
one  which  the  parties  could  do  effectuall}^  as  far  as  they  alone  were 
concerned.  Two  private  persons  could  thus  change  the  nature  of  the 
indebtedness  of  one  to  the  other  if  it  was  found  to  be  mutually  con- 
venient to  do  so.  And  in  any  controversy  which  might  or  could  grow 
out  of  the  matter  between  the  insurance  company  and  the  appellant 
we  are  not  prepared  to  say  that  the  company,  as  a  corporate  body, 
could  deny  that  the  stock  was  paid  in  full. 

And  on  this  consideration  one  of  the  main  arguments  on  which  the 
appellant  seeks  to  reverse  the  decree  stands.  He  assumes  that  the 
assignee  in  bankruptcy  is  the  representative  alone  of  the  corporation, 
and  can  assert  no  right  which  it  could  not  have  asserted.  The  weak- 
ness of  the  argument  is  in  this  assumption.  The  assignee  is  the  repre- 
sentative of  the  creditors  as  well  as  the  bankrupt.  He  is  appointed  by 
the  creditors.  The  statute  is  full  of  authority  to  him  to  sue  for  and 
recover  property,  rights,  and  credits,  where  the  bankrupt  could  not 
have  sustained  the  action,  and  to  set  aside  as  void  transactions  by 
which  the  bankrupt  himself  would  be  bound.  All  this,  of  course,  is  in 
the  interest  of  the  creditors  of  the  banki'upt. 

Had  the  creditors  of  this  insolvent  corporation  any  right  to  look 
into  and  assail  the  transaction  by  which  the  appellant  claims  to  have 
paid  his  stock  subscription? 

Though  it  be  a  doctrine  of  modern  date,  we  think  it  now  well  estab- 
lished that  the  capital  stock  of  a  corporation,  especially  its  unpaid 
subscriptions,  is  a  trust  fund  for  the  benefit  of  the  general  creditors 
of  the  corporation.  And  when  we  consider  the  rapid  development 
of  corporations  as  instrumentalities  of  the  commercial  and  business 
world  in  the  last  few  years,  with  the  corresponding  necessity  of 
adapting  legal  principles  to  the  new  and  varying  exigencies  of  this 
business,  it  is  no  solid  objection  to  such  a  principle  that  it  is  modern, 
for  the  occasion  for  it  could  not  sooner  have  arisen. 

The  principle  is  fully  asserted  in  two  recent  cases  in  this  court, 
namel}^  Burke  v.  Smith,  16  Wall.  390,  and  in  New  Albany  v.  Burke, 
11  Wall.  96.  Both  these  cases  turned  upon  the  doctrine,  we  have 
stated,  and  upon  the  necessary  inference  from  that  doctrine  that  the 
governing  officers  of  a  corporation  cannot,  by  agreement  or  other 
transaction  with  the  stockholder,  release  the  latter  from  his  obliga- 
tion to  pay,  to  the  prejudice  of  its  creditors,  except  by  fair  and  honest 
dealing  and  for  a  valual^le  consideration. 

In  the  latter  case,  a  judgment  creditor  of  an  insolvent  railroad  com- 
pany, having  exhausted  his  remedy  at  law,  sought  to  enforce  this 
principle  by  a  bill  in  chancery  against  the  stockholders.  The  court, 
by  affirming  the  right  of  the  corporation  to  deal  with  the  debt  due  it 
for  stock  as  with  any  other  debt,  would  have  ended  the  case  without 


928  SAWYER  r.  noAG.  [chap.  hi. 

further  inquiry.  But  asserting,  on  the  contrary,  to  its  full  extent,  that 
such  stock  debts  were  trust  funds  in  their  lumds  for  the  l>enefit  of  the 
corporate  creditors,  and  must  in  all  cases  be  dealt  with  as  trust  funds 
are  dealt  with,  it  was  found  necessary  to  go  into  an  elaborate  inquiry 
to  ascertain  whether  a  violation  of  the  trust  had  been  committed. 
And  though  the  court  find  that  the  tran.saction  by  whicii  tiic  stock- 
holders had  been  released  was  a  fair  and  valid  one,  as  foundeil  on  the 
conditions  of  the  original  subscription,  the  assertion  of  the  general 
rule  on  the  subject  is  none  the  less  authoritative  and  emphatic. 

In  the  case  before  us  the  aasignee  of  the  bankrupt,  in  the  interest  of 
the  creditors,  has  a  right  to  in([uire  into  this  conventional  payment  of 
his  stock  by  one  of  the  shareholders  of  the  company;  and  on  that 
inquiry,  we  are  of  opinion  that,  as  to  these  creditors,  there  was  no 
valid  payment  of  his  stock  by  the  appellant.  We  do  not  base  this 
upon  the  ground  that  no  money  actually  passed  between  the  paities. 
It  would  have  been  just  the  same  if,  agreeing  beforehand  to  turn  the 
stock  debt  into  a  loan,  the  appellant  had  brought  the  money  with 
him,  paid  it,  taken  a  receipt  for  it,  and  carried  it  away  with  him. 
This  would  loe  precisely  the  eciuivalent  of  the  exchange  of  checks  l)e- 
tween  the  parties.  It  is  the  intent  and  purpose  of  the  transaction 
which  forbids  it  to  be  treated  as  valid  payment.  It  is  the  change  of 
the  character  of  the  debt  from  one  of  a  stock  subscription  unpaid  to 
that  of  a  loan  of  money.  The  debt  ceases  by  this  o[)eration,  if  effect- 
ual, to  be  the  trust  fund  to  which  creditors  can  look,  and  becomes 
ordinary  assets,  with  which  the  directors  may  deal  as  they  choose. 

And  this  was  precisely  what  was  designed  by  the  parties.  It  di- 
vested the  claim  against  the  stockholder  of  its  character  of  a  trust 
fund,  and  enabled  both  him  and  the  director  to  deal  with  it  freed 
from  that  charge.  There  are  three  or  four  of  these  cases  now  before  us 
in  which  precisely  the  same  thing  was  done  by  other  insurance  com- 
panies organized  in  Chicago,  and  we  have  no  doubt  it  was  done  by 
this  company  in  regard  to  all  their  stockholders. 

It  was,  therefore,  a  regular  system  of  operations  to  the  injury  of 
the  creditor,  beneficial  alone  to  the  stockholder  and  the  corporation. 

We  do  not  believe  we  characterize  it  too  strongly  when  we  say  that 
it  was  a  fraud  upon  the  public  who  were  expected  to  deal  with  them. 

The  result  of  it  was  that  the  capital  stock  of  the  company  was 
neither  paid  up  in  actual  money,  nor  did  it  exist  in  the  form  of  de- 
ferred instalments  properly  secured. 

It  is  said  by  the  appellant's  counsel  that  conceding  this,  it  is  still  a 
debt  due  by  him  to  the  corporation  at  the  time  that  he  became  the 
owner  of  the  debt  due  by  the  corporation  to  Hayes,  and,  therefore, 
the  proper  subject  of  set-off  under  the  twentieth  section  of  the  Bank- 
rupt Act.  That  section  is  as  follows:  "In  all  cases  of  mutual  debts  or 
mutual  credits  between  the  parties,  the  account  between  them  shall 
be  stated,  and  one  debt  set  off  against  the  other,  and  the  balance  only 


CHAP.  III.]  SAWYER   V.  HOAG.  929 

shall  be  allowed  or  paid,  but  no  set-off  shall  be  allowed  of  a  claim  in 
its  nature  not  provable  against  the  estate:  Provided,  that  no  set-off 
shall  be  allowed  in  favor  of  any  debtor  to  the  bankrupt  of  a  claim 
purchased  by  or  transferred  to  him  after  the  fiHng  of  the  peti- 
tion." 

This  section  was  not  intended  to  enlarge  the  doctrine  of  set-off,  or 
to  enable  a  party  to  make  a  set-off  in  cases  where  the  principles  of 
legal  or  equitable  set-off  did  not  previously  authorize  it. 

The  debts  must  be  mutual;  must  be  in  the  same  right. 

The  case  before  us  is  not  of  that  character.  The  debt  which  the 
appellant  owed  for  his  stock  was  a  trust  fund  devoted  to  the  payment 
of  all  the  creditors  of  the  company.  As  soon  as  the  company  became 
insolvent,  and  this  fact  became  known  to  the  appellant,  the  right  of 
set-off  for  an  ordinary  debt  to  its  full  amount  ceased.  It  became  a 
fund  belonging  equally  in  equity  to  all  the  creditors,  and  could  not 
be  appropriated  by  the  debtor  to  the  exclusive  payment  of  his  own 
claim. 

It  is  unnecessary  to  go  into  the  inquiry  whether  this  claim  was 
acquired  before  the  commission  of  an  act  of  bankruptcy  by  the  com- 
panj^,  or  the  effect  of  the  bankruptcy  proceeding.  The  result  would 
be  the  same  if  the  corporation  was  in  the  process  of  liquidation  in  the 
hands  of  a  trustee  or  under  other  legal  proceedings.  It  would  still 
remain  true  that  the  unpaid  stock  was  a  trust  fund  for  all  the  cred- 
itors, which  could  not  be  appUed  exclusively  to  the  payment  of  one 
claim,  though  held  by  the  stockholder  who  owed  that  amount  on  his 
subscription. 

Nor  do  we  think  the  relation  of  the  appellant  in  this  case  to  the  cor- 
poration is  without  weight  in  the  solution  of  the  question  before  us. 
It  is  very  true,  that  by  the  power  of  the  legislature  there  is  created  in 
all  acts  of  incorporation  a  legal  entity  which  can  contract  with  its 
shareholders  in  the  ordinary  transactions  of  business  as  with  other 
persons.  It  can  buy  of  them,  sell  to  them,  make  loans  to  them,  and  in 
insurance  companies,  make  contracts  of  insurance  with  them,  in  all  of 
which  both  parties  are  bound  by  the  ordinary  laws  of  contract.  The 
stockholder  is  also  relieved  from  personal  liability  for  the  debts  of  the 
company.  But  after  all,  this  artificial  body  is  but  the  representative 
of  its  stockholders,  and  exists  mainly  for  their  benefit,  and  is  gov- 
erned and  controlled  by  them  through  the  officers  whom  they  elect. 
And  the  interest  and  power  of  legal  control  of  each  shareholder  is  in 
exact  proportion  to  the  amount  of  his  stock.  It  is,  therefore,  but  just 
that  when  the  interest  of  the  public,  or  of  strangers  dealing  with  this 
corporation  is  to  be  affected  by  any  transaction  between  the  stock- 
holders who  own  the  corporation  and  the  corporation  itself,  such 
transaction  should  be  subject  to  a  rigid  scrutiny,  and  if  found  to  be 
infected  with  anything  unfair  towards  such  third  person,  calculated 
to  injure  him,  or  designed  intentionally  and  inequitably  to  screen  the 


930  OAKES    V.  TURQUAND.  [CHAP.  III. 

stockholder  from  loss  at  the  expense  of  the  general  creditor,  it  should 
be  disregarded  or  annulled  so  far  as  it  may  equitably  affect  him. 

These  principles  require  the  affirmation  of  the  decree  in  the  present 
case,  and  it  is  accordingly  Affirmed. 

Mr.  Justice  Hunt  dissented,  holding  that  the  transaction  was  a 
loan  by  the  company  to  the  appellant. 


OAKES  V.  TURQUAND. 

L.R.  2  H.L.  325.     1S07. 

OvEREND,  GuRNEY  &  Cc,  LIMITED,  a  Company  formed  under  the 
Companies  Act  of  1862,  became  financially  involved  and  was  wound 
up.  Oakes  moved  that  his  name  be  stricken  from  the  list  of  contiibu- 
tories,  on  the  ground  that  he  had  been  induced  to  become  a  memljcr 
of  the  company  by  the  fraudulent  representations  of  its  directors. 
The  motion  was  denied. 

Lord  Cranworth.  INIy  Lords,  the  appellant,  Mr.  Oakes,  in  order 
to  sustain  his  appeal,  must  make  out  two  propositions.  He  must 
satisfy  the  House,  first,  that  he  was  induced  to  take  his  shares  in 
Overend,  Gurney  &  Co.,  Limited,  by  the  fraud  of  the  company,  or  of 
those  for  whom  the  company  became  responsible;  and,  secondly,  if 
that  is  made  out,  that  he  ought  not  to  be  retained  on  the  list  of  con- 
tributories.  The  first  question  is  one  of  fact,  and  its  determination, 
however  important  to  the  parties  concerned,  is  of  no  general  interest. 
The  other  question  is  of  very  extensive  consequence  in  the  mercantile 
world.  It  is  of  the  utmost  importance  that  persons  dealing  with  joint- 
stock  companies  should  be  in  no  doubt  as  to  who  arc  the  persons  to 
whom  they  are  entitled  to  look  as  liable  to  perform  the  obligations 
and  pay  the  debts  of  the  partnership. 

I  shall  proceed  at  once  to  consider  this  second  question  —  to  deter- 
mine what  are  the  relative  rights  of  Mr.  Oakes  and  the  creditors,  and 
for  this  purpose  shall  assume  it  to  be  true  that  he  was  induced  to 
take  shares  by  the  fraud  of  the  compan}',  or  of  those  for  whom  the 
company  became  responsible.  There  is  no  doubt  that  the  direct  rem- 
edy of  a  creditor  is  solely  against  the  incorporated  company.  He  has 
no  dealing  with  any  individual  shareholder,  and  if  he  is  driven  to 
bring  an  action  to  enforce  any  right  he  may  have  acquired,  he  must 
sue  the  company,  and  not  any  of  the  members  of  whom  it  is  com- 
posed. This  being  so,  the  argument  of  the  appellant  is,  that  it  is  only 
to  the  assets  of  the  company  that  the  creditor  can  resort,  and  so  that 
the  only  question  is,  of  what  those  assets  consist.  This  question,  he 
contends,  so  far  as  the  assets  consist  of  money  to  be  recovered  by 
legal  process  against  other  persons,  whether  shareholders  or  not,  can 
only  be  solved  by  ascertaining  what  rights  the  company  has  against 


CHAP.  III.]  OAKES    V.  TURQUAND.  931 

those  other  persons.  If  in  any  proceeding  by  the  company  instituted 
for  the  purpose  of  recovering  money  from  any  person,  that  person  has 
a  vahd  defence,  whether  legal  or  equitable,  the  appellant  contends 
that  the  sum  claimed  from  him  does  not  form  part  of  the  assets  of  the 
company.  These  assets,  he  says,  consist  solely  of  property  in  the 
actual  possession  of  the  company,  or  which  the  company  can  recover 
l)y  means  of  legal  proceedings.  In  this  case  the  appellant  contends 
that  he  was  induced  to  become  a  shareholder  by  means  of  a  fraud 
which  entitles  him  to  repudiate  the  status  of  shareholder,  and  to  say, 
as  between  himself  and  the  company,  that  he  never  held  a  share. 
And  if  he  can  say  this  against  the  company,  then  the  appellant  con- 
tends he  can  say  it  against  all  the  world,  for  his  Hability  is  a  liability 
to  the  company  and  to  no  one  else. 

.  .  .  Section  74  [of  the  Companies  Act]  defines  contributories  to  be 
all  persons  liable  to  contribute  to  the  assets  in  the  event  of  the  com- 
pany being  wound  up;  and  section  38  declares  that  on  that  event 
every  present  and  past  member  shall  be  liable  to  contribute  subject 
to  certain  qualifications.  In  order  to  ascertain  who  are  designated  by 
the  word  "members"  in  section  38,  we  must  refer  to  section  23,  which 
states  that  every  person  who  has  agreed  to  become  a  member,  and 
whose  name  is  entered  on  the  register,  shall  be  deemed  to  be  a  mem- 
ber of  the  company. 

The  name  of  Mr.  Oakes  was  certainly  entered  on  the  register;  if, 
therefore,  he  agreed  to  become  a  member  within  the  meaning  of  this 
23d  section,  he  is  a  contributory.  The  argument  is,  that  he  did  not 
so  agree,  because  all  which  he  did,  he  did  under  the  influence  of  fraud 
and  misrepresentation.  But  assuming  all  that  to  be,  and  I  believe  it 
was,  just  as  Mr.  Oakes  represents  it,  still  he  did  agree  to  become  a 
member  —  that  is,  he  in  fact  agreed.  He  may  have  full  rights  against 
those  who  deceived  him,  but  with  that  the  outer  world  can  have  no 
concern.  Appeal  dismissed. 

Note.  —  Although  a  stockholder  was  induced  by  corporate  fraud 
to  take  stock,  his  right  of  rescission  is  cut  off  by  the  insolvency  of  the 
corporation,  —  at  least,  as  to  creditors  who  became  such  after  his 
subscription.  See  Gress  v.  Knight,  135  Ga.  60;  Meholinv.  Carlson, 
17  Idaho,  742;  Foster  v.  Row,  120  Mich.  1;  Olson  v.  Bank,  67  ]\Iinn. 
267;  Howard  v.  Turner,  155  Pa.  349;  Burleson  v.  Davis,  141  S.W. 
(Tex.)  559;  Jordan  v.  Afinex  Corporation,  109  Va.  625;  Cox  v. 
Dickie,  48  Wash.  264;  Scott  v.  Deweese,  181  U.S.  202. 

But  see  Marion  Trust  Co.  v.  Blish,  170  Ind.  686;  Hinkley  v.  Oil  Co. 
(insolvency  proceedings  not  instituted),  132  Iowa,  390;  Ky.  Mutual 
Co.'s  Assignee  v.  Schaefer,  120  Ky.  227  (c/.  Reid  v.  Owensboro  Co.,  141 
Ky.  444,  451);  Fear  v.  Bartlett,  81  Md.  435  (stockholder  gave  cor- 
poration notice  of  rescission  while  it  was  solvent);  Ramsey  v. 
Thompson  Mfg.  Co.,  116  ISIo.  313. 


932  MCDONALD,  RECEIVER,  V.  WILLIAMS.  [CHAP.  III. 

McDonald,  receiver,  v.  williams. 

17-1  U.S.  397.     1899. 

Suit  by  receiver  of  the  Capital  National  Bank  of  Lincoln,  Ne- 
braska, to  recover  from  defendants,  stockholders  in  the  bank,  the 
amount  of  certain  dividends  previously  received  by  them. 

When  the  dividend  of  January  G,  1889,  was  declared  and  paid,  and 
when  each  subsequent  dividend,  down  to  and  including  July,  1891, 
was  declared  and  paid,  there  were  no  net  profits.  The  capital  of  the 
bank  was  impaired,  and  the  dividends  were  paid  out  of  the  capital, 
but  the  bank  was  still  solvent.  AVhen  the  tlividends  of  January  and 
July,  1892,  were  declared  and  paid  there  were  no  net  profits,  the 
capital  of  the  bank  was  lost,  and  the  bank  actually  insolvent. 

The  defendants,  neither  of  whom  was  an  officer  or  director,  were 
ignorant  of  the  financial  condition  of  the  bank,  and  received  the  divi- 
dends in  good  faith,  relying  on  the  officers  of  the  bank,  and  believing 
the  dividends  were  coming  out  of  the  profits. 

Upon  these  facts  the  court  desired  the  instruction  of  this  court  on 
the  question: 

Can  the  receiver  of  a  national  bank  recover  a  dividend  paid  not  at 
all  out  of  profits,  but  entirely  out  of  the  capital,  when  the  stockholder 
receiving  such  dividend  acted  in  good  faith,  believing  the  same  to  be 
paid  out  of  the  profits,  and  when  the  bank,  at  the  time  such  dividend 
was  declared  and  paid,  was  not  insolvent? 

Peckham,  J.  .  .  .  The  complainant  bases  his  right  to  recover  in 
this  suit  upon  the  theory  that  the  capital  of  the  corporation  was  a 
trust  fund  for  the  pajTuent  of  creditors  entitled  to  a  portion  thereof, 
and  having  been  paid  in  the  way  of  dividends  to  the  shareholders 
that  portion  can  be  recovered  back  in  an  action  of  this  kind  for  the 
purpose  of  paying  the  debts  of  the  corporation.  He  also  bases  his 
right  to  recover  upon  the  terms  of  section  5204  of  the  Revised 
Statutes. 

We  think  the  theory  of  a  trust  fund  has  no  application  to  a  case  of 
this  kind.  When  a  corporation  is  solvent,  the  theory  that  its  capital 
is  a  trust  fund  upon  which  there  is  any  lien  for  the  payment  of  its 
debts  has  in  fact  very  little  foundation.  No  general  creditor  has  any 
lien  upon  the  fund  under  such  circumstances,  and  the  right  of  the 
corporation  to  deal  with  its  property  is  absolute  so  long  as  it  does  not 
violate  its  charter  or  the  law  applicable  to  such  corporation. 

In  Graham  v.  Railroad  Company,  102  U.S.  148,  161,  it  was  said  by 
Mr.  Justice  Bradley,  in  the  course  of  his  opinion,  that  "when  a  cor- 
poration becomes  insolvent,  it  is  so  far  civilly  dead  that  its  property 
may  be  administered  as  a  trust  fund  for  the  benefit  of  its  stockholders 
and  creditors,  and  a  court  of  equity,  at  the  instance  of  the  proper 
parties,  will  then  make  those  funds  trust  funds,  which,  in  other  cir- 


CHAP.  III.]  MCDON.U.D,  RECEIVER,  V.  WILLIAMS.  933 

cumstances,  are  as  much  the  absolute  property  of  the  corporation  as 
any  man's  property  is  his."  .  .  . 

These  cases,  while  not  involving  precisely  the  same  question  now 
before  us,  show  there  is  no  well-defined  hen  of  creditors  upon  the 
capital  of  a  corporation  while  the  latter  is  a  solvent  and  going  con- 
cern, so  as  to  permit  creditors  to  question,  at  the  time,  the  disposition 
of  the  property. 

The  bank  being  solvent,  although  it  paid  its  dividends  out  of 
capital,  did  not  pay  them  out  of  a  trust  fund.  Upon  the  subsequent 
insolvency  of  the  bank  and  the  appointment  of  a  receiver,  an  action 
could  not  be  brought  by  the  latter  to  recover  the  dividends  thus  paid 
on  the  theory  that  they  were  paid  from  a  trust  fund,  and  therefore 
were  liable  to  be  recovered  back. 

It  is  contended  on  the  part  of  the  complainant,  however,  that  if  the 
assets  of  the  bank  are  impressed  with  a  trust  in  favor  of  its  creditors 
when  it  is  insolvent,  they  must  be  impressed  with  the  same  trust 
when  it  is  solvent ;  that  the  mere  fact  that  the  value  of  the  assets  of 
the  corporation  has  sunk  below  the  amount  of  its  debts,  although  as 
yet  unknown  to  any  body,  cannot  possibly  make  a  new  contract  be- 
tween the  corporation  and  its  creditors.  In  case  of  insolvency,  how- 
ever, the  recovery  of  the  money  paid  in  the  ordinary  way  without 
condition  is  allowed,  not  on  the  ground  of  contract  to  repay,  but  be- 
cause the  money  thus  paid  was  in  equity  the  money  of  the  creditor; 
that  it  did  not  belong  to  the  bank,  and  the  bank  in  paying  could 
bestow  no  title  in  the  money  it  paid  to  one  who  did  not  receive  it 
bona  fide  and  for  value.  The  assets  of  the  bank,  while  it  is  solvent, 
may  clearly  not  be  impressed  with  a  trust  in  favor  of  creditors,  and 
yet  that  trust  may  be  created  by  the  very  fact  of  the  insolvency,  and 
the  trast  enforced  by  a  receiver  as  the  representative  of  all  the  cred- 
itors. But  we  do  not  wish  to  be  understood  as  deciding  that  the 
doctrine  of  a  trust  fund  does  in  truth  extend  to  a  shareholder  receiv- 
ing a  dividend,  in  good  faith  believing  it  is  paid  out  of  profits,  even 
though  the  bank  at  the  time  of  the  payment  be  in  fact  insolvent. 
That  question  is  not  herein  presented  to  us,  and  we  express  no  opin- 
ion in  regard  to  it.  We  only  say,  that  if  such  a  dividend  be  recover- 
able, it  would  be  on  the  principle  of  a  trust  fund.  .  .  . 

Without  reference  to  the  statute,  therefore,  we  think  the  right  to 
recover  the  dividend  paid  while  the  bank  was  solvent  would  not  exist. 

But  it  is  urged  on  the  part  of  the  complainant  that  section  5204 
of  the  Revised  Statutes  makes  the  payment  of  a  dividend  out  of 
capital  illegal  and  ultra  vires  of  the  corporation,  and  that  money  thus 
paid  remains  the  property  of  the  corporation,  and  can  be  followed 
into  the  hands  of  any  volunteer. 

The  section  provides  that  ''no  association,  or  any  member  thereof, 
shall,  during  the  tune  it  shall  continue  its  banking  operations,  with- 
draw, or  permit  to  be  withdrawn,  either  in  the  form  of  dividends  or 


934  MCDONALD,  RECEIVER,  V.  WILUAMS.  [CHAP.  III. 

otherwise,  any  portion  of  its  capital."  What  is  meant  hy  this  lan- 
guage? Has  a  shareholder  witiulrawM  or  permitted  to  Ije  withdiawn 
in  the  form  of  a  dividend  any  portion  of  the  eai)ital  of  the  Ijank  wiien 
he  has  simply  and  in  good  faith  received  a  dividend  declared  by  a 
board  of  directors  of  which  he  was  not  a  member,  and  which  dividend 
he  honestly  supposed  was  declared  only  out  of  profits?  Does  he  in 
such  case  within  the  meaning  of  the  statute  withdraw  or  permit  to  be 
withdrawn  a  portion  of  the  capital?  The  law  prohibits  the  making 
of  a  dividend  by  a  national  bank  from  its  capital  or  to  an  amount 
greater  than  its  net  profits  then  on  hand,  deducting  therefrom  its 
losses  and  bad  debts.  The  fact  of  the  declaration  of  a  dividend  is  in 
effect  the  assertion  l)y  the  board  of  directors  that  the  dividend  is  made 
out  of  profits.  Believing  that  the  dividend  is  thus  made,  the  share- 
holder in  good  faith  receives  his  portion  of  it.  Can  it  be  said  that  in 
thus  doing  he  withdraws  or  permits  to  be  withdrawn  any  portion  of 
the  capital  of  the  corporation?  We  think  he  does  not  withdraw  it  by 
the  mere  reception  of  his  proportionate  part  of  the  dividend.  The 
withdrawal  was  initiated  by  the  declaration  of  the  dividend  by  the 
board  of  directors,  and  was  consummated  on  their  part  when  they 
permitted  payment  to  be  made  in  accordance  with  the  declaration. 
W^e  think  this  language  implies  some  positive  or  afhrmative  act  on 
the  part  of  the  shareholder  by  which  he  knowingly  withdraws  the 
capital  or  some  portion  thereof,  or  with  knowledge  permits  some  act 
which  results  in  the  withdrawal,  and  which  might  not  have  been  so 
withdrawn  without  his  action.  The  permitting  to  Ix'  withdrawn  can- 
not be  founded  upon  the  simple  receipt  of  a  dividend  under  the  facts 
stated  above. 

One  is  not  usually  said  to  permit  an  act  which  he  is  wholly  igno- 
rant of,  nor  would  he  l)e  said  to  consent  to  an  act  of  the  conunission 
of  which  he  had  no  knowledge.  Ought  it  to  be  said  that  he  with- 
draws or  permits  the  withdrawal  by  ignorantly  yet  in  entire  good 
faith  receiving  his  proportionate  part  of  the  dividend?  Is  each 
shareholder  an  absolute  insurer  that  dividends  are  paid  out  of  profits? 
Must  he  employ  experts  to  examine  the  books  of  the  bank  previous 
to  receiving  each  dividend?  Few  shareholders  could  make  such 
examination  themselves.  The  shareholder  takes  the  fact  that  a  divi- 
dend has  been  declared  as  an  assurance  that  it  was  declared  out  of 
profits  and  not  out  of  capital,  because  he  knows  that  the  statute  pro- 
hibits any  declaration  of  a  dividend  out  of  capital.  Knowing  that  a 
dividend  from  capital  would  be  illegal,  he  would  receive  the  dividend 
as  an  assurance  that  the  bank  was  in  a  prosperous  condition  and  with 
unimpaired  capital.  Under  such  circumstances  we  cannot  think  that 
Congress  intended  by  the  use  of  the  expression  "withdraw  or  permit 
to  be  withdrawn,  either  in  the  form  of  dividends,  or  otherwise,"  any 
portion  of  its  capital,  to  include  the  case  of  the  passive  receipt  of  a 
dividend  by  a  shareholder  in  the  bona  fide  belief  that  the  dividend 


CHAP.  III.]  MCDONALD,  EECEIVER,    V.  WILLIAMS.  935 

was  paid  out  of  profits,  while  the  bank  was  in  fact  solvent.  We  think 
it  would  be  an  improper  construction  of  the  language  of  the  statute 
to  hold  that  it  covers  such  a  case. 

We  are  strengthened  in  our  views  as  to  the  proper  construction  of 
this  act  by  reference  to  some  of  its  other  sections.  The  paj'ment  of 
the  capital  within  a  certain  time  is  provided  for  by  sections  5140  and 
5141.  Section  5151  provides  for  the  individual  responsibility  of  each 
shareholder  to  the  extent  of  his  stock  at  the  par  value  thereof  in 
addition  to  the  amount  invested  therein.  (These  shareholders  have 
already  been  assessed  under  this  section.)  And  section  5205  pro- 
vides for  the  case  of  a  corporation  whose  capital  shall  have  become 
impaired  by  losses  or  otherwise,  and  proceedings  may  be  taken  by  the 
association  against  the  shareholders  for  the  pajmient  of  the  deficiency 
in  the  capital  within  three  months  after  receiving  notice  thereof  from 
the  Comptroller.  These  various  provisions  of  the  statute  impose  a 
very  severe  liability  upon  the  part  of  holders  of  national  bank  stock, 
and  wliile  such  provisions  are  evidently  imposed  for  the  purpose  of 
securing  reasonable  safety  to  those  who  deal  with  the  banks,  we  may 
nevertheless  saj^,  in  view  of  this  whole  system  of  liability,  that  it  is 
unnecessary,  and  that  it  would  be  an  unnatural  construction  of  the 
language  of  section  5204  to  hold  that  in  a  case  such  as  this  a  share- 
holder, by  the  receipt  of  a  dividend  from  a  solvent  bank,  had  with- 
drawn or  permitted  to  be  withdrawn  any  portion  of  its  capital. 

We  may  concede  that  the  directors  who  declared  the  dividend 
under  such  circumstances  violated  the  law,  and  that  their  act  was 
therefore  illegal,  but  the  reception  of  the  dividend  by  the  shareholder 
in  good  faith,  as  mentioned  in  the  question,  was  not  a  wrongful  or 
designedly  improper  act.  Hence  the  liability  of  the  shareholder 
should  not  be  enlarged  by  reason  of  the  conduct  of  the  directors. 
They  may  have  rendered  themselves  liable  to  prosecution,  but  the 
liability  of  the  shareholder  is  different  in  such  a  case,  and  the  receipt 
of  a  dividend  under  the  circumstances  is  different  from  an  act  which 
may  be  said  to  be  generally  illegal,  such  as  the  purchase  of  stock 
in  one  national  bank  by  another  national  bank  for  an  investment 
merely,  which  is  never  proper.  Concord  First  National  Bank  v.  Haw- 
kins, just  decided,  a7ite,  364. 

The  declaration  and  payment  of  a  dividend  is  part  of  the  course  of 
business  of  these  corporations.  It  is  the  thing  for  which  the}^  are 
established,  and  its  payment  is  looked  for  as  the  appropriate  result 
of  the  business  which  has  been  done.  The  presumption  of  legality 
attaches  to  its  declaration  and  payment,  because  declaring  it,  is  to 
assert  that  it  is  payable  out  of  the  profits.  As  the  statute  has  pro- 
vided a  remedy  under  section  5205  for  the  impairment  of  the  capital 
which  includes  the  case  of  an  impairment  produced  by  the  payment 
of  a  dividend,  we  think  the  payment  and  receipt  of  a  dividend  under 
the  circumstances  detailed  in  the  question  certified  do  not  permit  of 


936  MCDONALD,  RECEIVER,  V.  WILLIAMS.  [CHAP.  III. 

its  recovery  back  by  a  receiver  appointed  upon  the  subsequent  insol- 
vency of  the  bank. 

The  facts  in  the  various  EngHsh  cases  cited  by  counsel  for  com- 
plainant are  so  entirely  unlike  those  which  exist  in  this  case  that  no 
useful  purpose  would  be  sul)served  by  a  reference  to  them.  Not  one 
holds  that  a  dividend  declared  under  such  facts  as  this  case  assumes 
can  be  recovered  back  in  such  an  action  as  this. 

We  answer  the  question  in  the  negative. 

Note.  —  After  the  Supreme  Court  had  given  the  above  opinion, 
the  Circuit  Court  of  Ai)peals  rendered  judgment  against  the  receiver 
as  to  the  dividends  in  the  years  when  the  bank  was  still  solvent,  and 
against  the  defendant  stockholders  for  the  dividends  paid  during 
insolvency.  Lacombe,  J.,  said:  "No  question  was  propounded" 
(i.e.,  to  the  Supreme  Court)  "as  to  the  dividends  paid  when  the  bank 
was  actually  insolvent,  as  we  had  no  doui)t  the  receiver  could  recover 
them  in  a  proper  action."  Hayden  v.  Williams,  96  Fed.  Rep.  279, 
pp.  283,  284.    See  also  Hammond  v.  Hammond  Co.,  72  Conn.  130. 

See,  in  accord  with  the  principal  case,  In  re  Denham  &  Co.,  L.R. 
25  Ch.D.  752. 

See,  contra,  Lexington  Insurance  Co.  v.  Page,  17  B.  Mon.  (Ky.)  412 
(dividends  declared  by  the  directors,  and  received  by  the  stock- 
holders, may  be  reclaimed  l)y  the  tlirectors,  if  illegally  declared  under 
a  misapprehension  of  the  right  to  declare  them);  American  Steel  & 
Wire  Co.  v.  Eddy,  138  Mich.  403  (statute);  Williarns  v.  Boice,  38 
N.J.  Eq.  364,  367. 


BOOK   VII. 

THE    REORGANIZATION   OF 
CORPORATIONS. 


CEL\PTER  I. 

ISSUES  OF  STOCK  BY  A  CORPORATION  WITH 
IMPAIRED  CAPITAL. 


HANDLEY  v.  STUTZ. 

139  U.S.  417.     1891. 

Creditors  of  the  Clifton  Coal  Company  sought  to  require  stock- 
holders to  pay  the  difference  between  the  par  value  of  their  stock  and 
the  amount  they  had  paid  for  such  stock.  Some  of  this  stock  had 
been  issued  some  years  after  the  corporation  was  organized,  and  at  a 
time  when  the  market  value  of  its  stock  was  less  than  par.  The  lower 
court  held  that  all  creditors  who  became  such  after  this  issue  of  stock 
were  entitled  to  the  relief  asked  for. 

Mr.  Justice  Brown.  Some  three  years  after  the  company  was 
organized  it  became  apparent  that  the  enterprise,  as  originally  con- 
templated, namely,  the  mining  and  selling  of  coal  for  steam  and  do- 
mestic purposes,  was  not  likely  to  be  a  success,  owing  to  the  inferior 
character  of  the  product;  and  the  only  hope  of  the  company  lay  in 
the  manufacture  of  the  coal  into  an  iron-making  coke,  that  is,  a  coke 
containing  a  percentage  of  sulphur  low  enough  to  admit  of  the  manu- 
facture of  merchantable  pig  iron.  To  embark  in  this,  however, 
money  was  needed,  and  as  the  stock  of  the  company  was  not  worth 
more  than  50  cents  on  the  dollar,  it  was  evident  this  could  not  be 
effected  simply  by  the  issue  of  new  stock.  It  was  proposed  at  the 
meeting  in  March  that  money  should  be  raised  by  the  issue  of  $50,003 
of  bonds,  with  which  to  add  the  requisite  structures  to  the  plant. 
But  it  was  soon  evident  that  the  bonds  could  not  be  negotiated  with- 
out the  stock,  and,  acting  upon  the  suggestion  of  a  Nashville  banker, 
it  was  resolved  at  the  meeting  in  May  that  the  stock  should  be  in- 
creased 800  shares,  500  of  which  should  be  turned  over  to  the  sub- 
scribers to  the  bonds,  as  a  bonus  or  an  additional  consideration.  The 
evidence  is  uncontradicted  that  the  bonds  could  not  have  been  ne- 
gotiated without  the  stock;  that  they  were  both  sold  as  a  whole;  that 
the  transaction  was  in  good  faith,  and,  considering  the  risk  that  was 
taken  by  the  subscribers,  the  price  paid  for  the  stock  and  bonds  was 


938  HANDLEY    V.  STUTZ.  [ciIAP.  I. 

fair  and  reasonable.  The  directors  appear  to  have  done  all  in  their 
power  to  obtain  the  best  possible  terms,  and  there  is  no  imputation 
of  unfair  dealing  on  the  part  of  any  one  connected  with  the  transac- 
tion. At  that  time  the  mines  and  property  of  the  company  were  in 
good  condition,  and  the  prospects  of  success  were  fair. 

The  case  then  resolves  itself  into  the  question  whether  an  active 
corporation,  or  as  it  is  called  in  some  cases,  a  "  going  concern,"  find- 
ing its  original  capital  impaired  by  loss  or  misfortune,  may  not,  for 
the  purpose  of  recuperating  itself  and  providing  new  conditions  for 
the  successful  prosecution  of  its  business,  issue  new  stock,  jnit  it  upon 
the  market  and  sell  it  for  the  best  price  that  can  le  obtain(  tl.  The 
question  has  never  been  directly  raised  before  in  this  court,  and  we 
are  not,  consequently,  embarrassed  by  any  previous  decisions  on  the 
point.  In  the  Upton  Cases,  arising  out  of  the  failure  of  tlie  C!reat 
Western  Insurance  Company;  in  Hatch  v.  Dana,  101  U.S.  205,  and 
in  Hawkins  v.  Glenn,  131  U.S.  319,  tl:e  defendants  were  either  origi- 
nal subscribers  to  the  increased  stock,  at  a  price  far  below  its  par 
value,  or  transferees  of  such  subscribers;  and  the  stock  was  i.'^sued, 
not  as  in  this  case  to  purchase  property  or  raise  money  to  add  to  the 
plant,  and  facilitate  the  operations  of  the  ccmpanj',  but  simply  to 
increase  its  original  stock  in  order  to  cany  on  a  larger  business,  and 
the  stock  thus  issued  was  treated  as  if  it  formed  a  part  of  the  original 
capital.  In  County  of  Morgan  v.  Allen,  103  U.S.  498,  the  same  prin- 
ciple was  applied  to  a  subscription  Ijy  a  county  to  the  capital  stock 
of  a  railroad  company,  for  which  it  had  issued  its  bontls,  although 
such  bonds  had  been  surrendered  to  the  county  with  the  consent  of 
certain  of  its  creditors. 

To  say  that  a  corporation  may  not,  under  the  circumstances  above 
indicated,  put  its  stock  upon  the  market  and  sell  it  to  the  highest 
bidder,  is  practically  to  declare  that  a  corporation  can  never  increase 
its  capital  by  a  sale  of  shares,'  if  the  original  stock  has  fallen  below 
par.  The  wholesome  doctrine,  so  many  times  enforced  by  this  court, 
that  the  capital  stock  of  an  in.solvcnt  corporation  is  a  trust  fund  for 
the  payment  of  its  debts,  rests  upon  the  idea  that  the  creditors  have 
a  right  to  rely  upon  the  fact  that  the  subscribers  to  such  stock  have 
put  into  the  treasury  of  the  corporation,  in  some  form,  the  amount 
represented  by  it;  but  it  does  not  follow  that  eveiy  creditor  has  a 
right  to  trace  each  share  of  stock  issued  by  such  corporation,  and 
inquire  whether  its  holder,  or  the  person  of  whom  he  purchased,  has 
paid  its  par  value  for  it.  It  frequently  happens  that  corporations,  as 
well  as  individuals,  fmd  it  necessary  to  increase  their  capital  in  order 
to  raise  money  to  prosecute  their  business  successfully,  and  one  of 
the  most  frequent  methods  resorted  to  is  that  of  issuing  new  shares 
of  stock  and  putting  them  upon  the  market  for  the  best  price  that 
can  be  obtained;  and  so  long  as  the  transaction  is  bona  fide,  and  not 
a  mere  cover  for  "watering"  the  stock,  and  the  consideration  ob- 


CHAP.   I.]  HAXDLEY    V.  STUTZ.  939 

tained  represents  the  actual  value  of  such  stock,  the  courts  have 
shown  no  disposition  to  disturb  it.  Of  course  no  one  would  take  stock 
so  issued  at  a  greater  price  than  the  original  stock  could  be  purchased 
for,  and  hence  the  ability  to  negotiate  the  stock  and  to  raise  the 
money  must  depend  upon  the  fact  whether  the  purchaser  shall  or 
shall  not  be  called  upon  to  respond  for  its  par  value.  While,  as  before 
observed,  the  precise  question  has  never  been  raised  in  this  court, 
there  are  numerous  decisions  to  the  effect  that  the  general  rule  that 
holders  of  stock,  in  favor  of  creditors,  must  respond  for  its  par  value, 
is  subject  to  exceptions  where  the  transaction  is  not  a  mere  cover  for 
an  illegal  increase. 

Thus  in  New  Albany  v.  Burke,  11  Wall.  96^  a  city  subscribed  to  the 
stock  of  a  railroad,  and  issued  bonds  for  a  part  of  the  subscription, 
agreeing  to  issue  them  for  the  rest  of  it,  when  the  road  should  be  built 
to  a  certain  point.  The  road  relied  mainly  upon  these  bonds  to  raise 
the  necessary  money.  The  validity  of  the  bonds  being  denied  by  tax- 
payers, who  had  filed  bills  to  enjoin  the  raising  of  a  tax  to  pay  the 
interest,  their  value  in  the  market  was  largely  impaired,  and  it  was 
found  they  could  not  be  sold  without  a  sacrifice.  Under  these  circum- 
stances the  company  applied  to  the  city  to  pay  a  certain  sum  which 
had  been  borrowed  by  the  road  upon  the  pledge  of  the  bonds  already 
issued,  with  sundry  other  moneys,  and  in  consideration  thereof  the 
city  obtained  from  the  company  a  large  number  of  bonds  which  had 
not  been  negotiated,  and  a  cancellation  of  the  subscription.  In  a  suit 
bi'ought  by  a  judgment  creditor  to  enforce  the  original  subscription, 
it  was  held  that  the  compromise  was  legal,  and  the  payment  of  such 
subscription  would  not  be  enforced,  although  it  subsequently  turned 
out  that  the  bonds  were  worth  more  than  they  could  have  been  sold 
for.  Said  Mr.  Justice  Strong,  speaking  for  the  court:  "Had  the 
company  sold  to  a  stranger,  and  then  the  city  become  a  purchaser 
from  the  stranger,  it  will  not  be  contended  that  any  creditor  of  the 
company  could  complain.  And  it  can  make  no  difference  whether 
the  purchase  was  made  directly  or  indirectly  from  the  first  holier  of 
the  bonds,  assuming  that  there  was  no  fraud.  The  transaction  .  .  . 
was,  in  sul^stance,  plainly  nothing  more  than  a  purchase  by  the  city 
of  its  own  bonds,  some  of  which  had  been  issued  and  others  of  which 
it  was  under  obligation  to  issue,  at  the  call  of  the  vendor.  .  .  ,  Look- 
ing at  it  in  the  light  of  subsequent  events,  it  was  no  doubt  an  advan- 
tageous purchase  for  the  city;  and,  if  the  uncontradicted  evidence  is 
to  be  believed,  it  was  deemed  at  the  time  an  advantageous  sale  or 
arrangement  for  the  company.  ...  We  may  add,  the  evidence  is  con- 
vincing that  the  contract  between  the  city  and  the  company  was  made 
in  the  utmost  good  faith,  with  no  intention  to  wrong  creditors  of  the 
latter;  that  it  was  at  the  time  considered  advantageous  to  the  com- 
pany, and  it  is  not  proved  that  all  was  not  paid  for  the  bonds  issued 
and  t-o  be  issued  that  they  could  have  been  sold  for  in  the  market." 


940  HANDLE Y  V.  STUTZ.  [cHAP.  I. 

So  in  Coit  v.  Gold  Amalgamating  Company,  119  U.S.  343,  it  was 
held  that  where  the  charter  of  a  corporation  authorizes  the  ca[)ital 
stock  to  he  paid  for  in  property,  and  the  sliareholdcrs  honestly  and 
in  good  faith  pay  for  their  sul)scrii)tioiis  in  property  instead  of 
money,  third  parties  have  no  ground  of  complaint,  although  a  gross 
and  obvious  over-valuation  of  such  property  would  l^e  strong  evi- 
dence of  fraud  in  an  action  by  a  creditor  to  enforce  personal  liability. 
The  court  held  that  where  full-paid  stock  was  issued  for  property 
received  there  must  be  actual  fraud  in  the  transaction  to  enable  credi- 
tors of  the  corporation  to  call  the  stockholders  to  account.  In  deliv- 
ering the  judgment  of  the  court  in  that  case  at  the  circuit,  14  Fed. 
Rep.  12,  Mr.  Justice  Bradley  observed:  "That  trust  [in  favor  of 
creditors]  does  not  arise  absolutely  in  ever\^  case  where  capital  stock 
has  been  issued,  and  where  it  has  been  settled  for  by  arrangement 
with  the  company.  It  is  not  as  if  the  stockholders  had  given  their 
promissory'  notes  for  the  amount,  these  notes  being  in  the  treasury  of 
the  company;  but  there  are  often  equities  to  which  the  stockholders 
are  entitled  —  on  which  they  are  to  stand."  As  one  of  them,  he 
mentioned  the  case  of  stock  dividends  fairly  made  in  consideration 
of  profits  earned  and  of  accumulations  of  the  property  of  the  com- 
pany, and  observed:  "It  is  not  true  tiiat  it  is  in  the  power  of  a  credi- 
tor in  eveiy  case,  and  in  all  cases,  as  a  mere  matter  of  right,  to  insti- 
tute an  inquiiy  as  to  the  valuation  of  the  amount  of  tiic  consideration 
given  for  the  stock,  and  disturl)  fair  arrangements  for  its  payment  in 
other  ways  than  by  cash.  If  the  stock  has  been  fairly  created  and 
paid  for,  there  is  an  end  of  trusts  in  favor  of  any  body;  and  this  does 
not  affect  the  general  proposition  that  unpaid  subscriptions  of  stock 
are  a  trust  fund  to  be  administered  for  the  benefit  of  creditors  after  a 
corporation  becomes  insolvent." 

A  case  nearer  in  point  is  that  of  Clark  v.  Bever,  139  U.S.  96,  de- 
cided at  the  present  term  of  this  court.  In  this  case,  a  railroad  com- 
pany, of  which  defendant's  intestate  was  president  and  stockholder, 
had  a  settlement  with  a  construction  company,  of  which  defendant's 
intestate  was  also  a  member,  for  work  done  in  building  the  road. 
The  railroad  company,  being  unable  to  pay  the  claim  of  the  construc- 
tion compan}',  delivered  to  it  thirty-five  hundred  shares  of  its  stock 
at  20  cents  on  the  dollar,  and  the  same  were  accepted  in  full  satisfac- 
tion of  the  debt.  The  stock  was  not  worth  anything  in  the  market, 
and  was  issued  directly  to  the  defendant's  intestate.  No  other  pay- 
ment than  the  20  per  cent  was  ever  made  on  account  of  this  stock.  A 
judgment  creditor  of  the  railroad  company  filed  a  bill  to  compel  the 
payment  by  the  defendant  of  his  claim,  upon  the  theory  that  he  was 
liable  for  the  actual  par  value  of  such  stock,  whatever  may  have  been 
its  market  value  at  the  time  it  was  received.  It  was  held  he  could 
not  recover.  "Of  course,  under  this  view,"  says  Mr.  Justice  Harlan, 
in  deUvering  the  opinion  of  the  court,  "every  one  having  claims 


CHAP.  I.]  HANDLEY    V.  STUTZ.  941 

against  the  railway  company,  —  even  laborers  and  employes,  — 
who  could  get  nothing  except  stock  in  payment  of  their  demands, 
became  bound,  by  accepting  stock  at  its  market  value  in  pajanent, 
to  account  to  unsatisfied  judgment  creditors  for  its  full  face  value, 
although,  at  the  time  it  was  sought  to  make  them  liable,  the  cor- 
poration had  ceased  to  exist,  or  its  stock  had  remained,  as  it  was 
when  taken,  absolutely  worthless.  ...  To  say  that  a  pubhc  corpora- 
tion, charged  with  public  duties,  may  not  relieve  itself  from  embar- 
rassment by  paying  its  debt  in  stock  at  its  real  value,  —  there  being 
no  statute  forbidding  such  a  transaction,  —  without  subjecting  the 
creditor,  surrendering  his  debt,  to  the  liability  attaching  to  stock- 
holders who  have  agreed,  expressly  or  impliedly,  to  pay  the  face 
value  of  stock  subscribed  by  them,  is,  in  effect,  to  compel  them  either 
to  suspend  operations  the  moment  they  become  unable  to  pay  their 
current  debts,  or  to  borrow  money  secured  by  mortgage  upon  the 
corporate  property." 

So  in  Fogg  v.  Blair,  139  U.S.  118,  also  decided  at  the  present  term, 
it  was  held  to  be  competent  for  a  railroad,  exercising  good  faith,  to 
use  its  bonds  or  stock  in  payment  for  the  construction  of  its  road, 
although  it  could  not,  as  against  creditors  or  stockholders,  issue  its 
stock  as  fully  paid  without  getting  some  fair  or  reasonable  equivalent 
for  it.  It  was  there  said:  "What  was  such  an  equivalent  depends 
primarily  upon  the  actual  value  of  the  stock  at  the  time  it  was  con- 
tracted to  be  issued,  and  upon  the  compensation  which,  under  all  the 
circumstances,  the  contractors  were  equitably  entitled  to  receive 
for  the  particular  work  undertaken  or  done  by  them."  It  appeared 
in  that  case  that  full  and  adequate  compensation  for  the  work  done 
had  been  paid  by  the  company  in  its  mortgage  bonds,  and,  as  the  bill 
contained  no  allegation  whatever  as  to  the  real  or  market  value  of 
such  stock,  it  was  held  that  the  contractors  receiving  this  stock  were 
not  liable  to  creditors  for  its  par  value.  It  was  added:  "If,  when 
disposed  of  by  the  railroad  company,  it  was  without  value,  no  wrong 
was  done  to  creditors  by  the  contract  made  with  Blair  and  Taylor. 
If  the  plaintiff  expected  to  recover  in  this  suit  on  the  ground  that 
the  stock  was  of  substantial  value,  it  was  incmnbent  upon  him  to 
distinctly  allege  facts  that  would  enable  the  court  —  assuming  such 
facts  to  be  true  —  to  say  that  the  contract  between  the  railroad  com- 
pany and  the  contractors  was  one  which,  in  the  interest  of  creditors, 
ought  to  be  closely  scrutinized."  It  would  seem  to  follow  from  this 
that  if  the  stock  had  been  of  some  value,  that  value,  however  much 
less  than  par,  would  have  been  the  limit  of  the  holder's  liability. 

In  Morrow  v.  Nashville  Iron  and  Steel  Co.,  87  Tennessee,  262,  275, 
276,  the  Supreme  Court  of  Tennessee  held,  that  a  contract  with  a 
subscriber  to  stock  of  a  corporation,  that  for  every  share  subscribed 
he  should  receive  bonds  to  an  equal  amount,  secured  by  mortgage  on 
the  company's  plant,  is  void  as  against  creditors,  and  also  between 


942  HANDLEY    V.  8TUTZ.  [CHAI'.   I. 

the  subscriber  and  the  corporation.  But  the  court  drew  a  distinction 
between  such  a  case  and  sales  of  or  subscription  to  the  stock  of  an 
organized  and  going  corporation.  It  said:  "The  necessities  of  the 
business  of  an  organized  company  might  demand  an  increa.se  of  capi- 
tal stock,  and  if  such  stock  is  lawfully  issued,  it  may  veiy  well  be 
offered  upon  special  terms.  In  such  case,  if  the  market  price  was  less 
than  par,  it  is  clear  that  a  purchaser  or  subscriber  for  such  stock  at 
its  market  value  would,  in  the  absence  of  fraud,  l)e  liable  only  for  his 
contract  price.  So  a  cavse  might  arise  where  the  stock  of  a  going  con- 
cern was  much  depreciated,  antl  where  its  bonds  were  likewise  below 
par,  and  there  was  lawful  authority  to  issue  additional  stock  and 
bonds.  Now,  in  such  ca.se,  the  real  market  value  of  an  equal  amount 
of  stock  and" bonds  might  not  exceed,  or  even  equal,  the  par  value  of 
either.  In  such  cases,  the  question  of  fraud  aside,  a  purchaser  would 
only  be  held  for  his  contract  price."  This  ca.se  from  Tennessee  puts 
as  an  illustration  the  exact  case  with  which  we  are  now  dealing. 

The  liability  of  a  sul)scril  er  for  the  par  value  of  increased  stock 
taken  by  him  may  depend  somewh.at  upon  the  circumstances  under 
which,  and  the  purposes  for  which,  such  increase  was  made.  If  it  be 
merely  for  the  purpose  of  adding  to  the  original  capital  stock  of  the 
corporation,  and  enabling  it  to  do  a  larger  and  moie  profitahle  busi- 
ness, such  subscriber  would  stand  practically'  upon  the  same  basis  as 
a  subscriber  to  the  original  capital.  But  we  think  that  an  active  cor- 
poration may,  for  the  purpose  of  paying  its  debts,  and  obtaining 
money  for  the  successful  prosecution  of  its  business,  issue  its  stock 
and  dispose  of  it  for  the  lest  price  that  can  be  obtained.  Steiri  v. 
Howard,  65  California,  616.  As  the  company  in  this  case  found  it 
impossible  to  negotiate  its  bonds  at  par  without  the  stock,  and  as  the 
stock  was  issued  for  tlie  purpose  of  enhancing  the  value  of  the  bonds, 
and  was  taken  by  the  sul:scribers  to  the  bonds  at  a  price  fairly  repre- 
senting the  value  of  both  stock  and  bonds,  we  think  the  transaction 
should  be  sustained,  and  that  the  defendants  cannot  be  called  upon 
to  respond  for  the  par  value  of  such  stock,  as  if  they  had  subscribed 
to  the  oiiginal  stock  of  the  company. 

Mr.  Chief  Justice  Fuller,  with  whom  concurred  Mr.  Justice 
Lamar,  dissenting. 

I  dissent  from  the  conclusion  of  the  court  in  respect  of  the  stock 
received  by  the  subscribers  to  the  bonds.  That  stock  was  not  paid 
for  in  money  or  ir.oney's  worth,  or  issued  in  payment  of  debts  due 
from  the  company,  or  purchased  at  sale  upon  the  market.  It  was  a 
mere  bonus,  thrown  in  with  the  bonds  as  furnishing  the  inducement 
to  the  bond  subscription,  of  larger  control  over  the  corporation,  and 
of  possible  gain  without  expenditure.  Becoming  secured  creditors 
through  the  bonds,  the  subscribers  increased  their  power  through  the 
stock.  In  my  view,  there  was  no  actual  payment  for  the  stock,  and 
to  treat  it  as  paid  up,  is  to  sanction  an  arrangement  to  relieve  those 


CHAP.  I.]  KRAFT   V.  GRIFFON    CO.  943 

who  would  reap  the  benefit  derived  from  the  possession  of  the  stock, 
in  the  event  of  the  success,  from  Habihty  for  the  consequences,  in  the 
event  of  the  failure,  of  the  enterprise. 

When  the  capital  stock  of  a  corporation  has  become  impaired,  or 
the  business  in  which  it  has  engaged  has  proven  so  unremunerative 
as  to  call  for  a  change,  creditors  at  large  may  well  demand  that 
experiments  at  rehabilitation  should  not  be  conducted  at  their 
risk. 

M}^  brother  Lamar  concurs  with  me  in  this  dissent. 

Note.  —  See,  accord,  Stein  v.  Howard,  65  Cal.  616;  McDowell  v.. 
Lindsay,  213  Pa.  591  (W.Va.  statute). 


KRAFT  V.  GRIFFON  CO. 

82  N.Y.  App.  Div.  29.     1903.- 

Laughlin,  J.  This  is  an  action  by  a  stockholder  of  the  Griffon 
Company  to  enjoin  a  second  issue  of  stock  to  be  given  as  a  bonus  on 
the  sale  of  company  bonds  for  their  value. 

The  original  capital  stock  was  S25,000,  one-half  of  which  was 
issued  to  the  plaintiff  and  the  other  half  to  the  defendant  Ernest  F. 
Greff,  Jr.  Down  to  the  1st  day  of  July,  1900,  there  was  a  continuous 
and  increasing  impairment  of  the  capital,  and  the  company  was 
seriously  in  need  of  funds.  At  a  meeting  of  the  stockholders,  held  for 
that  purpose  on  the  11th  day  of  September,  1900,  the  capital  stock 
was  increased  to  $150,000,  of  which  $50,000  was  preferred.  This  pre- 
ferred stock  was  sold  at  par,  but  the  common  stock  was  not  sold  at 
all.  The  company  being  again  pressed  for  funds,  on  the  28th  of  Feb- 
TUQxy,  1901,  determined  to  issue  certificates  of  indebtedness  to  the 
extent  of  $30,000,  but  only  one-half  of  the  amount  was  sold.  On  the 
25th  day  of  May,  1901,  public  accountants  employed  to  investigate 
and  make  statement  of  the  financial  condition  of  the  company,  re- 
ported that  its  then  capital  of  $75,000  was  impaired  to  the  extent  of 
$41,602.85.  The  company  being  unable  to  make  a  further  sale  of  the 
capital  stock  or  otherwise  raise  necessary  funds  for  paj' ing  current 
obligations  and  continuing  the  business,  the  board  of  directors  on  the 
20th  day  of  August,  1901,  adopted  a  resolution  authorizing  the  issue 
of  bonds  to  the  extent  of  $75,000  with  interest  at  six  per  cent  paj^able 
quarterly  or  semi-annually  and  authorizing  the  president  and  treas- 
urer to  issue,  negotiate  and  sell  the  same  upon  the  best  terms  obtain- 
able and  authorizing  the  issue  and  delivery  of  $75,000  capital  stock 
to  be  offered  and  delivered  as  a  bonus  to  the  purchasers  of  the  bonds 
to  an  extent  not  exceeding  the  par  value  of  the  bonds  purchased. 
One-half  of  this  issue  of  bonds  and  stock  was  tendered  to  the  plain- 


944  KRAFT  V.  GRirroN  CO.  [chap.  I. 

tiff,  who  declined  the  offer,  and  the  other  half  to  the  defendant 
Ernest  F.  Greff,  Jr.,  who  accepted  and  paid  par  for  the  bonds  to  the 
extent  of  S37,000  and  the  bontls  and  an  equal  amount  of  stock  were 
delivered  to  him.  The  plaintiff  then  brought  this  action  to  enjoin 
the  further  issue  of  stock  to  be  given  as  a  bonus  on  tlie  sale  of  Ijonds 
and  to  cancel  the  stock  already  issued  as  a  bonus. 

The  appellant  contends  that  the  issue  of  stock  to  be  delivered  as  a 
bonus  to  the  purchasers  of  bonds  of  the  corporation  is  unauthorized. 
The  questions  presented  upon  the  appeal  depend  upon  the  construc- 
tion of  §  48  of  the  General  Corporation  Law  of  New  Jersey  (Laws 
of  N.J.  of  1896,  chap.  185),  which  provides  as  follows:  "Nothing  but 
money  shall  be  considered  as  payment  of  any  part  of  the  capital 
stock  of  any  corporation  organized  under  this  act,  except  as  herein- 
after provided  in  case  of  the  purchase  of  property,  and  no  loan  of 
money  shall  be  made  to  a  stockiiolder  or  officer  thereof;  and  if  any 
such  loan  be  made  the  officers  who  make  it,  or  assent  thereto,  shall  be 
jointly  and  severally  liable,  to  tlie  extent  of  such  loan  and  interest,  for 
all  the  debts  of  the  corporation  until  the  repajanent  of  the  sum  so 
loaned." 

The  exception  referred  to  in  this  section  is  contained  in  §  49  and 
it  relates  exclusively  to  the  issue  of  stock  in  payment  for  property 
purchased  by  the  corporation  and  nccessarj'  for  its  benefit  antl  pro- 
vides that  the  stock  so  issued  shall  not  exceed  the  value  of  the  prop- 
erty to  pay  for  which  it  is  issued.  It  is  conceded  that  these  are  the 
only  provisions  of  New  Jersey  law  applicable.  Manifestly,  neither 
the  stock  nor  bonds  are  issued  in  payment  for  property  purchased  by 
the  corporation  within  the  exception  contained  in  §  48.  It  will  be 
observed  that  §  48  makes  no  distinction  between  the  consideration 
for  which  the  original  stock  may  be  issued  and  that  for  which  an 
authorized  increase  of  stock  may  be  issued.  No  authoritative  deci- 
sion on  the  point  is  cited  and  we  find  none.  The  trial  court  has  found, 
and  the  finding  is,  we  think,  sustained  by  the  evidence,  that  on  ac- 
count of  the  impairment  of  the  capital  the  par  value  of  the  bonds  is 
all  that  the  bonds  together  with  the  stock  issued  as  a  bonus  were 
worth,  and  that,  therefore,  the  transaction  is  not  inequitable  as 
against  existing  stockholders.  There  is  a  dictum  in  Morrow  v.  Iron 
<fc  Steel  Co.  (87  Tenn.  262)  to  the  effect  that  where  the  original  capital 
has  become  impaired,  the  corporation  may  issue  new  stock  at  its 
actual  or  market  value,  and  Morawetz  on  Corporations  (2d  ed. 
§  306)  to  the  same  effect  is  cited  as  authority  for  that  proposition. 
The  only  point  decided  in  that  case,  however,  was  that  the  original 
i^tock  could  not  be  issued  for  less  than  par,  and  it  does  not  appear 
that  there  was  any  statute  of  the  State  under  which  the  company 
was  incorporated  prohibiting  the  issue  of  stock  for  less  than  its  face 
value.  This  dictum  in  the  Morrow  case  was  approved  in  Handley  v. 
Stutz  (139  U.S.  417)  where  it  appears,  however,  that  the  subsequent 


CHAP.  I.]  KRAFT    V.  GRIFFON    CO.  945 

issue  of  stock  for  less  than  par  was  authorized  by  all  the  stockholders, 
and  in  that  case,  apparently,  there  was  no  statutory  prohibition 
against  such  action,  and  the  complaint  was  by  prior  creditors  who 
could  not  be  affected  thereby.  In  Dickerman  v.  Northern  Trust  Co. 
(176  U.S.  181)  it  wa^  held  that  bonds  issued  and  stock  given  there- 
with as  a  bonus  were  valid  in  the  hands  of  bona  fide  purchasers  as 
against  stockholders  suing  in  the  right  of  the  corporation,  but  it  was 
intimated  that  they  might  not  be  as  against  creditors.  In  Donald  v. 
American  Smelting  &  Refining  Co.  (62  N.J.  Eq.  729)  the  issue  of  an 
increase  of  corporate  stock  in  payment  for  property  worth  less  than 
the  par  value  of  the  stock  was  enjoined.  (See,  also.  Peck  v.  Elliott, 
79  Fed.  Rep.  10.)  By  analogy,  the  Donald  case  would  seem  to  be  an 
authority  against  the  issue  of  stock  as  a  bonus  with  the  bonds,  for 
there  seems  to  be  no  reason  for  distinction  between  subsequent  issue 
of  stock  for  property  worth  less  than  its  par  value  and  the  subsequent 
issue  of  stock  with  bonds  for  money.  In  Dummer  v.  Smeileij  (110 
Mich.  466)  it  was  held  that  stock  issued  to  a  mortgagee  as  a  bonus  for 
moneys  advanced  was  valid  as  to  prior  creditors,  and  also  as  to  subse- 
quent creditors  if  issued  in  good  faith  and  for  full  market  value.  It  is 
clear  that  the  issue  of  this  stock  as  a  bonus  with  the  bonds  would  not 
be  binding  upon  subsequent  creditors  of  the  company,  for  the  stock- 
holders cannot  thus  enable  the  company  to  obtain  credit  upon  the 
strength  of  its  capital  stock  without  paying  into  the  treasury  of  the 
corporation  the  par  value  of  their  stock  or  delivering  to  it  property  of 
equal  value.  {See  v.  Heppenheimer,  55  N.J.  Eq.  240;  Boneij  v.  Wil- 
liams, id.  691;  Edgerton  v.  Electric  hnprovement,  &c.,  Co.,  50  id.  354; 
Rickerson  Roller-Mill  Co.  v.  Farrell  Foundry  &  Machine  Co.,  75  Fed. 
Rep.  554;  Scovill  v.  Thayer,  105  U.S.  143,  153;  Donald  v.  American 
Smelting  &  Refining  Co.,  supra;  Dickerman  v.  Northern  Trust  Co., 
supra.) 

In  Hebberd  v.  Southwestern  Land  &  Cattle  Co.  (55  N.J.  Eq.  31)  it 
was  stated  that  where  a  corporation  contracted  with  the  purchaser 
of  its  bonds  to  issue  bonus  stock  "such  a  contract  is  binding  upon  the 
company  and  its  shareholders,"  but  that  the  purchaser  of  the  stock 
could  be  compelled  to  pay  the  par  value  of  the  stock  for  the  benefit 
of  subsequent  creditors.  The  effect  of  the  decisions  seems  to  be  that 
neither  before  nor  after  consummation  of  a  sale  of  bonds,  with  a 
delivery  to  the  purchaser  of  the  stock  as  a  bonus,  can  the  purchaser 
at  the  instance  of  the  corporation  or  of  a  stockholder  be  compelled 
to  pay  into  the  treasury  of  the  corporation  the  par  value  of  the  stock, 
and  that  an  innocent  bona  fide  holder  of  the  stock  for  value  and  with- 
out notice  probably  would  not  be  forced  to  contribute  further  even 
for  the  benefit  of  creditors.  Subscriptions  for  capital  stock  and  the 
money  or  property  paid  therefor  constitute  a  trust  fund  for  the  bene- 
fit of  creditors  who,  in  dealing  with  the  corporation,  have  a  right  to 
assume  that  the  stock  has  been  issued  for  cash  or  for  property  of 


946  KRAFT    V.  GRIFFON    CO.  [CHAP.  I. 

equivalent  value,  and  the  persons  to  whom  the  stock  was  originally 
issued  may,  for  the  benefit  of  subsequent  creditors,  be  compelled  to 
restore  the  difference  between  the  par  value  of  the  stock  and  the 
amount  they  paid  therefor.  This  seems  clear  under  the  New  Jersey 
statute  and  decisions.  Such  being  the  case,  the  issue  of  this  stock  at 
less  than  par  will  be  a  fraud  upon  creditors.  We  are  asked  to  permit 
this  fraud  to  be  perpetrated  merely  because  it  is  not  inequital)le  as  to 
existing  stockhoklers  who  only  at  the  present  time  are  complaining. 
We  are  of  opinion,  however,  that  §  48  of  the  Xew  Jersey  (leneral 
Corporation  Law,  already  quoted,  should  be  given  full  force  and 
effect  according  to  its  tenor.  It  in  express  terms  prohibits  the  issue 
of  any  stock  except  for  its  par  value  in  cash  or  the  equivalent  in 
property.  Hence  it  appeai-s  to  us  that  the  i.ssue  made  and  the  other 
issue  contemplateil  is  unauthorized  and,  therefore,  illegal. 

So  far  as  the  bonds  liave  not  been  sold  and  stock  i.ssued,  there 
appears  to  be  no  difficulty  in  the  way  of  affording  injunctive  relief. 
The  case  is  somewhat  different,  however,  with  reference  to  the  bonds 
and  stock  already  issued.  As  to  that,  two  (juestions  may  aui^o,  first, 
the  right  of  the  corporation,  for  this  action  is  brought  by  a  stock- 
holder in  its  right,  to  rescind,  and,  second,  whether  the  bonds  and  stock 
have  reached  the  hands  of  an  innocent  purcha.ser  for  value  who  may 
in  any  event  l)e  entitled  to  protection  to  the  extent  of  the  value  paid 
therefor.  If  this,  instead  of  i;eing  an  executed  contract,  were  an 
executory  contract  between  the  corporation  and  a  purchaser  for  the 
sale  and  purchase  of  these  bonds  with  the  stock  as  a  bonus  and  the 
corporation  refused  to  perform,  we  think  it  dear  that  the  purchaser 
could  not  enforce  performance;  but,  it  being  an  executed  contract, 
the  corporation,  probably,  cannot  rescind  in  any  event  without  re- 
turning the  moneys  received  by  it,  and  we  are  not  informed  as  to 
whether  it  is  in  a  position  to  do  that.  Furthermore,  it  appears  that 
the  defendant  Ernest  F.  CJrcff,  Jr.,  has  sold  the  stock  and  bf)nds  to 
the  copartnership  of  Greff  &  Co.,  of  which  he  is  a  member,  although 
the  stock  still  stands  in  his  name  on  the  books  of  the  company, 
and  the  other  members  of  the  firm  arc  not  parties.  It  may  be,  even  if 
the  corporation  is  not  in  a  position  to  rescind  as  to  the  consummated 
transaction,  that  in  the  interests  of  future  cretlitors  the  court  should 
enjoin  the  further  transfer  of  the  stock  to  prevent  the  same  reaching 
the  hands  of  bona  fide  purchasers  without  notice.  These  questions, 
however,  should  not  be  decided  on  this  appeal. 

Note.  —  See  also  Vaughn  v.  Alabama  National  Bank,  143  Ala. 
572;  New  Haven  Trust  Co.  v.  Gaffney,  73  Conn.  480;  Jackson  v. 
Traer,  64  Iowa,  469;  Peter  v.  Union  Mfg.  Co.,  56  Ohio,  181. 

A  corporation  organized  to  take  over  the  assets  of  a  bankrupt  cor- 
poration may  not  issue  debentures  at  93,  convertible  into  preferred 
stock  at  70.  Carver  v.  Southern  Iron  &  Steel  Co.,  78  N.J.  Eq.  81. 


CHAP.  II.]         ELYTON  LAND  CO.  V.   DOWDELL.  947 


CHAPTER  II. 

RIGHT  OF  STOCKHOLDERS  TO  PREVENT  A  SALE, 
OR  LEASE,   OF  CORPORATE  ASSETS. 


■    ELYTON  LAND  CO.   v.  DOWDELL. 

113  .Ua.  177.     1896. 

Bill  in  equity  filed  by  Annie  Dowdell,  the  owner  of  five  shares  in 
the  Elyton  Land  Company,  for  the  purpose  of  annulling  a  convey- 
ance of  its  property  by  that  corporation  to  the  Elyton  Company,  and 
also  of  annulling  a  mortgage  executed  by  the  latter  company  to  se- 
cure certain  bonds 

Some  years  before  the  conveyance  the  El3ii;on  Land  Company  hav- 
ing on  hand,  as  profits,  a  large  amount  of  notes,  had  issued  dividend 
certificates  to  the  amount  of  S1200  per  share.  These  certificates  had 
subsequently  been  paid  for  in  bonds  of  the  company,  denominated 
"Dividend  Trust  Bonds."  The  plaintiff  had  disposed  of  her  bonds. 
Her  rights  as  a  bondholder  are  not  involved  in  this  litigation,  but 
only  her  rights  as  a  shareholder. 

The  Elyton  Land  Company,  under  its  charter  and  amendments, 
was  authorized  to  buy  land  and  sell  lots;  to  borrow  and  lend  money; 
to  guaranty  indebtedness;  to  build,  rent,  lease,  and  use  buildings;  to 
issue  bonds  in  amount  not  to  exceed  five  millions  of  dollars;  and  to 
take  stock  in  other  corporations. 

In  1893,  the  Elyton  Company  was  incorporated,  with  authority  to 
engage  in  many  enterprises  not  included  in  the  original  or  amended 
charter  of  the  Elyton  Land  Co.  The  fourth  section  of  the  act  incor- 
porating the  Elyton  Co.  enacts,  "that  said  corporation  may  purchase 
the  property,  real,  personal,  and  mixed,  of  the  Elyton  Land  Com- 
pany: provided  that  such  sale  is  made  under  the  laws  now  in  force, 
and  nothing  in  this  act  shall  be  construed  to  impair  or  in  any  manner 
whatsoever  to  affect  the  rights  of  any  stockholder  of  the  Elyton  Land 
Company."  ... 

At  a  regular  meeting  of  the  stockholders  of  the  Elyton  Land  Com- 
pany, a  majority  of  the  stockholders  voted  to  sell  its  entire  assets  to 
the  Elyton  Company.  The  terms  of  the  sale  were,  that  the  Elyton 
Company  should  pay  all  the  liabilities  of  the  Elyton  Land  Company; 
and  issue  S2,500,000  bonds,  $1,796,000  of  which  were  to  be  issued  to 
the  holders  of  the  dividend  trust  bonds  in  payment  thereof;  and  in 
addition  issue  10  shares  of  its  stock  to  each  holder  of  1  share  of  stock 


948  ELYTON    LAND    CO.  V.  DOWDELL.  [cHAP.  II. 

in  the  El>i;on  Land  Co.  Thereupon  the  Elyton  Land  Company  trans- 
ferred all  its  property  to  the  Elyton  Company.  The  latter  issued  the 
bonds  provided  for,  and  executed  a  mortgage  to  secure  tlu>m.  The 
stipulated  amount  of  stock  was  also  issued,  and  was  delivered  to  such 
of  the  stockholders  as  were  willing  to  receive  it  in  exchange  for  the 
stock  held  by  them  in  the  Elyton  Land  Company.  No  other  arrange- 
ment or  provision  was  made  to  pay  the  stockholder  in  the  Elyton 
Land  Company  for  his  share,  except  to  accept  the  stock  in  the  Elyton 
Company.  It  is  alleged  in  the  bill,  and  not  traversed  in  the  plea,  that 
complainant  was  not  present,  was  not  re[)i-esentcd,  and  had  no  notice 
of  the  meeting  of  the  directors  of  the  I^lyton  Land  Company  at  which 
it  was  resolved  to  sell  its  property  to  the  El>ton  Company.  Lnmedi- 
atcly  after  the  consummation  of  the  transaction  Ixjtween  the  two 
corporations,  complainant  filed  her  bill. 

To  the  bill,  the  respondent  filed  a  plea  and  answer  in  support  of  the 
plea.  The  plea  set  forth  the  histoiy  of  the  "Dividend  Trust  Bonds"; 
alleged  that  they  were  valid  obligations  of  the  Elj'ton  Land  Com- 
pany; and  that  the  plaintiff,  having  accepted  her  proportion  of  the 
l)onds  with  full  knowledge  of  the  facts,  is  estojiptxl  to  deny  that  they 
are  binding  obligations  of  the  Elyton  Land  Company. 

The  court  ruled  that  the  plea  was  insufficient  as  a  defense  to  the 
bill.  Appeal. 

Coleman,  J.  We  do  not  doubt  the  right  of  complainant  to  relief, 
so  far  as  the  defense  is  rested  upon  the  plea.  In  the  first  place,  by  its 
charter,  The  Elyton  Company  was  authorized  to  purchase  the  prop- 
erty of  The  Llytcn  Land  Comfjany,  "  provided  that  such  sale  is  made 
under  the  laws  now  in  force,  and  nothing  in  this  act  shall  be  construed 
to  ivifMir,  or  in  any  manner  whatsoever  to  affect  the  rights  of  any 
stockholder  of  The  Elyton  Land  Company."  At  the  time  of  the  sale 
and  transfer  of  its  property.  The  Elytcn  Land  Company  was  solvent, 
a  going  corporaticn,  and  its  stock  was  veiy  valuable.  Its  duties  and 
powers  were  fixed  ly  its  charter,  and  its  business  evidently  managed 
with  great  skill  and  success,  for  the  benefit  of  its  shareholders.  The 
Elyton  Company  by  its  charter  was  authorized  to  engr.ge  in  many 
enterprises  not  within  the  scope  of  the  powers  of  The  Elyton  Land 
Company.  A  shareholder  in  the  latter  might  not  be  willing  to  be- 
come a  shareholder  in  the  other.  Ey  the  sale  and  transfer  of  the 
property,  The  Elyton  Land  Company  divested  itself  of  all  its  prop- 
erty and  capacity  to  continue  the  business  for  which  it  was  organized. 
If  the  sale  stands,  the  owner  of  stock  in  The  Elj-ion  Land  Company 
is  compelled  to  accept  the  stock  of  the  new  corporation,  or  hold  stock 
in  a  corporation  without  capital  assets.  We  lay  no  stress  on  the  argu- 
ment, that  by  its  amended  charter,  The  Elyton  Land  Company  is 
authorized  "to  take  stock"  in  other  corporations.  It  was  certainly 
never  intended  by  that  provision,  to  authorize  The  Elyton  Land 
Company  to  effect  its  own  dissolution  by  a  sale  of  all  its  assets,  and 


CKAP.  II.]         ELYTON  LAND  CO.  V.   DOWDELL.  949 

"take  the  stock"  of  another  company  in  pajanent  for  distribution 
to  the  shareholders  or  any  sharehokler,  without  the  consent  and 
contrary  to  the  preference  of  the  shareholder.  But  it  is  too  clear  for 
argument,  that  the  two  million  shares  of  stock  of  The  Elyton  Com- 
pany were  to  be  issued  to  The  Elyton  Land  Company,  as  a  mere 
conduit  to  the  shareholder  of  The  Elyton  Land  Compan}^,  and  not  to 
be  held  and  owned  as  capital  assets  of  The  Eljlon  Land  Company. 
It  may  be  that  a  private  business  corporation  may  sell  out  its  entire 
property  by  and  with  the  consent  of  less  than  all  its  stockholders, 
for  the  purposes  of  paying  its  debts,  or  for  the  purposes  of  dissolu- 
tion and  settlement,  but  when  this  is  the  purpose,  it  must  be  clearly 
understood,  and  the  terms  and  conditions  of  the  sale  must  be  within 
the  contractual  relations  between  the  corporation  and  its  creditors  or 
shareholders.  There  can  be  no  presumption  that  a  creditor  or  stock- 
holder of  the  dissolved  corporation  will  accept  in  pajmient  of  his 
demand  anything"  but  money.  He  cannot  be  required  to  do  so  arbi- 
trarily. While  the  plea  shows  the  consent  and  ratification  of  the 
complainant  to  the  issue  of  the  certificate  of  twelve  hundred  dollars 
to  the  shareholder  for  each  share  of  stock,  and  its  subsequent  pay- 
ment by  a  dividend  bond,  it  does  not  show  consent  or  ratification  of 
the  sale  of  the  property  and  the  execution  of  the  mortgage.  It  is 
manifest  that  the  whole  plan  of  organization  of  The  Elyton  Com- 
pany was  in  the  interest  of  those  who  held  the  dividend  bonds,  with- 
out reference  to  the  interest  of  the  stockholder.  These  bonds  at  first 
maturing  within  three  or  four  years  were  a  lien  or  charge  only  upon 
§2,400,000  of  its  promissory  notes,  leaving  all  its  other  property  unin- 
cumbered. By  the  arrangement,  the  dividend  bonds,  amounting  to 
only  $1,796,000,  secured  by  a  lien  upon  S2,403,000  of  notes,  were  con- 
verted into  gold  bonds,  running  thirty  years,  and  were  secured  by  a 
mortgage  upon  all  the  property  owned  by  The  Elyton  Land  Com- 
pany. The  bonded  indebtedness  was  increased  over  a  half  million 
dollars.  The  Elyton  Company,  from  the  pleading,  did  not  own  a  dol- 
lar of  capital  other  than  that  acquired  by  the  purchase  from  The 
Elyton  Land  Company. 

Decree  of  City  Court  affirmed. 

Note.  —  There  are  numerous  authorities  to  the  effect  that  if  the 
assets  of  a  prosperous  corporation  are  transferred  to  a  second  corpor- 
ation, which  is  to  pay  for  those  assets  with  its  stock  and  continue  the 
business,  such  transfer  is  a  wrong  to  any  dissenting  stockholder  of 
the  first  corporation. 

Suppose  that,  at  the  instance  of  a  dissenting  stockholder,  a  threat- 
ened transfer  of  this  kind  has  been  enjoined.  Ought  the  injunction 
to  be  dissolved  upon  the  corporation's  giving  adequate  security  for 
the  payment,  in  cash,  to  the  plaintiff  of  the  value  of  his  stock?  In 
Lauman  v.  Lebanon  Valley  R.R.  Co.,  30  Pa.  42,  one  railroad  corpora- 


950  ELYTON    L-A.XD    CO.  V.  DOWDELL.  [CHAP.  II. 

tion  proposed,  pursuant  to  legislative  authority,  to  consolidate  with 
another  railroad  corporation.  The  court  held  that  a  dissentinR  stock- 
holder was  entitled  to  an  injunction,  but  that  this  should  he  dissolved 
if  the  defendants  secured  the  payment  to  the  plaintiff  of  the  value  of 
his  stock.  See  Barnett  v.  Philadelphia  Market  Co.,  218  Pa.  G49.  And 
in  Tanner  v.  Lindell  Ry.  Co.,  180  Mo.  1,  the  court  refused  to  set  aside 
such  a  transfer,  which  had  been  made,  and  remitted  the  plaintiff  to 
his  remedy  for  a  proportionate  share  of  the  proceeds  of  the  sale,  or  for 
damages. 

Laiiman  v.  Lebanon  Valley  R.R.  Co.  .sanctions,  it  is  submitted,  an 
exercise  of  the  power  of  eminent  domain  without  legislative  author- 
ity. (There  was  no  suggestion  in  the  opinion  of  the  court  that  the 
legislative  sanction  of  the  consolidation  included  legislative  sanction 
of  the  condemnation  of  the  interests  of  dis.senting  stockholders.) 

The  weight  of  authority  is  against  the  Lauman  ca.^c.  Thus,  in 
Morris  v.  Ehjton  Land  Co.,  125  Ala.  263  (another  suit  arising  out  of 
the  transactions  stated  in  the  principal  case),  the  lower  court  held 
that  the  relief  to  which  the  dissenting  stockholder  was  entitled  was 
the  payment  of  tlie  value  of  her  stock  in  cash.  The  Supreme  Court 
held  that  this  was  error.  "To  do  so  would  be  nothing  more  nor  less 
than  compelling  the  shareholder  to  sell  his  stock,  which  a  court  of 
equity  has  not  the  power  to  do.  That  it  would  Ix?  to  the  benefit  of 
the  corporation  and  all  other  shareholders  in  it,  to  let  the  tran.'^action 
stand  and  compel  the  dissentient  to  accept  compen.sation  for  his 
stock,  is  an  argument  that  rests  upon  no  higher  ground  than  that  of 
expediency."  See,  accord,  Kean  v.  Johnson,  1  Stockton  (N.J.)  401, 
412;  Abbot  v.  Aynerican  Hard  Rubber  Co.,  33  Barb.  (N.Y.)  578; 
People  V.  Ballard,  134  N.Y.  2G9,  295.  See  also  Natusch  v.  Irinng, 
Gow  on  Partnership,  Appendix  No.  VI,  p.  398,  where  Lord  Eldon 
said:  "The  company  will  indemnify  the  plaintiff  against  loss  by  its 
transactions  already  had,  or  hereafter  to  be  had,  not  for  the  specified 
purposes  of  the  institution.  But  the  right  of  a  partner  is  to  hold  to 
the  specified  purposes  his  partners  whilst  the  partnership  continues, 
and  not  to  rest  upon  indemnities  with  respect  to  what  he  has  not 
contracted  to  engage  in.  A  dissatisfied  partner  may  sell  his  shares  for 
double  what  he  originally  gave  for  them.  But  he  cannot  l)c  com- 
pelled to  part  with  them  for  that  reason;  it  may  be  his  principal  rea- 
son for  keeping  them,  having  the  partnership  concern  carried  on 
according  to  the  contract.  The  original  contract  and  the  loss  which 
his  partners  would  suffer  by  a  dissolution,  is  his  security  that  it  shall 
be  so  carried  on  for  him  and  them  beneficially,  and  with  augmented 
improvement  in  the  value  of  his  shares  and  their  shares." 


CHAP.  II.]      PHILLIPS   V.  PROVIDENCE   STEAM    ENGINE    CO.  951 

PHILLIPS  V.  PROVIDENCE  STEAM  ENGINE  CO. 

21  R.I.  302.     1899. 

Bill  in  equity  to  restrain  a  sale  of  the  property  of  a  corporation, 
ordered  b}^  a  vote  of  the  majority  of  the  stockholders,  brought  by  a 
minority  stockliolder.  The  facts  are  stated  in  the  opinion.  Heard  on 
bill,  answer,  and  replication.   Bill  dismissed. 

Stiness,  J.  The  complainant,  a  stockholder,  seeks  to  restrain  the 
respondent  corporation  from  disposing  of  its  property.  The  company 
is  doing  business  under  an  extension  by  its  creditors,  in  the  terms  of 
which  an  installment  becomes  due  in  November  next.  It  is  agreed 
that  tliis  cannot  be  met,  and  that  the  company  will  be  unable  to  go  on 
in  business  because  the  creditors  refuse  a  further  extension.  In  view 
of  these  facts,  an  arrangement  has  been  made  to  form  a  new  company, 
in  which  creditors  holding  extension  notes  will  take  preferred  stock 
to  the  extent  of  one-half  of  their  claims,  while  other  subscribers  will 
furnish  enough  cash  to  pay  for  the  plant  and  provide  a  worldng  capi- 
tal. The  terms  of  the  proposed  sale  give  to  the  present  stockholders 
$70,000  over  and  above  the  indebtedness  of  the  company,  amount- 
ing to  about  $228,000,  maldng  a  total  pa3anent  of  about  .$298,000. 
The  estimates  of  the  value  of  the  property  vary  from  $327,000  to 
$397,000,  the  latter  being  the  complainant's  estimate;  but  it  does  not 
appear  that  either  party  has  reason  to  expect  that  either  sum  would 
be  reahzed  at  a  forced  sale.  This  is  not  a  sale  in  which  the  other 
stockholders  are  to  gain  any  advantage  beyond  the  privilege,  which  is 
also  offered  to  the  complainant,  of  taking  his  proportionate  amount 
of  cash  or  its  equivalent  stock  in  the  new  company,  as  he  may  prefer. 

It  is  in  effect  a  cash  sale  to  strangers,  approved  by  stockliolders 
representing  3675  shares  against  75  held  by  the  complainant.  While 
this  majority  cannot  affect  any  rights  to  which  he  is  entitled,  it  tends 
to  show  a  fair  price.  It  is  a  well-known  result,  to  which  courts  of 
justice  cannot  be  blind,  that  large  plants  of  this  kind  are  often,  if  not 
usually,  sold  at  a  great  sacrifice  in  case  of  a  forced  sale.  We  should 
not  have  to  go  outside  of  the  records  of  our  own  court  to  find  proof 
of  this  fact.  A  sale  being  necessary,  the  question  is  how  shall  it  be 
made.  The  prayer  of  the  bill  is  that  a  receiver  may  be  appointed; 
that  the  business  may  be  wound  up  and  the  company  dissolved ;  and 
the  argument  is  that  the  sale  of  the  effects  should  be  at  public  auction. 

The  question,  then,  is  whether  the  complainant  is  entitled  to  such 
a  decree. 

There  is  a  difference  of  opinion  as  to  the  power  of  a  corporation  to 
sell  its  entire  property  and  thus  practically  to  retire  from  business. 
Some  coilrts  hold  that  it  may  be  done  by  the  consent  of  all  the  stock- 
holders (Am.  &  Eng.  Ency.  L.  2  ed.  vol.  7,  p.  734,  note  1),  and  others 
hold  that  it  may  be  done  by  a  majority.   Ditto,  notes  2,  3,  and  4.  All 


952  PHILLIPS   t'.  PROVIDENCE    STEAM    ENGINE   CO.      [cHAP,  11. 

of  the  authorities  cited  in  note  1,  however,  do  not  hold  that  the  con- 
sent of  all  the  stockholders  is  necessary,  e.g.,  Treadwell  v.  Salisbury, 
7  Gray,  393;  Wilsan  v.  Miers,  100  Eng.  Com.  Law,  248,  et  al.  But 
the  editor  adils:  "There  seems  to  l)c  no  doubt  that  it  may  do  so  when 
it  is  no  longer  able  to  profitably  continue  its  business." 

We  think  that  this  is  the  correct  rule.  It  has  been  recognized  in 
this  State.  Hodges  v.  N.E.  Screw  Co.,  1  R.I.  312,  350.  In  Wilson 
v.  Prop'rs  Central  Bridge,  9  R.I.  590,  Br.\yton,  C.J.,  said:  "No  case 
has  been  cited,  and,  in  view  of  the  dilij:;ence  of  counsel  in  thb<  case, 
we  may  say  there  is  no  ca.se  which  holds  that  where  the  purpose  of 
the  incorporation  could  not  be  accomplished,  the  business  contem- 
plated coukl  not  be  carried  on;  where  the  capital  had  lx?en  exhausted 
in  endeavors  to  go  on,  having  no  means  to  go  further;  a  com[iany  thus 
laboring  under  i)urdens  which  they  could  no  longer  bear,  coukl  not  re- 
lease themselves  by  a  surrender  of  their  franchise  to  the  State  which 
granted  and  which  was  willing  to  receive  it,  and  that  by  a  majority. 
This  is  not  only  for  their  benefit,  but  it  is  a  necessity,  and  it  would 
l)e  hard  in(l(>ed  if  one  stockholder  could  by  his  dissent  prevent  such 
relief  against  the  prayer  of  all  other  members  of  the  company."  In 
Peabody  v.  Westerly  Water  Works,  20  R.I.  176,  a  necessary  limita- 
tion to  this  rule  was  recognized  in  the  words:  "The  action  of  the 
company  was  taken  by  a  vote  of  more  than  1100  out  of  a  total  of 
1350  shares.  There  is  no  proof  of  unfairness,  oppression,  or  fraud  in 
such  action.  The  ca.se  as  presente<l  is  simply  that  of  a  stockholder 
who  differs  from  a  large  majority  of  his  fellow  stockholders  as  to  the 
expediency  of  a  .sale." 

The  principle  upon  which  these  cases  rest  is  that  a  corporation  may 
dispose  of  its  property  by  a  majority  vote,  in  cases  which  are  free 
from  unfairness,  oppression,  and  fraud.  Against  wrongs  of  this  kind 
equity  will  interfere.  To  this  cfTect  are  Lauman  v.  Libanon  R.R., 
30  Pa.  St.  42;  Treadwell  v.  Salisbury,  7  Gray,  393;  Leathers  v.  Janney, 
41  La.  Ann.  1120;  Sewell  v.  East  Cape  May  Co.,  50  N.J.  E(i.  717; 
Sargent  v.  Webster,  13  Met.  497;  Warfield  v.  Marshall,  72  la.  666; 
Wilson  V.  Miers,  100  Eng.  Com.  Law,  348;  see  also  Miner's  Ditch  Co. 
v.  Zcllerbach,  37  Cal.  543. 

The  complainant  does  not  charge  improper  conduct,  but  simply 
that  he  considers  the  price  inadequate  and  unjust ;  and  hence  he  prays 
for  a  receiver  and  a  sale  of  the  property  by  auction.  Ordinarily  when 
a  court  orders  a  sale  it  can  only  be  done  by  auction.  A  court  cannot 
negotiate  a  private  sale,  and  it  orders  an  auction  as  the  fairest  chance 
for  all  parties  to  bid  and  buy.  But  when  the  parties  in  interest  have 
negotiated  a  sale  which  is  fair  to  all  concerned,  and  there  is  nothing 
to  show  that  a  larger  price  may  reasonably  be  expected,  it  does  not 
follow  that  an  auction  sale  would  be  ordered.  This  quest icfh  was  con- 
sidered in  Quidyiick  Co.  v.  Chafee,  13  R.I.  402,  in  which  the  trustee 
had  au  offer  for  the  entire  property,  approved  by  nearly  all  the  cred- 


CHAP.  II.]      PHILLIPS   V.  PROVIDENCE    STEAM    ENGINE    CO.  953 

itors.  Then  other  parties  intervened,  agreeing  to  bid  the  amount 
named  at  auction,  and  the  court  ordered  a  sale  by  auction.  In  the 
present  case  there  is  no  evidence  that  anybody  is  wilhng  to  give  as 
much  as  the  offer  proposed,  or  that  there  is  any  reason  to  suppose 
that  it  will  bring  as  much  or  more.  The  only  testimony  put  in  by  the 
complainant  is  that  the  tools  will  probably  bring  more  than  they  are 
valued  at  by  the  company,  while  as  to  the  bulk  of  the  property,  the 
real  estate,  etc.,  there  is  no  evidence  of  market  value.  Moreover,  the 
complainant  does  not  show  that  he  desires  to  bid  upon  the  property 
himself,  or  that  he  knows  of  any  one  who  would  bid  at  a  sale.  In 
this  absence  of  evidence  that  a  larger  total  might  be  expected  from  an 
auction  sale  we  see  no  reason  to  disturb  the  agreement  already  made, 
which,  upon  the  testimony  given,  seems  to  be  fair. 

The  complainant  relies  strongly  on  Mason  v.  Pewabic  Co.,  133  U.S. 
50.  In  that  case  the  court  had  appointed  a  master  to  value  the  prop- 
erty, which  he  reported  to  be  nearly  $500,000.  A  majority  of  the 
company  had  arranged  a  sale  to  themselves  at  $50,000.  Naturally,  in 
view  of  such  gross  inadequacy,  the  court  ordered  a  sale  by  auction. 
The  case  was  very  different  in  its  details  from  the  case  before  us. 

In  Wilson  v.  Prop'rs  Central  Bridge,  9  R.I.  590,  the  city  of  Provi- 
dence had  control  of  the  corporation  and  had  sold  the  corporate 
property  to  itself.  The  court  restrained  the  city  from  taking  posses- 
sion and  ordered  a  sale  by  auction.  That,  too,  was  a  different  case 
from  this  one. 

The  court  is  bound  to  look  to  the  interests  of  all  parties,  and  espe- 
cially to  protect  the  rights  of  a  minority  from  oppression  and  fraud. 
But  where,  as  in  this  case,  no  such  thing  is  charged,  and  nothing  is 
shown  to  lead  to  the  belief  of  a  better  total  price,  the  complainant 
makes  no  case  for  interference.  To  show  that  movable  tools  may  be 
sold  at  a  price  somewhat,  but  not  largely,  higher  than  that  at  which 
they  are  scheduled,  is  quite  a  different  thing  from  showing  that  the 
plant  as  a  whole  would  sell  for  more  than  the  price  offered.  To  set 
aside  the  sale  under  these  circumstances  would  be  to  risk  a  certainty 
for  an  uncertainty,  without  any  testimony  on  which  to  base  a  hope  of 
benefit  to  the  stockholders  from  such  interference.  We  see  no  reason 
for  such  a  step  in  the  dark.  Bill  dismissed. 

Note.  —  There  are  numerous  authorities,  accord.  As  to  dissolu- 
tion, see  Arents  v.  Durham  Co.,  101  Fed.  338. 

In  Treadwell  v.  Salisbury  Mfg.  Co.,  7  Gray  (Mass.)  393,  it  was 
proposed  to  convey  the  real  estate  of  the  defendant  to  a  second  cor- 
poration at  a  specified  price,  payable  in  the  stock  of  the  second  cor- 
poration. The  evidence  tended  to  prove  (p.  398)  that  this  step  was 
part  of  a  plan  made  necessary  by  the  financial  difficulties  of  the  de- 
fendant. BiGELOW,  J.,  said:  "We  entertain  no  doubt  of  the  right  of  a 
corporation,  established  solely  for  trading  and  manufacturing  pur- 


954  PHILLIPS   V.  PROVIDENCE    STEAM    ENGINE    CO.      [CHAP.  II. 

poses,  by  a  vote  of  the  majority  of  their  stockholders,  to  wind  up 
their  affairs  and  close  their  business,  if  in  the  exercise  of  a  sound  dis- 
cretion they  deem  it  expedient  so  to  do.  At  common  law,  the  rij^ht  of 
corporations,  acting  by  a  majority  of  their  stockholders,  to  sell  their 
property  is  absolute,  and  is  not  limited  as  to  objects,  circumstances 
or  quantity,  Angell  &  Ames  on  Corp.  §  127  &  seq.;  2  Kent  C'om. 
(6th  ed.)  280;  Mayor,  etc.,  of  Colchester  v.  Lowton,  1  Ves.  &  B.  226, 
240,  244.  Bimiey's  case,  2  Bland,  142,  To  this  general  rule  there  are 
many  exceptions,  arising  from  the  natu^'C  of  particular  corporations, 
the  purposes  for  which  they  were  created,  and  the  duties  and  liabili- 
ties imposed  on  them  by  their  charters.  Corporations  estal)lish(>d  for 
objects  quasi  public,  such  as  railway,  canal  and  turnpike  corpora- 
tions, to  which  the  right  of  eminent  domain  and  other  large  privileges 
are  gi-anted  in  order  to  enable  them  to  accommodate  the  public,  may 
fall  within  the  exception;  as  also  charitable  and  religious  bodies,  in 
the  administration  of  whose  affairs  the  community  or  some  portion  of 
it  has  an  interest  to  see  that  their  corporate  duties  are  propeily  dis- 
charged. Such  corporations  may  perhaps  be  restrained  from  alienat- 
ing their  property,  and  compelled  to  appropriate  it  to  specific  uses, 
by  mandamus  or  other  proper  process.  But  it  is  not  so  with  corpora- 
tions of  a  private  character,  established  solely  for  trading  antl  maim- 
facturing  purposes.  Neither  the  public  nor  the  legislature  have  any 
direct  interest  in  their  business  or  its  management.  These  are  com- 
mitted solely  to  the  stockholders,  wIkj  have  a  pecuniary  stake  in  the 
proper  conduct  of  their  affairs.  By  accepting  a  charter,  the}'  do  not 
undertake  to  carry  on  the  business  for  which  they  are  incorporated, 
indefinitely,  and  without  any  regard  to  the  condition  of  their  cor- 
porate property.  Public  policy  does  not  require  them  to  go  on  at  a 
loss.  On  the  contrary,  it  would  seem  very  clearly  for  the  public  wel- 
fare, as  well  as  for  the  interest  of  the  stockholders,  that  they  should 
cease  to  transact  business  as  soon  as,  in  the  exercise  of  a  sound  judg- 
ment, it  is  found  that  it  cannot  be  prudently  continued.  If  this  be 
not  so,  we  do  not  see  that  any  limit  could  be  put  to  the  business  of  a 
trading  corporation,  short  of  the  entire  lo.ss  or  destruction  of  the  cor- 
porate property.  The  stockholders  could  be  compelled  to  carry  it  on 
until  it  came  to  actual  insolvency.  .  ,  .  Upon  the  facts  found  in  the 
case  before  us,  we  see  no  reason  to  doubt  that  the  vote  of  the  majority 
of  the  stockholders,  for  the  sale  of  the  corporate  property,  and  the 
closing  of  the  business  of  the  corporation,  was  justified  by  the  con- 
dition of  their  affairs.  Without  available  capital,  and  without  the 
means  of  procuring  it,  the  further  prosecution  of  their  business  would 
be  unprofitable,  if  not  impracticable.  Under  these  circumstances  it 
was  in  furtherance  of  the  purposes  of  the  corporation,  to  pay  their 
debts,  close  their  affairs  and  settle  with  their  stockholders  on  terms 
most  advantageous  to  them.  Sargent  v.  V/ehster,  13  Met.  504.  Nor 
can  we  see  anything  in  the  proposed  sale  to  a  new  corporation,  and 


CHAP.  II.]  MASON    V.  PEWABIC   MINING    CO.  955 

the  receipt  of  their  stock  in  payment,  which  makes  the  transaction 
illegal.  It  is  not  a  sale  by  a  trustee  to  himself,  for  his  own  benefit; 
but  it  is  a  sale  to  another  corporation  for  the  benefit  and  with  the 
consent  of  the  cestuis  que  trust,  the  old  stockholders.  The  new  stock 
is  taken  in  lieu  of  money,  to  be  distributed  among  those  stockholders 
who  are  willing  to  receive  it,  or  to  be  converted  into  money  by  those 
who  do  not  desire  to  retain  it." 

In  Maben  v.  Gulf  Coal  Co.,  173  Ala.  259,  the  court  upheld  a  transfer 
of  substantially  all  the  assets  of  the  corporation,  although  it  did  not 
appear  that  this  transfer  was  made  necessary  by  the  financial  condi- 
tion of  the  corporation.  The  court  relied  on  Treadwell  v.  Salisbury 
Mfg.  Co.,  and  did  not  mention  the  Elyton  cases,  supra. 

In  Tamier  v.  Lindell  Ry.  Co.,  180  Mo.  1,  the  court  said  (p.  24) :  "It 
is  said  that  if  the  corporation  is  doing  business  at  a  loss  the  majority 
may  close  it  out.  But  suppose  it  is  not  running  at  an  actual  loss,  yet 
at  a  profit  so  small  that  in  the  judgment  of  the  majority  the  capital 
invested  is  not  yielding  what  it  should,  and  from  a  business  stand- 
point it  should  be  diverted  into  a  channel  that  promises  better 
results,  is  there  no  discretion  lodged  in  the  majority  to  act  in  such 
emergency?  "  The  company  was  earning  a  dividend  of  five  per  cent 
per  annum.  If  this  line  of  reasoning  is  sound,  it  undermines  Elyton 
Land  Co.  v.  Dowdell,  and  similar  authorities.  Transfers  of  the  assets 
of  solvent  corporations  (if  not  made  for  any  fraudulent  purpose)  are 
made  because  the  majority  believe  that  thereby  their  profits  will  be 
increased.  The  question  remains  whether  an  attempt  to  increase  the 
profits  by  such  a  transfer  is  permitted  by  the  compact  between  the 
stockholders.  It  is  to  be  noted  that  no  court  has  yet  held  that  there 
is  a  discretion  lodged  in  the  majority  to  change  the  purposes  of  the 
corporation  when  that  ''promises  better  results,"  so  that  the  action 
of  the  majorit}''  binds  the  minority. 


MASON  V.  PEWABIC  MINING   CO. 

133  U.S.  50.     1890. 

The  Pewabic  Mining  Company  was  about  to  be  dissolved.  The 
holders  of  a  majority  of  the  stock  approved  the  transfer  of  its  assets 
to  a  new  corporation  for  $50,000,  the  stockholders  in  the  old  corpora- 
tion to  be  entitled,  at  their  option,  to  their  pro  rata  share  of  the  stock 
of  the  new  corporation,  or  their  pro  rata  share,  in  cash,  in  the  value 
of  the  assets  transferred,  such  value  being  taken  to  be  $50,000. 

Minority  stockholders  sought  to  enjoin  the  sale.  A  special  master 
was  appointed,  who  found  the  value  of  the  assets  to  be  nearly  $500,- 
000.  The  Circuit  Court  directed  that  the  property  be  sold  at  public 
auction  for  cash  to  the  highest  bidder. 


956  MA^ON    V.  PEWABIC    MINING    CO.  [CIIAP.   II. 

Mr.  Justice  Miller.  With  regard  to  the  main  question,  the 
power  of  the  directors  and  of  the  majority  of  the  corporation  to  sell 
all  of  the  assets  and  property  of  the  Pewahic  Mining  Company  to 
the  new  corporation  under  the  existinj?  circumstances  of  this  case, 
we  concur  with  the  Circuit  Court.  It  is  earnestly  argued  that  the 
majority  of  the  stockholders  —  such  a  relatively  large  majority  in 
interest  —  have  a  right  to  control  in  this  matter,  especially  a.s  the 
corporation  exists  for  no  other  purpose  but  that  of  winding  up  its 
affairs,  and  that,  therefore,  the  majority  should  control  in  determin- 
ing what  is  for  the  interest  of  the  whole,  and  as  to  the  best  manner  of 
effecting  this  object.  It  is  further  said  that  in  the  present  ca.se  the 
dissenting  stockholders  are  not  compelled  to  enter  into  a  new  cor- 
poration with  a  new  set  of  corporators,  l)ut  have  their  option,  if  they 
do  not  choose  to  do  this,  to  receive  the  value  of  their  stock  in  money. 

It  seems  to  us  that  there  are  two  insurmountable  objections  to 
this  view  of  the  sui)ject.  The  fii-st  of  the.so  is  that  tiie  estimate  of  the 
value  of  the  property  which  is  to  be  transferred  to  the  new  corpora- 
tion and  the  new  set  of  stockliolders  is  an  arbitrar>'  estimate  made 
by  this  majority,  and  without  any  power  on  the  part  of  the  dissent- 
ing stockholders  to  take  part,  or  to  exercise  any  influence,  in  making 
this  estimate.  Tliey  arc  therefore  reduced  to  the  propo.sition  that 
they  must  go  into  this  new  company,  however  much  they  may  be 
convinced  that  it  is  not  likely  to  be  successful,  or  whatever  other 
objections  they  may  have  to  becoming  members  of  that  corporation, 
or  they  must  receive  for  the  property  which  they  have  in  the  old 
company  a  sum  which  is  fixed  by  those  who  are  buying  them  out. 
The  injustice  of  this  needs  no  comment.  If  this  be  established  as  a 
principle  to  govern  the  winding  up  of  dissolving  corporations,  it 
places  any  unhappy  minority,  as  regards  the  interest  which  they 
have  in  such  corporation,  under  the  absolute  control  of  a  majcjrity, 
who  may  themselves,  as  in  this  case,  constitute  the  new  company, 
and  become  the  purchasers  of  all  the  assets  of  the  old  company  at 
their  own  valuation. 

The  other  objection  is  that  there  is  no  superior  right  in  two  or 
three  men  in  the  old  company,  who  may  hold  a  preponderance  of  the 
stock,  to  acquire  an  absolute  control  of  the  whole  of  it,  in  the  way 
which  may  be  to  their  interest,  or  which  they  may  think  to  be  for  the 
interest  of  the  whole.  So  far  as  any  legal  right  is  concerned,  the  mi- 
nority of  the  stockholders  has  as  much  authority  to  say  to  the  ma- 
jority as  the  majority  has  to  say  to  them,  "We  have  formed  a  new 
company  to  conduct  the  business  of  this  old  corporation,  and  we  have 
fixed  the  value  of  the  shares  of  the  old  corporation.  We  propose  to 
take  the  whole  of  it  and  pay  you  for  your  shares  at  that  valuation, 
unless  you  come  into  the  new  corporation,  taking  shares  in  it  in  paj^- 
ment  of  your  shares  in  the  old  one."  When  the  proposition  is  thus 
presented,  in  the  light  of  an  offer  made  by  a  very  small  minority  to  a 


CHAP.  II.]  MASON   V.  PEWABIC   MINING    CO.  957 

very  large  majority  who  object  to  it,  the  injustice  of  the  proposition 
is  readil}^  seen ;  yet  we  know  of  no  reason  or  authority  why  those  hold- 
ing a  majority  of  the  stock  can  place  a  value  upon  it  at  which  a  dis- 
senting minority  must  sell  or  do  something  else  which  they  think  is 
against  their  interest,  more  than  a  minority  can  do. 

We  do  not  see  that  the  rights  of  the  parties  in  regard  to  the  assets 
of  this  corporation  differ  from  those  of  a  partnership  on  its  dissolu- 
tion, and  on  that  subject  Lindley  on  Partnership  says,  Book  3,  chap. 
10,  §  6,  sub-div.  4,  p.  555,  original  edition:  "In  the  absence  of  a 
special  agreement  to  the  contrary,  the  right  of  each  partner  on  a  dis- 
solution is  to  have  the  partnership  property  converted  into  money 
by  a  sale,  even  though  a  sale  may  not  be  necessary  to  the  payment  of 
debts.  This  mode  of  ascertaining  the  value  of  the  partnership  effects 
is  adopted  by  courts  of  equity,  unless  some  other  course  can  be 
followed  consistently  with  the  agreement  between  the  partners,  and 
even  where  the  partners  have  provided  that  their  shares  shall  be 
ascertained  in  some  other  way;  still,  if  owing  to  any  circumstance 
their  agreement  in  this  respect  cannot  be  carried  out,  or  if  their 
agreement  does  not  extend  to  the  event  which  has  in  fact  arisen, 
realization  of  the  property  by  a  sale  is  the  only  alternative  which  a 
court  of  equity  can  adopt."  .  .  . 

We  do  not  say  that  there  may  not  be  circumstances  presented  to  a 
court  of  chancery,  which  is  winding  up  a  dissolved  corporation  and 
distributing  its  assets,  that  will  justify  a  decree  ascertaining  their 
value,  or  the  value  of  certain  parts  of  them,  and  making  a  distribu- 
tion to  partners  or  shareholders  on  that  basis;  but  this  is  not  the 
general  rule  by  which  the  property  in  such  cases  is  disposed  of  in  the 
absence  of  an  agreement. 

Note.  —  It  is  probably  law  that  a  stockholder  cannot  be  required 
to  accept  anything  but  cash  or  its  equivalent  for  his  interest  in  the 
corporation,  even  if  a  sale  of  the  corporate  assets  is  made  because  the 
corporation  is  in  financial  difficulties.  See  People  v.  Anglo-Ameri- 
can  Ass'n,  60  N.Y.  App.  Div.  389. 

But  there  would  seem  to  be  no  objection  to  a  sale  of  the  assets  to 
a  new  corporation  at  a  fair  price  to  be  paid  by  the  new  corporation 
in  its  stock  at  par,  or  cash,  at  the  option  of  the  old  stockholders.  See 
Slattery  v.  Greater  New  Orleans  Co.,  128  La.  871;  Treadwell  v.  Salis- 
hury  Mfg.  Co.,  supra. 

The  ultimate  question,  it  is  submitted,  is  therefore  this:  is  the  plan 
of  reorganization  proposed  by  the  majority  such  that  a  sale  at  auc- 
tion for  cash  may  be  dispensed  with  without  unfairness  to  the 
minority? 


958  SMALL    V.  MINNEAPOLIS    ELECTRO-MATRIX    CO.     [CHAP.  II. 

SMALL  V.  MINNEAPOLIS  ELECTRO-MATRIX  CO. 

45  Minn.  264.     1891. 

Dickinson,  J.  The  Minneapolis  Electro-Matrix  Company  is  a 
Minnesota  corporation,  of  which  the  plaintiff,  and  the  several  indi- 
vidual defendants  who  have  an.swered  in  this  action,  are  the  stock- 
holders and  directors.  The  American  Electro-Matrix  Company  is  a 
foreign  corporation,  organized  and  existing  under  the  general  laws 
of  the  state  of  New  Jersey.  For  the  sake  of  ijrevity,  the  former  cor- 
poration will  be  hereafter  designated  as  the  '*  Minneapolis  Company  " 
and  the  latter  as  the  "American  Company."  The  case  is  here  on 
appeal  by  the  Minneapolis  Company  and  the  individual  defendants 
above  referred  to,  from  an  order  refusing  to  dissolve  a  temporary 
injunction.  Speaking  comprehensively,  it  may  be  said  that  the  in- 
junction restrained  the  Minneapolis  Company  and  the  individual 
defendants,  its  directors  and  stockholders,  from  carrying  into  effect 
a  resolution  of  the  board  of  directors,  which,  as  set  forth  in  the 
answers  of  the  appellants,  was  as  follows:  — 

"Resolved,  that  the  directors  of  the  Minneapolis  Electro-Matrix 
Company  recommend  to  the  stockholders  of  the  company  the  adop- 
tion of  the  following  proposition  from  the  American  Electro-Matrix 
Company:  'That  the  Minneapolis  Electro-MatrixCompany  lease  for 
twenty-five  years  whatever  rights  and  property  of  every  description 
it  has  under  the  laws  of  Minnesota  a  right  to  lease,  to  the  American 
Electro-Matrix  Company,  a  corporation  organized  under  the  laws  of 
the  state  of  New  Jersey,  upon  the  following  terms,  namely:  The 
American  Electro-IMatrix  Company  shall  assume  and  pay  all  in- 
debtedness of  this  company,  and  meet  all  obligations  arising  under 
any  contracts  made  by  it;  shall  furnish  all  capital  that  maybe  re- 
quired for  the  prompt  prosecution  of  its  patent  applications,  inter- 
ferences or  other  suits,  for  the  speedy  development  of  its  business  in 
this  country,  for  the  negotiation  of  franchises  in  foreign  countries  on 
the  best  possible  terms,  and  for  the  manufacture  of  machines  in  the 
most  speedy  and  perfect  manner;  shall  bring  into  the  direction  and 
practical  management  men  of  high  reputation  and  business  experi- 
ence, and  shall  enlist  in  the  different  states  the  active  co-operation 
of  efficient  men,  through  organization  of  franchise  companies  or 
otherwise  if  more  desiral:)le  arrangements  for  the  interests  of  this 
company  can  be  made;  and  shall  pay  to  the  Minneapolis  Electro- 
Matrix  Company  one-half  of  the  net  receipts  from  all  sources,  after 
deducting  all  expenditures  under  the  provisions  of  this  lease.' 

"Resolved,  that  T.  C.  Bates,  Erastus  Wiman,  and  C.  W.  Davison 
be  a  committee  to  prepare,  in  conference  with  the  American  Electro- 
Matrix  Company,  and  with  the  advice  of  Duncan,  Curtis  &  Page,  on 
behalf  of  this  company,  a  lease  in  accordance  with  the  above  terms, 


CHAP.  II.]     SMALL    V.  MINNEAPOLIS    ELECTRO-MATRIX    CO.  959 

to  be  executed  on  behalf  of  this  company  by  its  officers,  upon  the 
approval  of  the  stockholders  at  a  meeting  hereby  called  to  be  held 
at  Minneapolis." 

After  the  adoption  of  these  resolutions,  a  meeting  of  the  stockhold- 
ers was  called  to  take  action  upon  this  matter.  By  the  injunction, 
as  subsequently  modified,  the  Minneapolis  Company  and  its  directors 
were  restrained  from  executing  a  lease  or  transfer  of  its  franchises 
or  property  to  the  American  Company,  and  the  stockholders  were 
enjoined  from  voting  to  ratify  any  such  lease  or  transfer;  but  it  was 
expressly  provided  that  the  corporation  should  not  be  thereby  pro- 
hibited from  carrying  on  its  ordinary  and  lawful  business  through 
its  board  of  directors  and  its  officers  in  its  accustomed,  usual,  and 
lawful  manner,  retaining  to  itself  the  control  and  management  of  its 
affairs. 

The  facts  bearing  upon  the  propriety  of  the  injunction  are  dis- 
closed only  so  far  as  they  are  set  forth  in  the  pleadings.  The  pre- 
cise purposes  for  which  the  IMinneapolis  Company  was  organized  are 
not  stated  in  the  pleadings  of  either  party.  The  facts  are  disclosed, 
however,  that  the  corporation  owns  valuable  patents  for  a  new  sys- 
tem of  printing,  which  it  purchased  by  the  issue  of  the  entire  amount 
of  its  authorized  capital  stock,  —  SI, 000,000;  and  the  answers  of  the 
defendants  justify  the  inference  that  the  proper  business  of  the  cor- 
poration consisted  in  part,  if  not  principally,  in  the  construction  of 
machines  or  apparatus  for  printing,  under  such  patents,  and  in  intro- 
ducing them  into  use  by  others  so  as  to  derive  a  royalty  therefrom. 
But  however  this  may  be,  and  whatever  may  have  been  the  particu- 
lar nature  and  scope  of  the  purposes  for  which  this  organization  was 
effected,  we  are  of  the  opinion  that  the  learned  judges  of  the  district 
court  were  right  in  considering  the  acts  to  which  the  injunction  was 
directed  as  being  a  violation  of  the  legal  rights  of  the  plaintiff  as  a 
stockholder  of  the  corporation,  in  that  the  carrying  into  effect  of 
what  was  contemplated  in  these  resolutions  would  have  been  sub- 
stantially a  surrender  and  transfer  of  the  property  and  lousiness  of 
the  Minneapolis  Company  to  another  and  foreign  corporation,  not 
for  the  purposes  of  winding  up  the  affairs  of  the  former,  and  distribut- 
ing its  property  to  those  who  would  in  that  event  be  entitled  to  it, 
but  in  order  that  the  business  which  this  corporation  was  organized 
to  prosecute  might  be  for  the  period  named  carried  on  by  the  for- 
eign corporation,  in  consideration  of  a  percentage  of  the  proceeds  of 
the  business  to  be  paid  by  it.  That  such  was  the  purpose  contem- 
plated seems  very  apparent  from  the  terms  of  the  resolution  above 
recited.  It  is  to  be  assumed  from  the  pleadings  and  from  the  reso- 
lution itself  that  this  corporation  was  organized  for  the  purpose  of 
carrying  on  some  business,  whatever  its  precise  nature  may  have 
been,  and  the  resolution  discloses  the  purpose  that  for  the  period  of 
twenty-five  years  such  business  should  not  be  conducted  by  the  ]\Iin- 


960  SMALL    V.  MINNEAPOLIS    ELECTRO-MATRIX    CO.     [CHAP.  II. 

nesota  corporation,  but  that  it  should  be  taken  up  and  carried  on 
solely  by  the  American  Company.  As  justifying  these  condusion.s,  it 
is  only  necessary  that  attenti<jii  be  tlireeted  to  the  facts  that  the 
transfer  of  rights  and  property  is  to  be  for  the  period  of  twenty-five 
years;  that  the  American  Company  is  to  assume  and  pay  all  the  debts 
and  perform  all  the  contract  obligations  of  the  Minneapolis  Com- 
pany; to  furnish  the  capital  for  the  prosecution  of  tiie  patent  ai)pli- 
cations  of  the  domestic  corporation,  for  the  conduct  of  its  suits,  the 
speedy  development  of  its  business,  for  the  negotiation  of  francliises, 
the  manufacture  of  machines;  and  to  pay  to  the  Minnesota  corpora- 
tion, whose  continued  existence  is  plainly  contemi)lated,  a  specified 
percentage  of  the  proceeds  of  the  business.  Other  provisions,  recited 
above,  but  not  here  again  referred  to,  go  to  support  the  conclusions 
announced. 

We  need  not  inf|uire  how  far,  or  under  what  circumstances,  con- 
siderations of  public  policy  and  of  the  general  interests  of  the  state 
may  affect  the  right  of  a  corporation  to  discontinue  the  business  for 
which  it  was  created,  and  to  surrender  to  another  corporation  its 
property  and  the  conduct  of  such  business.  We  do  decide  that  such 
a  surrender  of  the  property,  and,  so  far  as  possil)le,  of  the  functions, 
of  a  corporation,  in  order  that,  while  it  is  to  still  continue  in  exist- 
ence, its  business  may  be  carried  on  by  another  corporation,  to  which 
such  transfer  is  made,  would  violate  the  rights  of  a  non-assenting 
stockhokler  arising  from  the  contract  implied,  if  not  expressed,  in 
the  creation  of  such  an  organization;  and  he  would  be  entitletl  to 
have  such  acts  restrained  bv  injunction.  Stewart  v.  Eric  ct  Western 
Trans.  Co.,  17  Minn.  348  (372,  398);  Cook,  Stocks,  §§  6G7,  068;  1 
Mor.  Priv.  Corp.,  §§  413,  410;  Black  v.  Delaware,  etc..  Canal  Co.,  24 
N.J.  Eq.  455;  Zabriskie  v.  Hachensack  &  N.Y.  R.  Co.,  18  N.J.  Eq. 
178;  Abbot  v.  Am.  Hard  Rubber  Co.,  33  Barb.  578;  Middlesex  R.  Co. 
V.  Boston  &  Chelsea  R.  Co.,  115  Mass.  347.  In  the  absence  of  express 
provision  to  the  contrary,  it  is  to  be  considered  as  the  law  concern- 
ing business  corporations  that  their  affairs  are  to  be  managed  in  the 
interest  of  their  stockholders,  and  by  directors  or  agents  apijointed 
by  them.  This  is  to  be  taken  to  be  implied  in  the  contract,  unless 
in  some  manner  a  different  intention  is  expressed.  It  is  not  to  be  in- 
ferred from  the  pleadings  in  this  case,  even  if  such  a  thing  be  possible, 
that  the  original  purposes  of  this  corporation  may  have  included  the 
project  of  surrendering  its  business  to  some  other  corporation,  to  be 
carried  on  for  a  period  of  years  by  the  latter,  under  the  direction  and 
control  of  its  officers  and  stockholders,  the  stockholders  of  the  com- 
pany thus  transferring  its  business  having  no  voice  in  the  selection 
of  such  officers  nor  in  the  management  of  the  business.  If  in  fact  the 
contract  involved  in  the  corporate  organization  did  express  any  such 
extraordinary  purpose  as  the  committing  of  the  business  and  inter- 
ests of  this  company  to  the  sole  management  and  control  of  strangers 


CHAP.  II.]      BARTHOLOMEW  V.   DERBY  RUBBER  CO.  961 

to  this  corporation  and  its  stoclrdiolders,  for  a  period  of  twenty-five 
years,  we  think  that  it  was  incumbent  upon  the  defendants,  upon 
this  motion  to  dissolve  the  injunction,  to  show  that  fact  by  present- 
ing the  articles  of  incorporation. 

Order  affirmed. 

Note.  —  See,  accord,  Parsons  v.  Tacoma  Smelting  Co.,  25  Wash. 
492,  and  cases  cited. 

A  fortiori,  a  stockholder  may  object  to  a  lease  by  a  pubHc  service 
corporation,  not  sanctioned  by  the  legislature.  See  Dow  v.  Northern 
R.R.  Co.,  67  N.H.  1;  Oregon  Ry.  Co.  v.  Oregonian  Ry.  Co.,  Ltd., 
130  U.S.  1. 


BARTHOLOMEW  v.  DERBY  RUBBER  CO. 

69  Conn.  521.     1897. 

Suit  by  minority  stockholders  of  a  manufacturing  corporation,  to 
compel  the  surrender  and  cancellation  of  a  lease  of  its  plant  to  Loe- 
wenthal.  The  directors  voted  to  make  the  lease,  and  gave  notice  of  a 
special  stockholders'  meeting  to  confirm  their  action.  The  action  of 
the  directors  was  approved  by  all  the  stockholders  present  at  the 
meeting. 

The  term  of  the  lease  thus  confirmed  was  for  one  year,  with  a  privi- 
lege upon  the  part  of  the  lessee  to  renew  the  lease  from  year  to  year, 
for  a  period  not  exceeding  nine  years,  upon  the  same  rent  and  con- 
ditions. The  lease  also  provided  that  at  the  expiration  of  any  year 
the  lessee  might  purchase  the  property  if  he  chose,  at  a  price  to  be 
determined  upon  by  an  appraisal  made  in  conformity  to  the  mode 
therein  designated. 

The  respondents  demurred  to  the  complaint, 

Andrews,  C.J.  The  plaintiffs  are  a  minority  of  the  stockholders 
of  the  Derby  Rubber  Company.  They  ask  that  a  certain  contract 
called  a  lease,  between  the  said  company  and  the  other  defendants, 
be  set  aside  and  declared  to  be  void.  The  record  shows  that  this  con- 
tract was  made  by  the  directors  of  the  company;  that  it  was,  before 
delivery,  submitted  to  a  meeting  of  the  stockholders  duly  called  for 
that  purpose,  and  that  by  a  unanimous  vote  of  the  stockholders  pres- 
ent at  that  meeting  and  holding  a  majority  of  all  the  stock,  it  was 
affirmed  and  ratified.  The  plaintiffs,  although  duly  notified  of  said 
meeting  and  the  purposes  for  which  it  was  to  be  held,  voluntarily 
remained  away. 

If  the  contract  was  really  ultra  vires  of  the  corporation,  the  plain- 
tiffs may  claim  that  it  should  be  set  aside.  The  contract  contains  an 
option  to  the  lessee  to  become  the  purchaser  of  the  property  at  a  price 


902  BARTHOLOMEW    V.  DERBY    RUBBER    CO.  [CHAP.  II. 

to  be  fixed  by  a  sort  of  arbitration.  The  complaint  avers  that  it  is 
the  intention  of  the  directors  and  the  majority  stoekiioidcrs,  in  case 
the  option  is  used,  to  divide  the  money  received  amouff  all  the  stock- 
holders and  wind  up  the  affairs  of  the  corporation.  As  a  conditional 
contract  to  sell  the  property,  this  agreement  is  not  questioned;  nor 
could  it  well  be  questioned.  It  is  competent  for  any  business  corpo- 
ration to  sell  its  property,  pay  its  debts,  divide  its  assets  and  wind  up 
its  affairs.  Especially  is  this  so  if  the  corporation  is  in  an  embarras-sed 
condition.  It  is  as  a  lease  for  ten  years  without  a  sale,  that  the  eon- 
tract  is  said  to  be  ultra  vires.  We  speak  of  the  contract  hereafter  as 
a  lease.  The  sole  question  then  is:  Was  the  vote  ratifying  the  lease, 
and  so  the  lease  itself,  ultra  vires  and  void? 

We  are  inclined  to  think  the  lease  was  not  voitl.  The  lessee  is  to 
continue  the  same  business  which  the  corporation  was  organized  to 
carry  on.  The  lease,  therefore,  is  not  a  change  in  the  business,  but 
only  a  change  in  the  management  of  the  business.  The  financial  con- 
dition of  the  corporation  is  now  depressed,  and  its  business  cannot  be 
made  profitable  under  its  own  management,  for  want  of  capital.  Ad- 
ditional capital  is  not  available.  But  neither  the  directors  nor  the 
majority  stockholders  have  so  far  lost  confidence  in  the  concern  as  to 
be  willing  peremptorily  to  wind  up  its  afTairs.  The  lea.se  was  entered 
into  as  the  best,  perhaps  the  only,  means  of  carrying  the  corporation 
over  this  period  of  depression,  and  in  the  meantime  obtaining  some 
income  for  the  stockholders.  If  a  sale  take  place  it  is  certain  tiiat 
the  property  will  be  worth  more  in  operation  than  if  left  idle.  Such 
leases  have  repeatedly  been  sustained  by  the  courts  of  equity.  .  .  . 

We  have  considered  this  case  on  the  assumption  that  the  action  of 
the  directors  and  the  majority  stockholders  was  done  in  good  faith 
and  in  the  honest  belief  that  they  ser\'ed  the  l)est  interests  of  all  con- 
cerned. If  fraud  had  been  charged  a  very  different  case  would  have 
been  presented. 

Note.  —  In  Parsons  v.  Tacoma  Smelting  Co.,  2.3  Wash.  492,  the 
defendant  contended  that  the  lease  in  question  was  justified  by 
financial  difficulties,  but  the  court  refused,  on  the  facts,  to  support 
the  contention. 

On  the  other  hand  there  are  cases  where  the  court  has  held  that  a 
lease  was  proper,  even  though  the  corporation  was  not  in  financial 
difficulties.  See  Hennessy  v.  Muhleman,  40  N.Y.  App.  Div.  175 
(lease  for  development  of  mineral  lands) ;  Starke  v.  Guffey  Petroleum 
Co.,  98  Tex.  542  (same.  Lease  for  20  years). 


CHAP.  II.]  RIKER    &    SON    CO.  V.  UNITED    DRUG    CO.  963 

RIKER  &  SON  CO.  v.  UNITED  DRUG   CO. 

79  N.J.  Eq.  580.     1911. 

GuMMERE,  C.J.  This  is  an  appeal  from  an  order  denying  a  pre- 
liminary injunction  restraining  the  defendant,  its  officers,  directors, 
tellers  and  inspectors  from  submitting  to  the  stockholders  of  the 
company  a  proposition  to  take  action  upon  a  resolution  of  the  board 
of  directors  providing  that  the  defendant  corporation  should  be  dis- 
solved, and  prohibiting  them  from  passing  any  resolution  or  receiv- 
ing or  counting  any  votes  in  favor  of  any  resolution  designed  to 
car»y  into  effect  or  accomplish  any  proposition  to  dissolve  the  said 
company. 

The  United  Drug  Company  is  a  New  Jersey  corporation.  The 
proposed  dissolution  is  a  step  in  the  carrying  into  execution  of  a  plan 
formulated  by  the  board  of  directors  of  the  company  for  its  "reor- 
ganization," and  outlined  by  the  board  in  a  communication,  sent  by 
it  to  the  several  stockholders  of  the  company  upon  the  same  day  that 
a  resolution  was  passed  by  it,  reciting  that,  in  the  judgment  of  the 
board,  it  was  for  the  benefit  of  the  corporation  that  it  should  be 
forthwith  dissolved  and  that  a  meeting  of  the  stockholders  should  be 
held  to  take  action  upon  that  resolution. 

The  material  parts  of  the  resolution  (so  far  as  the  matter  before  us 
is  concerned)  are  as  follows:  "To  the  stockholders  of  the  United 
Drug  Company.  Your  directors  have  had  under  consideration  for 
some  time  the  desirability  of  a  reorganization  of  the  affairs  of  the 
United  Drug  Company.  They  have  had  in  mind,  among  other  things, 
the  accomplishment  of  the  following  results  —  first,  owing  to  the 
remarkable  increase  in  the  business  of  the  company,  it  is  necessary 
to  provide  not  only  for  additional  capital  to  meet  its  immediate  re- 
quirements, but  also  to  put  the  company  on  such  a  basis  that  it  can 
obtain  from  time  to  time  in  the  future  such  additional  capital  as 
may  be  needed;  second,  .  .  .  ;  third,  a  substantial  part  of  the  business 
of  the  company  is  now  conducted  by  the  United  Laboratories  Com- 
pany, the  United  Perfume  Company,  the  United  Candy  Company 
and  the  United  Stationery  Company,  all  subsidiary  corporations  of 
the  parent  company.  It  is  proposed  to  eliminate  these  subsidiary 
companies,  to  place  the  ownership  of  all  these  in  one  corporation,  and 
obtain  greater  simplicity  in  accounting,  and  to  some  extent  elimi- 
nate an  unnecessary  duplication  of  expense.  With  the  approval  of 
your  directors,  therefore,  the  following  plan  for  the  reorganization  of 
the  affairs  of  the  United  Drug  Company  has  been  proposed:  Your 
directors  have  authorized  the  organization  of  a  corporation  under  the 
laws  of  Massachusetts  by  the  name  of  United  Drug  Company,  .  .  . 
The  United  Drug  Company  (of  Massachusetts)  has  offered  to  pur- 
chase all  the  propert}^  and  assets  of  the  United  Drug  Company  (of 


964  HIKER    &    SON    CO.  V.  UNITED    DRUG    CO,  [CHAP.  II. 

New  Jersey),  subject  to  all  its  indebtedness,  and  to  pay  therefor  as 
follows" :  viz.,  by  delivering  to  the  holders  of  stock  of  the  New  Jersey 
corporation  in  exchange  for  that  stock  shares  of  the  stock  of  the 
Massachusetts  corporation.  The  communication  then  concludes 
thus:  "Your  directors  unanimously  recommend  the  acceptance  of 
the  proposed  plan  of  reorganization,  and  pending  action  by  the  New 
Jersey  Company  recommend  an  immediate  exchange  of  the  stock  of 
the  New  Jersey  company  for  stock  of  the  Massachusetts  company  in 
accordance  with  the  terms  of  the  offer.  If  for  any  reason  it  .should 
become  either  necessary  or  desiral)lc  to  delay  the  dis.solution  of  the 
New  Jersey  corporation  and  the  transfer  of  its  assets,  or  even  to 
continue  its  corporate  existence,  the  practical  accomplishment  of  the 
plan  would  not  be  affected,  as  the  Mas.sachusetts  corporation  would 
by  the  exchange  become  the  controlling  stockholder  of  the  Now  Jer- 
sey corporation." 

Manifestly,  the  prime  purpose  of  the  scheme  outlined  in  this  com- 
munication is  not  the  winding  up  of  the  New  Jersey  corporation  and 
the  distribution  of  its  assets,  or  the  proceeds  of  the  sale  thereof, 
among  its  stockholders,  but  the  absorption  of  that  company  by  the 
Massachusetts  corporation,  the  transfer  not  only  of  its  assets  but  of 
its  business,  to  that  corporation,  and  the  future  carr>'ing  on  of  that 
business  by  the  Massachusetts  corporation  under  the  name  of  the 
defendant  compan3\  The  scheme,  in  its  essence,  whatever  it  may 
be  in  form,  is  not  a  plan  for  the  reorganization  of  the  New  Jersey 
company,  nor  even  for  the  winding  up  of  its  business  and  its  disso- 
lution within  the  meaning  of  the  latter  word  as  used  by  our  Corpora- 
tion Act,  but  is  a  scheme  for  its  merger  into  or  consolidation  with  the 
Massachusetts  corporation.  State  v.  Atlantic  City  and  Shore  Railroad 
Co.,  77  N.J.  Law  (48  Vr.)  466,  483. 

Consequently,  the  fundamental  question  now  to  be  decided  is 
whether  a  corporation  of  this  State,  organized  under  our  General 
Corporation  Act,  may  legally  be  merged  into  or  con.solidatcd  with 
a  corporation  created  by  and  organized  under  the  laws  of  a  sister 
State.  The  answer  to  this  question  seems  to  us  not  to  be  in  doubt. 
As  was  said  by  this  court  in  Colgate  v.  United  States  Leather  Co., 
75  N.J.  Eq.  (5  Buch.)  229,  the  power  of  corporations  to  consolidate 
and  merge  is  not  to  be  implied,  and  exists  only  by  virtue  of  plain 
legislative  enactment;  and  no  statute  of  our  State  can  be  found 
which  authorizes  the  proposed  scheme.  The  only  right  given,  by  our 
legislature,  to  two  or  more  corporations  to  merge  or  consolidate  into 
a  single  corporation,  is  expressly  limited  to  those  which  are  organized 
under  the  laws  of  our  own  State.  Revised  Corporation  Act,  §  104; 
P.  L.  1896,  p.  309.  The  proposed  plan  for  the  so-called  "reorganiza- 
tion" of  the  defendant  company  is,  therefore,  in  violation  of  the  law 
of  the  State  whose  creature  it  is;  and,  this  being  so,  any  stockholder 
who  refuses  to  consent  thereto  is  entitled  to  the  aid  of  a  court  of 


CHAP.  II.]  RIKER    &    SON    CO.  V.  UNITED    DRUG    CO.  965 

equity  to  prevent  its  being  carried  into  execution.  Each  stockholder 
of  the  company  owns  a  share  in  its  property  and  assets,  and  is 
entitled  to  have  a  proportionate  share  in  its  profits.  They  have  in- 
vested their  capital  in  it,  and  in  it  alone,  and  they  are  entitled  to 
every  dollar  that  it  earns.  This  is  the  agreement  of  the  stockholders 
among  themselves.  They  each  contract  with  the  other  that  their 
money  shall  be  employed  for  the  purposes  specified  in  the  certificate 
of  incorporation,  and  for  no  other  purpose,  and  that  the  profits  of  the 
enterprise  shall  be  ratably  apportioned  among  them.  In  the  absence 
of  legislation  permitting  a  variation  of  the  provisions  of  this  funda- 
mental contract,  by  vote  of  a  majority  of  the  stockholders,  no 
majority,  however  large,  has  a  right  to  divert  any  part  of  the  joint 
capital,  however  small,  to  any  purpose  not  consistent  with  and  grow- 
ing out  of  this  original,  fundamental  agreement.  Black  v.  Delaware 
and  Raritan  Canal  Co.,  24  N.J.  Eq.  (9  C.  E.  Gr.)  456,  463;  Mills  v. 
Central  Railroad  Co.  of  New  Jersey,  41  N.J.  Eq.  (14  Stew.)  1;  Colgate 
V.  United  States  Leather  Co.,  supra. 

The  scheme,  in  the  carrying  out  of  which  the  dissolution  of  the 
company  is  a  proposed  step,  is  a  fraud  upon  the  statute  (the  word  is 
used  in  a  legal,  not  a  moral  sense) ;  and  every  act  done  in  furtherance 
thereof,  no  matter  whether  it  be  legal,  standing  alone,  or  not,  is 
equally  a  fraud  upon  the  statute.  This  being  so,  the  complainants 
were  entitled  to  an  injunction  to  restrain  the  proposed  invasion  of 
their  rights  under  the  contract  of  incorporation,  as  soon  as  it  was 
made  manifest  that  such  invasion  was  in  fact  contemplated. ' 

The  order  denying  the  preliminary  injunction  will  be  reversed  and 
the  case  remitted  to  the  court  of  chancery,  with  a  direction  that  an 
injunction  do  issue  restraining  the  defendant  company,  its  officers 
and  directors,  from  submitting  to  its  stockholders  for  action  thereon 
by  them  the  resolution  of  the  board  of  directors  of  the  company 
advising  its  dissolution. 

Note.  —  People  v.  Ballard,  134  N.Y.  269.  A  business  corporation 
cannot  sell  all  of  its  property  to  a  foreign  corporation,  organized 
through  its  procurement  with  a  majority  of  non-resident  trustees, 
for  the  purpose  of  taking  its  place  and  its  assets  and  carrying  on  its 
business;  as  this  is  a  practical  dissolution  of  the  corporation. 

Theis  V.  Spokane  Falls  Co.,  34  Wash.  23.  By  statute  a  corporation 
might  be  dissolved  upon  the  vote  of  the  holders  of  two-thirds  of  the 
stock.  Held,  that  this  authorized  a  dissolution  only  upon  the  bona 
fide  intent  of  the  stockholders  to  discontinue  the  business.  If  the  dis- 
solution is  made  that  the  property  may  be  sold  to,  and  the  business 
carried  on  by,  a  new  corporation  controlled  by  the  majority  stock- 
holders, any  single  stockholder  is  entitled  to  restrain  (and  to  set 
aside,  if  consummated)  the  sale  of  the  corporate  assets  made  in  such 
dissolution  proceedings. 


966  MATTER    OF    TIMMIS.  (CHAP.  11. 

MATTER   OF  TIMMIS. 

200  N.Y.  177.     VJW. 

Appeal  from  an  order  of  the  Api^ellate  Division  of  the  Supreme 
Court  in  tlic  second  judicial  department,  entered  July  2\),  I'JIO, 
which  affirmed  an  order  of  Special  Term  tlirecting  an  appraisal  of  the 
stock  of  the  petitioner  pursuant  to  section  17  of  article  2  of  the  Stock 
Corporation  Law. 

The  Sackett  &  Wilhelms  Company  is  a  domestic  corporation 
organized  to  carry  on  the  business  of  lithofjraphinK  and  printhig. 
In  August,  IIXX),  at  a  nuvtinj;  of  its  stockholdei-s.  held  pursuant  to 
notice,  a  resolution  was  adopted  hy  the  votes  of  the  holder-s  of  more 
than  two-thirds  of  the  capital  stock,  authorizing  the  lM)ard  of  direc- 
tors to  "sell  the  p;ood-will,  business,  a.s.scts  and  prop<Tty  of  what  is 
known  as  its  Calendar  Department,  the  siime  iH'inj^  and  constituting 
a  separately  conducted  department  of  its  business,  upon  such  ternm 
and  for  such  consideration"  as  the  directors  should  iirescriln'.  The 
respondent,  who  owned  forty  shares  of  preferretl  stock  and  thirty-five 
of  conunon,  voted  ajjainst  the  re.soluti«»n,  and  within  twenty  days 
after  the  meeting  .served  a  notice  objecting  to  the  sale  and  demrnd- 
ing  payment  for  his  stock,  "pin'suant  to  the  provisions  of  the  Stock 
Corporation  Law."  As  the  demand  was  not  comi)lied  with,  upon  a 
petition  showing  the.se  facts  among  others,  he  moved  at  Special  Term 
on  due  notice  for  the  appointment  of  apprai.sers,  and  that  he  Ik*  paid 
for  his  stock  the  amount  of  the  appraisal  thereof,  when  math'. 

Upon  the  hearing  before  the  Special  Term  it  appeared  that  the 
business  of  the  calemlar  department  was  to  obtain  orders  and  create 
a  demand  for  calendars  and  other  advertising  specialties  through 
traveling  .salesmen;  to  .secure  designs  and  |)lates  for  the  decoration 
thereof;  to  procure  the  same  to  be  lithographed  and  printed  by  the 
regular  tlepartment  of  the  company,  accounting  for  the  work  at  cur- 
rent rates  and  to  .sell  the  .same  through  its  .salesmen;  that  it  did  no 
printing  or  lithographing;  that  the  sales  of  the  calendar  department, 
whicli  has  always  bec^n  separat(>ly  conducted  and  the  accf)unts  thereof 
separately  kept,  amounted  to  about  one-thirteenth  of  the  entire 
business  of  the  corporation;  that  the  successful  conduct  of  the  de- 
partment requiretl  the  continuerl  use  of  a  large  amount  of  capital 
which  the  corporation  was  unable  to  provide;  that  the  business, 
assets  and  good-will  compri.sed  among  other  things  pictures,  plates, 
fini.sheil  calendars,  contracts  with  .salesmen  of  calendars  and  the 
good-will  of  buyers  of  calendars;  that  a  corporation  known  as  the 
Robert  Chapman  Company  had  been  organized  with  power  to  "ac- 
quire, as  a  going  concern,"  the  calendar  business  of  the  Sackett  & 
Wilhelms  Company,  and  the  terms  of  sale  required  the  purchaser  to 
give  all  the  printing  and  lithographing  to  the  parent  company  at 


CHAP.  II.]  MATTER    OF    TIMMIS.  967 

current  rates  for  the  period  of  ten  years;  that  the  purchase  price  was 
to  be  $20,000  in  cash,  all  the  common  stock  amounting  to  $150,000 
and  $60,000  of  the  entire  issue  of  $300,000  of  preferred  stock. 

The  motion  was  granted,  appraisers  were  appointed  and  the  court 
further  ordered  that  within  ten  days  after  their  report  "the  said 
Sackett  &  Wilhelms  Company  pay  in  cash  to  the  petitioner  the  value 
of  his  stock  as  estimated  and  certified  by  said  apprstisers  and  that 
thereupon  the  petitioner  surrender  the  certificates  for  said  shares  to 
said  company  for  cancellation."  The  corporation  appealed  from  the 
order  of  the  Special  Term  to  the  Appellate  Division  and  from  the 
order  of  affirmance  by  that  court  to  the  Court  of  Appeals. 

Vann,  J.  This  appeal  involves  the  construction  of  sections  16  and 
17  of  the  Stock  Corporation  Law.  Section  16,  which  is  entitled 
"Voluntary  sale  of  franchise  and  property,"  provides  that  "A  stock 
corporation  .  .  .  with  the  consent  of  two-thirds  of  its  stock,  may  sell 
and  convey  its  property,  rights,  privileges  and  franchises,  or  any 
interest  therein  or  any  part  thereof  to  a  domestic  corporation,  en- 
gaged in  a  business  of  the  same  general  character  .  .  .  and  such  sale 
and  conveyance  shall,  in  case  of  a  sale  to  a  domestic  corporation, 
vest  the  rights,  property  and  franchises  thereby  transferred  ...  in 
the  corporation  to  which  they  are  conveyed  for  the  term  of  its  cor- 
porate existence.  .  .  .  Before  such  sale  or  conveyance  shall  be  made 
such  consent  shall  be  obtained  at  a  meeting  of  the  stockholders 
called  upon  like  notice  as  that  required  for  an  annual  meeting." 
The  provisions  authorizing  a  sale  of  property  only  to  a  foreign  cor- 
poration are  not  now  material. 

Section  17,  entitled,  "Rights  of  non-consenting  stockholders  on 
voluntary  sale  of  franchise  and  property,"  provides  that  "If  any 
stockholder  not  voting  in  favor  of  such  proposed  sale  or  conveyance 
shall  at  such  meeting,  or  within  twenty  days  thereafter,  object  to 
such  sale,  and  demand  payment  for  his  stock,  he  may,  within  sixty 
days  after  such  meeting,  apply  to  the  Supreme  Court  ...  for  the 
appointment  of  three  persons  to  appraise  the  value  of  such  stock,  and 
the  court  shall  appoint  three  such  appraisers,  and  .  .  .  also  direct  the 
manner  in  which  payment  for  such  stock  shall  be  made  to  such  stock- 
holder. .  .  .  When  the  corporation  shall  have  paid  the  amount  of 
such  appraisal,  as  directed  by  the  court,  such  stockholder  shall  cease 
to  have  any  interest  in  such  stock  and  in  the  corporate  property  of 
such  corporation  and  such  stock  may  be  held  or  disposed  of  by  such 
corporation."  (Stock  Corporation  Law  [L.  1909,  chap.  61],  §§  16  and 
17;  Consolidated  Laws,  chap.  59,  §§  16  and  17.) 

The  appellant  claims  that  the  sale  of  the  calendar  department  is 
in  the  line  of  its  ordinary  business;  that  it  is  a  lawful  corporate  act 
regardless  of  section  16  and  that  it  did  not  give  to  the  dissenting  stock- 
holder the  rights  created  by  section  17. 

The  substance  of  the  sections  in  question  was  first  enacted  by 


9C8  MATTER    OF   TIMMI9.  [CIIAP.  II. 

chapter  638  of  the  Laws  of  1893,  prol)ably  to  meet  the  situation  a«  it 
was  left  by  a  lino  of  judicial  decisions  ending  in  1S92.  The  valuable 
opinion  of  Judjjje  Allen  in  Abbot  v.  Anurican  Ilnnl  liabbtr  Co.  (33 
Barb.  578),  after  standing  the  test  of  time  and  criticism  for  thirty 
years,  was  followed  by  People  v.  Ballard  (134  N.Y.  209).  The.se  cases 
and  those  which  intervened  estal)lished  the  law  that  a  corporation 
cannot  sell  all  its  profXTty,  or  even  a  part  thereof  so  inte^^ral  as  to 
be  essential  for  the  transaction  of  its  ordinary  business,  becau.se  such 
a  sale  is  wholly  or  partly  an  act  of  self-destruction  and  a  practical 
dissolution  without  compliance  with  law. 

The  discussion  of  the  subject  in  the  various  opinions  suRgested 
two  evils:  (1)  The  injustice  "to  the  bulk  of  the  stockholders  from 
want  of  power  in  a  corporation  to  sell  its  business  or  an  es.sential  part 
thereof  to  another  corporation  organized  for  the  purpose,  frequently 
from  its  own  memlx'rship,  on  terms  dwmed  advantageous  by  the 
holders  of  a  large  majority  of  the  stock.  (2)  The  injustice  to  mi- 
nority stockhoUlers  of  requiring  them  to  abandon,  change  or  limit 
their  business  if  the  majority  should  have  the  power  to  din^ct  such  a 
sale.  An  incidental  evil  was  the  power  of  a  dissenting  stockholder  to 
compel  the  majority  to  buy  him  out  on  his  own  terms  in  order  to  se- 
cure unanimous  con.sent  with  no  one  left  to  question  the  transaction. 

These  evils  could  be  remedied  only  by  legislation,  for  the  courts 
cannot  provide  against  inherent  defects  in  the  creation  of  corpora- 
tions. The  Act  of  1893  is  reproduced  and  amplified  by  sections  10 
and  17  of  the  statute  now  in  force.  This  legislation  was  designed  to 
meet  the  evils  pointed  out  by  the  courts  by  enal)ling  a  majority  of 
two-thirds  to  sell  if  they  deemed  it  was  the  Ijest  policy,  and  at  the 
same  time  to  protect  the  minority,  if  they  regarded  the  sale  a.s  op- 
posed to  their  interests.  The  situation  when  the  original  act  was 
passed  points  to  the  purpose  of  the  legislature  and  throws  light  on 
the  meaning  of  the  words  used  to  express  its  intention.  Notwith- 
standing the  broad  language  of  section  10,  it  is  obvious  that  it  was 
not  addressed  to  ordinary  sales  by  a  corporation,  nor  even  to  those 
extraordinary'  in  size  but  still  in  the  regular  line  of  its  business,  for 
such  sales  would  have  been  valid  without  amending  the  Stock  Cor- 
poration T.aw.  We  are  not  now  called  upon  to  lay  down  a  rule  em- 
bracing all  the  cases  covered  by  the  statute,  but  simply  to  decide 
whether  the  facts  of  this  case  bring  it  within  the  sections  under 
consideration. 

The  sale  before  us  was  not  made  in  the  ordinary  course  of  the  busi- 
ness of  the  corporation,  for  it  was  not  organized  to  .sell  calendar 
departments,  or  any  department  that  would  involve  going  out  of 
business  pro  tanto.  It  was  not  a  sale  of  calendars  over  the  counter  or 
on  the  road,  but  of  the  "business  assets  and  property,"  including  the 
good-will,  of  an  independent  and  important  branch  of  its  business, 
and  the  large  price  agreed  upon  indicates  the  actual  value  of  what 


CHAP.  II.]  MATTEK    OF    TIMMIS.  969 

was  sold.  The  parent  company  lacked  capital  to  carry  on  the  depart- 
ment, and,  as  the  learned  counsel  for  the  appellant  states,  "the  sale 
was  a  business  necessity,"  which  implies  that  it  was  not  in  the  ordi- 
nary course.  By  the  sale  of  the  good-will  the  corporation  would  be 
prevented  from  ever  engaging  in  that  kind  of  business  again,  and 
while  not  in  form  a  sale  of  its  franchise  to  that  extent,  it  would  be  in 
effect,  because  it  could  no  longer  exercise  its  franchise  to  make  and 
sell  calendars.  One  of  the  powers  conferred  by  the  charter  would 
thus  be  parted  with,  and  the  right  to  carry  on  a  line  of  business 
authorized  by  the  law  of  its  being  would  be  permanently  gone.  It 
could  not  do  a  kind  of  business  duly  authorized  by  its  charter  as  it 
had  before.  As  an  arm  of  a  living  man  may  become  paralyzed  and 
useless,  so  an  arm  of  the  appellant  would  become  paralyzed  and  use- 
less by  such  a  sale  as  the  one  described.  As  the  living  arm  could  no 
longer  lift,  or  touch,  or  exercise  its  cunning,  so  the  arm  of  the  arti- 
ficial being  could  no  longer  make  calendars,  or  sell  them,  or  enter 
into  contracts  relating  thereto.  Its  own  action  would  result  in  com- 
plete paralysis  of  every  power  required  to  conduct  a  calendar  de- 
partment, and  to  this  extent  it  would  go  out  of  business.  Such  a  sale 
would,  therefore,  be  corporate  suicide  to  a  certain  extent,  and  to  that 
extent  a  sale  or  abandonment  of  the  charter.  While  a  natural  person 
may  do  anything  within  the  Imiits  of  his  physical  and  mental  capac- 
ity not  forbidden  by  law,  an  artificial  person  can  do  nothing  except 
as  authorized  by  law.  The  sale  in  question  would  not  be  valid  with- 
out resorting  to  section  16,  and  by  resorting  to  that  section  the  appel- 
lant opened  the  door  for  the  respondent  to  enter  and  demand  his 
rights  under  section  17.  The  claim  that  the  earlier  section  was  not 
invoked  by  specific  mention  in  the  notice  calling  a  meeting  of  stock- 
holders to  authorize  the  sale,  is  met  by  the  statement  therein  that 
"under  the  charter  of  the  corporation  the  calendar  department  can- 
not be  transferred  to  a  separate  corporation  without  the  authoriza- 
tion of  the  holders  of  two-thirds  of  the  capital  stock."  While  this  did 
not  refer  directly  to  the  Stock  Corporation  Law,  it  did  indirectly,  for 
every  statute  which  adds  to  or  takes  from  the  power  of  a  corporo^tion 
is  a  part  of  its  charter. 

As  the  appellant  availed  itself  of  the  privilege  conferred  by  the 
statute,  it  must  comply  with  the  condition  prescribed  for  the  exercise 
thereof. 

The  order  appealed  from  should  be  affirmed,  with  costs. 

CuLLEN,  Ch.J.,  Gray,  Haight,  Werner,  Willard  Bartlett 
and  Chase,  JJ.,  concur. 

Order  affirmed. 

Note.  —  See  Mass.  Laws  of  1903,  chap.  437,  §§40  and  44. 
Koehler  v.  St.  Mary's  Brewing  Co.,  228  Pa.  648.  Although  by  the 
Act  of  1876,  P.  L.  30,  §  5,  the  holders  of  the  majority  of  the  stock 


G70  COTTON    V.  IMPERIAL    CORPOIL\TION.  [ciIAP,  II. 

of  specified  corporations  may  cause  all  its  property  to  Ijc  sold  to 
other  corporations,  this  act  is  not  to  be  construed  to  require  any 
dissenting  stockholder  to  accept  anything  but  cash  or  its  equivalent 
for  his  interest. 


COTTON  V.  IMPERIAL  CORPORATION. 

[1892.1     3  Ch.  454. 

The  Imperial  and  Foreign  Agency  and  Investment  Corporation, 
hereinafter  called  the  Old  Company,  was  formed  in  1889.  The  capital 
consisted  of  founders'  shares,  preferred  shares,  and  deferred  shares. 

The  memorandum  of  a.ssociation  stated  that  the  oijject  of  the 
company,  amongst  other  things,  was  (S)  to  sell,  lca.se,  or  otlierwise 
dispose  of  the  company's  undertaking,  or  any  part  thereof,  or  any 
property,  or  interest  in  property,  from  time  to  time  belonging  to  the 
company,  for  such  consideration  as  the  company  might  tiiink  fit; 
and  in  particular  for  shares,  stock,  obligations,  debentures,  de!)cn- 
ture  stock,  scrip,  or  securities  of  any  company;  and  (T)  to  divide  any 
shares,  stock,  bonds,  obligations,  dei)enture  stock,  scrip,  or  securities 
belonging  to  the  company  among  the  members  in  specie. 

It  having  been  deemed  expedient  to  wind  up  the  company,  an 
extraordinary  general  meeting  of  the  company  was  hclil  on  tlie  13th 
of  April,  1892,  at  which  a  resolution  was  passetl  approving  of  the  sale 
and  transfer  of  the  undertakings  of  the  Oltl  Company  to  a  New 
Company,  to  be  incorporated  for  the  purpose,  untler  the  same  name 
with  the  word  Neic  prefixed,  in  accordance  with  the  terms  of  a  draft 
agreement  submitted  to  the  meeting.  On  the  same  13th  of  April, 
at  the  same  meeting,  a  special  resolution  was  proposed  for  the  vol- 
untary winding  up  of  the  Old  Company  and  for  the  appointment  of 
two  liciuitlators;  but  such  resolution  was  lost. 

On  the  2d  of  May,  1892,  the  agreement  between  the  Old  Company 
and  the  New  Company  was  executed  for  the  sale  and  transfer  of  the 
Old  Company's  undertaking  to  the  New  Company,  in  consideration 
of  the  allotment  to  the  Old  Company  of  fully  paid-up  shares  in  the 
New  Company. 

At  an  extraordinary  general  meeting  of  the  Old  Companj^  held  on 
the  4th  of  May,  1892,  a  special  resolution  was  passed  for  the  volun- 
tary winding-up  of  that  company  and  the  appointment  of  two  liqui- 
dators; and  on  the  25th  of  May,  at  another  extraordinary  general 
meeting,  the  resolution  passed  at  the  meeting  of  the  4th  of  May  was 
confirmed,  and  it  was  resolved  that  the  liquidators  should  be  author- 
ized to  divide  among  the  members  of  the  Old  Company,  so  far  as 
possible,  the  paid-up  shares  receivable  under  the  agreement  of  the 
2d  of  May,  1892. 


CHAP.  II.]      '  COTTON  V.   IMPERIAL  CORPORATION.  971 

The  plaintiff  was  the  holder  of  founders'  shares  as  well  as  other 
shares. 

In  July,  1892,  the  plaintiff  took  out  a  summons  in  the  winding-up 
of  the  Old  Company,  before  Mr.  Justice  Vaughan  Williams,  asking 
that  it  might  be  declared  that  he  was  entitled  to  compel  the  liquida- 
tors to  purchase  the  shares  and  all  other  (if  any)  the  interest  held 
b}'  or  belonging  to  him  in  the  Old  Company,  at  a  price  to  be  deter- 
mined in  accordance  with  the  provisions  of  §§  161  and  162  of  the 
Companies  Act,  1862,  and  that  the  liquidators  might  be  restrained 
from  transferring  the  assets  of  the  Old  Company  to  the  New  Com- 
pany, when  his  Lordship  held,  that  the  transaction  did  not  come 
within  the  161st  section,  and  was  of  opinion  that  if  the  plaintiff  had 
any  remedy  it  was  by  an  action  to  set  aside  the  agreement. 

The  plaintiff  thereupon  commenced  this  action  on  behalf  of  himself 
and  all  other  the  shareholders  in  the  Old  Company,  asking  that  it 
might  be  declared  that  the  agreement  of  the  2d  of  May,  1892,  was 
ultra  vires  the  Old  Company;  and  for  an  injunction  to  restrain  such 
company  and  the  liquidators  from  proceeding  to  carry  the  agreement 
into  effect;  or,  in  the  alternative,  for  a  declaration  that  the  plaintiff 
and  all  other  dissentient  shareholders  of  the  Old  Company  were 
entitled  to  require  the  liquidators  either  to  abstain  from  carrying  the 
agreement  into  effect  or  to  purchase  the  interest  held  by  them  at  a 
price  to  be  determined  in  manner  prescribed  by  §  161  of  the  Com- 
panies Act,  1862;  ^  and  to  restrain  the  liquidators  from  dealing  with 
the  assets  of  the  Old  Company  without  providing  for  the  payment 
of  the  amount  due  to  them  in  respect  of  the  purchase  of  such  interest. 

The  plaintiff  now  moved  in  the  terms  of  his  writ. 

1  25  &  26  Vict.  chap.  89,  §  161 :  "Where  any  company  is  proposed  to  be  or  is  in  the 
course  of  being  wound  up  altogether  voluntarily,  and  the  whole  or  a  portion  of  its 
business  or  property  is  proposed  to  be  transferred  or  sold  to  another  company,  the 
liquidators  of  the  first-mentioned  company  may,  with  the  sanction  of  a  special  resolu- 
tion of  the  company  by  whom  they  were  appointed,  conferring  either  a  general  author- 
ity on  the  liquidators,  or  an  authority  in  respect  of  any  particular  arrangement,  receive 
in  compensation  or  in  part  compensation  for  such  transfer  or  sale  shares,  policies,  or 
other  like  interests  in  such  other  company,  for  the  purpose  of  distribution  amongst 
the  members  of  the  company  being  wound  up,  or  may  enter  into  any  other  arrange- 
ment whereby  the  members  of  the  company  being  wound  up  may,  in  lieu  of  receiving 
cash,  shares,  policies,  or  other  like  interests,  or  in  addition  thereto,  participate  in  the 
profits  of  or  receive  any  other  benefits  from  the  purchasing  company;  and  any  sale 
made  or  arrangement  entered  into  by  the  liquidators  in  pursuance  of  this  section  shall 
be  binding  on  the  members  of  the  company  being  wound  up;  subject  to  this  proviso, 
that  if  any  member  of  the  company  being  wound  up  who  has  not  voted  in  favour  of 
the  special  resolution  passed  by  the  company  of  which  he  is  a  member  at  either  of  the 
meetings  held  for  passing  the  same  expresses  his  dissent  from  any  such  special  resolu- 
tion in  writing  addressed  to  the  liquidators  or  one  of  them,  and  left  at  the  registered 
office  of  the  company  not  later  than  seven  days  after  the  date  of  the  meeting  at  which 
such  special  resolution  was  passed,  such  dissentient  member  may  require  the  liquida- 
tors to  do  one  of  the  following  things  as  the  liquidators  may  prefer;  that  is  to  say, 
either  to  abstain  from  carrying  such  resolution  into  effect,  or  to  purchase  the  interest 
held  by  such  dissentient  member  at  a  price  to  he  determined  in  manner  hereinafter 
mentioned,  such  purchase-money  to  be  paid  before  the  company  is  dissolved,  and  to  be 
raised  by  the  liquidators  in  such  manner  as  may  be  determined  by  special  resolution." 


972  COTTON    V.  IMPERIAL    CORPORATION.  [CHAP,  II. 

.Chitty,  J.  The  motion  is  to  restrain  the  Old  Company,  in  which 

the  plaintilT  is  a  shareholder,  and  the  lifjuidators  of  that  company, 
from  i)rocceding  to  carry  into  elTect  the  aj^reement  of  the  2d  of  May, 
1892.  That  agreement  was  entered  into  between  the  Old  Company 
and  a  New  Company  which  has  the  same  name,  with  the  addition  of 
the  word  "New,"  and  wlio  are  also  defendants. 

In  the  memorandum  of  association  of  the  Old  Company  there  is 
the  usual  clause  stating  the  objects  for  which  the  company  is  estab- 
lished, and  they  are  numerous;  but  I  need  only  to  refer  to  that  one 
under  the  letter  "S."  [His  Lordship  read  the  clau.se  as  set  out 
above.] 

Now  it  is  said  that  the  power  which  is  thus  taken  by  the  company 
to  itself,  and  assented  to  by  all  the  {x^rsons  who  were  or  were  to 
become  mt^mbcrs  of  the  company,  is  ultra  vires;  and  I  have  lx?en  at  a 
loss  to  understand  from  the  begiiuiing  of  the  argument  to  the  present 
moment  how  that  can  \n}.  The  company  might  have  for  one  of  its 
objects  the  buying  and  working  of  an  hotel,  antl  it  buys  the  hotel  and 
worLs  it,  but  it  takes  power  in  its  memorandum  of  association  to  sell 
the  whole  of  its  undertaking.  That  is  a  good  pow(T.  It  can  sell  the 
hotel,  and,  when  it  has  got  the  money,  the  money  will  have  to  be  dealt 
with  according  to  the  constitution  of  the  company.  Instead  of  selling 
for  money,  this  company  by  its  memorandum  says  that  the  sale  may 
be  for  shares  in  another  company.  I  see  nothing  unlawful  in  that 
whatever.  I  am  really  at  a  loss  to  know  how  to  put  the  argument, 
because,  when  the  shares  in  the  other  company  arc  thus  acf[uired 
through  the  medium  of  a  sale,  these  shares  become  the  property  of 
the  selling  company,  and  have  to  be  dealt  with  according  to  the  con- 
stitution of  that  company.  In  the  memorandum  before  me,  there  is 
under  the  letter  "T"  power  to  divide  the  .shares,  debenture  stock, 
and  securities  belonging  to  the  company  among  the  members  in 
specie.  I  am  not  concerned  with  that  power  at  the  present  moment; 
but  it  shews  that  the  Old  Company  contemplated  selling,  a.s  it  clearly 
did,  for  shares,  and  dividing  them  among  the  m(>mbcrs.  Of  course, 
that  must  be  subject  to  all  the  rights  of  the  members  as  defined  by 
the  memorandum  and  articles  of  association.  They  must  divide  the 
shares  and  the  other  securities  mentioned  if  they  take  them  upon  the 
sale  according  to  the  rights  of  the  members  inter  se ;  but  they  may 
clearly,  in  my  opinion,  take,  as  the  consideration  for  the  sale,  shares 
in  another  company.  That  being  so,  it  was  necessary,  in  conformity 
with  clause  S,  which  provided  that  the  consideration  was  to  be  such 
as  the  company  might  think  fit,  that  there  should  be  a  meeting  of 
the  Old  Company  to  determine  whether  they  would  take  shares  as  a 
consideration  for  a  sale.  A  meeting  was  duly  convened  and  held,  and 
a  resolution  was  passed,  the  effect  of  which  was  that  the  directors 
were  authorized  by  the  company  to  enter  into  the  agreement  of  the 
2d  of  May,  1892.    It  is  in  substance  an  agreement  for  the  trans- 


CHAP.  II.]  COTTON   V.  IMPERIAL    CORPORATION.  973 

fer  of  the  whole  of  its  undertaking  by  the  Old  Company  to  the  New 
Company,  the  consideration  being  shares. 

In  my  opinion  what  has  been  done  by  the  directors  is  authorized 
by  the  memorandum,  and  by  the  resolution  of  the  company  acting 
in  pursuance  of  the  memorandum. 

Now,  it  certainly  is  the  case  that  when  the  directors  proposed  the 
resolution  in  regard  to  this  sale  for  shares  to  the  meeting  they  also 
proposed  that  there  should  be  a  winding-up,  which  proposition  was, 
however,  not  carried,  while  the  other  was.  Afterwards  the  directors 
thought  it  would  still  be  advisable  to  wind  up  if  the  shareholders  were 
of  that  opinion;  and  subsequent  meetings  were  held,  and  the  result 
was  that  a  resolution  was  passed  to  wind  up  voluntarily. 

These  latter  facts  form  another  ground  upon  which  the  argument 
in  support  of  this  motion  is  based.  It  is  said  that  now  the  161st  sec- 
tion of  the  Act  of  1862  is  brought  in,  and  that  inasmuch  as  there  was 
at  the  time  when  the  first  resolution  was  carried,  a  proposal  before 
the  meeting  to  wind  up,  the  resolution  as  to  the  sale  was  ultra  vires 
because  the  clause  in  the  memorandum  of  association  was  rendered 
void  by  the  161st  section.  With  great  respect  to  those  who  put  the 
argument  before  the  Court,  it  seems  to  me  that  that  is  extravagant. 

This  was  a  good  resolution  when  it  was  passed,  and  it  is  contrary 
to  the  settled  decisions  upon  the  construction  of  Acts  of  Parliament 
to  go  upon  a  "tendency."  You  must  find  that  the  thing  which  is 
done,  and  which  is  said  to  be  void,  is,  when  the  Act  of  Parliament  is 
properly  understood,  a  violation  of  the  Act:  Jeffries  v.  Alexander, 
8  H.L.C.  594;  Philpott  v.  St.  George's  Hosjntal,  6  H.L.C.  338. 

The  161st  section  is  in  substance  this  —  when  there  is  a  wind- 
ing-up, whether  voluntarily  or  by  the  Court  or  under  supervision, 
the  duty  of  the  liquidators  under  the  Act  of  Parliament  is  to  turn  all 
the  assets  of  the  company  into  money,  and,  having  paid  the  creditors 
and  the  costs  of  the  winding-up,  then  to  distribute  among  the  mem- 
bers according  to  their  equities  the  surplus,  if  there  be  any.  Then  it 
was  seen  that  there  were  many  cases  in  which  a  company  might 
wind  itself  up  voluntarily  or  the  like  merely  for  the  purpose  of  re- 
construction, and  that  it  would  be  very  advantageous  that  there 
should  be  taken  a  power  in  substance  for  the  company  to  reconstruct 
itself.  That  was  one  of  the  objects  that  was  sought  to  be  accom- 
plished by  the  161st  section;  but  the  gist  of  the  enactment  is  this  — 
that  the  liquidators  in  a  winding-up,  instead  of  selling  for  money, 
may  sell  for  shares;  but,  as  a  safeguard  against  that,  and  against  im- 
posing possibly  a  liability  upon  a  member  of  the  company  which  is 
being  wound  up  by  seeking  to  force  upon  him  shares  which  were  not 
fully  paid  up,  the  Legislature  has,  by  way  of  protecting  his  interest, 
said  in  substance  that  if  he  dissents  he  may  receive  the  value  of  his 
shares  in  money.  That  is,  in  short,  an  explanation  of  the  meaning 
and  effect  of  the  161st  section.  It  relates  to  what  may  be  done  where 


974  SCHWAB    V.  POTTER    CO.  [CHAP.  n. 

there  is  a  winding-up;  and  although  the  section  commences  with  the 
words,  "Where  any  company  is  proposed  to  be  .  .  .  wound  up,"  the 
result  is  plain  that  the  power  is  only  conferred  upon  the  liciuidator. 
Now,  I  take  this  clause,  and  endeavour  to  apply  it  to  the  power  in 
the  memorandum.  The  company  has  sold  its  undertaking  for  shares 
in  another  company.  What  then?  This  161st  section  may  still  hav3 
an  operation  upon  the  shares  which  have  thus  been  taken  as  the  con- 
sideration. I  can  see  no  inconsistency  in  saying  that  the  liquidators, 
if  otherwise  duly  authorized  according  to  the  161st  section,  might 
actually  sell  the  shares  which  th?v  take  from  the  new  company,  they 
being  part  of  the  assets  of  the  old,  and  sell  them  to  some  other  com- 
pany on  the  terms  of  their  taking  shares  in  that  other  company. 
I  can  see  therefore  upon  this  short  statement  no  inconsistency  be- 
tween the  161st  section  and  the  power  taken  by  the  memorandum 
of  association.  There  is  no  prohil)ition  in  the  161st  section.  It  is  a 
power  conferred  upon  the  liquidators  for  the  more  convenient  wind- 
ing-up of  a  company,  and  it  is  not  a  violation  of  anything  to  be  found 
in  that  section  for  a  company,  l)y  its  own  memorandum  of  associa- 
tion, to  take  power  to  sell  its  assets  for  shares  in  another  company, 
and  even  if  it  should  think  fit  (because  this  would  l)o  the  agreement  of 
all  the  membei-s  of  the  company)  to  divide  in  specie  among  the  share- 
holders the  shares  which  have  been  thus  acquired. 

Note.  —  See  also,  Republican  Mines,  Ltd.,  v.  Brown,  58  Fed.  644, 
650. 

Traer  v,  Lucas  Prospecting  Co.,  124  Iowa,  107.  Although  minority 
stockholders  dissent,  a  prosperous  corporation  may  sell  all  its  prop- 
erty for  stock  in  another  corporation,  if  its  articles  of  incorporation, 
taken  in  connection  with  the  law  under  which  the  organization  takes 
place,  authorize  such  transfer.  "When  a  person  becomes  a  share- 
holder in  a  corporation,  he  assents  to  the  transaction  of  the  business 
expressly  or  impliedly  authorized  by  the  charter;  and  therefore,  if 
the  charter  authorizes  the  sale  or  other  disposition  of  all  its  property, 
he  cannot  complain." 

See  also  Maben  v.  Gulf  Coal  Co.,  173  Ala.  259,  261,  265. 


SCHWAB  V.   POTTER  CO. 

194  N.Y.  409.     1909. 

Appeal,  by  permission,  from  an  order  of  the  Appellate  Division  of 
the  Supreme  Court  in  the  first  judicial  department,  entered  Decem- 
ber 11,  1908,  which  reversed  an  interlocutory  judgment  of  Special 
Term  overruling  a  demurrer  to  the  answer  and  sustained  such 
demurrer. 


C:iAP.  II.]  SCHWAB    V.   POTTER    CO.  975 

The  case  made  by  the  complaint  is  substantially  as  follows:  The 
defendant,  "E.  G.  Potter  Company,"  is  a  domestic  corporation 
organized  in  1905  for  a  purpose  not  disclosed,  with  a  capital  stock  of 
$350,000,  divided  into  3500  shares  of  the  par  value  of  $100  each. 
Three  thousand  shares  have  been  issued  and  are  outstanding,  but 
the  remainder  have  not  been  issued. 

On  the  31st  of  December,  1907,  said  company  owned  a  parcel  of 
real  estate  in  the  city  of  New  York  known  as  477  Fifth  Avenue,  with 
an  office  building  thereon  six  stories  in  height.  Said  property,  being 
all  the  real  estate  owned  by  the  company,  was  subject  to  a  mortgage 
thereon  of  $350,000,  but  was  otherwise  free  from  incumbrance. 

On  the  day  last  named  "said  company,  at  a  special  meeting  of  its 
stockholders  called  for  the  purpose  .  .  .  passed  a  resolution"  the 
material  portions  of  which  are  as  follows:  "Resolved,  that  the  board 
of  directors  of  this  company  be  and  they  hereby  are  authorized, 
empowered  and  directed  to  cause  to  be  organized  a  corporation  at 
the  expense  of  this  company  under  the  laws  of  the  State  of  New  York, 
with  a  capital  stock  of  $100,000,  with  the  name  'Library  Realty 
Companj^,'  or  such  other  name  as  may  be  satisfactory  to  the  officers 
of  this  company,  for  the  purpose  of  acquiring  the  real  estate  of  this 
company,  No.  477  Fifth  Avenue,  in  consideration  of  the  issuance  to 
this  company  of  all  the  capital  stock  of  said  new  corporation;  .  .  . 
That  the  board  of  directors  be  and  they  are  hereby  authorized,  em- 
powered and  directed  to  transfer  to  said  new  corporation  when 
formed,  the  equity  in  the  real  estate  of  this  company  known  as  477 
Fifth  Avenue,  subject  to  the  existing  mortgage  thereon  amounting 
to  $350,000  and  to  receive  in  exchange  for  said  equity  in  said  real 
estate  all  the  capital  stock  of  said  new  corporation  to  be  formed,  viz. : 
capital  stock  of  the  par  value  of  $100,000;  .  .  .  That  the  board  of 
directors  of  this  company  be  and  they  hereby  are  authorized,  em- 
powered and  directed  to  cause  the  said  $100,000  par  value  of  stock 
of  said  new  corporation  when  acquired  by  this  company  to  be  offered 
by  proper  notice  to  the  stockholders  of  this  company  for  subscription 
at  par,  each  stockholder  of  this  company  to  have  the  right  to  sub- 
scribe for  an  amount  of  the  stock  of  the  new  corporation  at  par  equal 
to  one-third  of  the  par  value  of  said  stockholders'  holdings  of  this 
company,  each  stockholder  not  wishing  to  subscribe  to  have  the 
right  to  assign  his  rights  to  so  subscribe,  and,  in  the  event  of  failure 
of  any  stockholder  or  his  assignee  to  so  subscribe,  his  rights  t*o  sub- 
scribe to  terminate  and  the  company  to  have  the  right  to  receive 
subscriptions  for  all  or  any  part  of  such  unsubscribed  for  stock  in  the 
new  corporation  from  the  stockholders  of  this  company  or  from  out- 
side parties,  the  time  in  which  to  subscribe  to  be  limited  as  the  direc- 
tors may  deem  best  and  the  said  subscription  to  be  in  cash  as  follows 
.  .  .  That  the  board  of  directors  be  and  they  hereby  are  authorized, 
empowered  and  directed  to  do  or  cause  to  be  done  all  acts  that  may 


976  SCHWAB    V.  POTTER    CO.  [cHAP.  II. 

be  necessary,  convenient  or  desirable  in  order  to  carry  out  the  fore- 
going resolutions  and  to  properly  safeguard  the  rights  of  this  com- 
pany and  of  the  stockholders  to  the  stock  of  the  new  company." 

This  resolution  was  adopted  by  a  vote  of  2450  shares  in  favor  as 
against  550  opposed,  after  the  stockholders  in  attendance  at  the 
meeting  had  been  furnished  with  a  statement  of  the  assets  and  liabil- 
ities of  the  company  in  which  said  real  estate  is  valued  at  the  sum 
of  $498,301.90,  less  !$350,000,  the  amount  of  the  mortgage  thereon. 
The  plaintiff  subsequently  had  the  property  appraised  by  competent 
and  reputable  real  estate  dealers  familiar  with  the  values  of  real 
property  in  the  locality  in  question,  who  reported  it  worth  the  sura 
of  S525,000,  said  sums  being  respectively  S48,000  and  S75,000  "in 
excess  of  the  prices  at  which  it  is  proposed  to  convey  the  same  to  the 
corporation," 

The  rest  of  the  assets,  valued  at  about  8100,000,  were  described 
in  said  statement  as  "merchandise  in  store,  fixtures  in  store,  labor 
on  contracts  in  progress,  etc."  The  bills  and  accounts  owing  by  the 
corporation  amounted  to  $98,199.23,  and  while  a  surplus  of  SI, 042. 97 
was  reported,  unless  the  equity  in  the  real  estate  was  worth  more 
than  S100,000,  the  sum  at  which  it  was  proposed  to  sell  it,  there  was 
not  only  no  surplus,  but  the  capital  was  impaired  to  the  extent  of 
$46,658.03. 

The  plaintiff  was  one  of  the  original  corporators  of  the  defendant 
company  and  has  owned  100  shares  of  its  capital  stock  from  the 
outset,  having  paid  $10,000  in  ca.sh  therefor.  lie  voted  and  protested 
against  the  adoption  of  said  resolution,  and,  alleging  that  $100,000 
is  an  inadequate  price  for  the  equity  in  the  real  estate,  he  brought  this 
action  in  behalf  of  himself  and  the  other  dissenting  stockholders,  to 
restrain  the  company,  its  directors  and  officers  from  taking  the  pro- 
posed action,  upon  the  ground  that  it  "is  illegal  and  calculated  to 
injuriously  affect  the  rights  of"  the  minority.  The  complaint  con- 
tains no  express  allegations  of  fraud  or  bad  faith.  It  alleges  that  the 
directors  all  favor  the  plan  and  that  they  are  about  to  carry  it  into 
effect. 

The  defendants  answered,  and  the  following  is  a  copy  of  their  sec- 
ond and  third  separate  defenses:  "Second.  That  it  was  necessary  to 
sell  the  property  at  said  sum  of  $450,000,  or  even  less,  if  said  price 
could  not  have  been  obtained,  to  conserve  the  interests  of  the  stock- 
holders of  the  defendant  company."  "Third.  That  the  agreement 
to  sell  the  property  pursuant  to  the  resolution  marked  in  the  com- 
plaint '  Exhibit  A,'  was  ratified  and  confirmed  by  stockholders  repre- 
senting over  two-thirds  of  the  capital  stock  of  the  company." 

To  these  defenses  the  plaintiff  demurred  on  the  ground  that  each 
is  insufficient  in  law  upon  the  face  thereof.  The  court  at  Special 
Term  overruled  the  demurrer,  holding  that  the  answers  were  good, 
only  because  the  complaint  was  bad,  but  the  Appellate  Division,  by 


CHAr.  II.]  SCHWAB    V.  POTTER    CO.  977 

a  vote  of  three  to  two,  reversed  the  interlocutory  judgment  and  sus- 
tained the  demurrer  upon  the  ground  that  the  complaint  was  good 
and  the  answers  bad. 

The  defendants  appealed  to  this  court  by  permission  of  the  Appel- 
late Division,  which  certified  the  following  question  for  decision: 
"Does  the  complaint  state  facts  sufficient  to  constitute  a  cause  of 
action?" 

Vann,  J.  The  main  question  presented  by  this  appeal  is  whether 
the  proposed  transaction  is  beyond  the  powers  of  the  defendant 
corporation,  for  it  is  well  established  that  in  the  absence  of  fraud  or 
bad  faith  courts  have  nothing  to  do  with  the  internal  management 
of  business  corporations,  provided  they  keep  within  their  corporate 
powers.  *  {Gamble  v.  Queens  County  Water  Co.,  123  N.Y.  91 ;  Flijnn  v. 
Brooklyn  City  R.R.  Co.,  158  N.Y.  493,  507.)  Thus  we  said  in  the  case 
last  cited:  "Whatever  may  lawfully  be  done  by  the  directors  or 
stockholders,  acting  through  majorities  prescribed  by  law,  must  of 
necessity  be  submitted  to  by  the  minority,  for  corporations  can  be 
conducted  upon  no  other  basis.  All  questions  within  the  scope  of  the 
corporate  powers  which  relate  to  the  policy  of  administration,  to  the 
expediency  of  proposed  measures,  or  to  the  consideration  of  con- 
tracts, provided  it  is  not  so  grossly  injidequate  as  to  be  evidence  of 
fraud,  are  beyond  the  province  of^fhe  courts.  The  minority  directors 
or  stockholders  cannot  come  into  court  upon  allegations  of  a  want  of 
judgment  or  lack  of  efficiency  on  the  part  of  the  majority  and  change 
the  course  of  administration.  Corporate  elections  furnish  the  only 
remedy  for  internal  dissensions,  as  the  majority  must  rule  so  long  as 
it  keeps  within  the  powers  conferred  by  the  charter." 

The  complaint  does  not  disclose  the  purposes  for  which  the  defend- 
ant corporation  was  organized,  nor  set  forth  its  corporate  powers 
except  as  it  may  be  inferred  from  the  statement  of  assets  and  liabili- 
ties that  it  carries  on  a  manufacturing  business,  while  the  new  cor- 
poration apparently  was  to  be  a  "realty"  company.  If,  however,  no 
corporation  in  this  state  is  authorized  to  organize  another,  divide  its 
assets  with  it  and  take  in  exchange  its  entire  capital  stock,  then  the 
proposed  plan  is  ultra  vires  and  the  execution  thereof  may  be  re- 
strained by  injunction. 

Corporations  are  created  by  statute  and  have  no  powers  except 
those  conferred  by  statute,  directly  or  indirectly.  (L.  1892,  chap. 
687;  L.  1895,  chap.  672,  §  10.)  There  is  no  statute  in  this  state  which 
directly  authorizes  one  corporation  to  organize  another  and,  as  we 
think,  such  action  is  not  indirectly  authorized  by  any  reasonable 
inference  from  the  most  extensive  powers  committed  to  any  class  of 
corporations  known  to  our  law.  Corporations  are  organized  by  natu- 
ral persons,  acting  under  the  direction  of  a  statute,  and  they  only 
can  become  corporators,  directors  or  officers.  "Artificial  persons," 
without  brain  or  body,  existing  only  on  paper  through  legislative 


978  SCHWAB    V.  POTTER    CO.  [cHAP.  II. 

command  and  incapable  of  thought  or  action  except  through  natural 
persons,  cannot  create  other  "artificial  persons,"  and  those,  other 
still,  until  the  line  is  so  extended  and  the  capital  stock  so  (lu|)lirated 
and  reduplicated,  as  to  result  in  confusion  and  fraud.  If,  in  the  ca.se 
before  us,  the  proposed  plan  is  carried  into  effect,  the  old  corporation 
will  be  the  only  stockholder  of  the  new  corporation  when  it  comes 
into  being,  which  is  the  time  to  test  its  legality,  and  the  entire  capital 
stock  of  the  latter  will  have  been  taken  from  the  a.s.sets  of  the  former. 
After  the  old  corporation  has  thus  split  it.self  into  two  corporations, 
both  together  will  have  only  the  capital  that  the  old  corporation  had 
before.  Not  a  dollar  of  new  capital  will  have  been  contributed  either 
in  money  or  property,  and  only  when  the  old  corporation  sells  to  sul)- 
scribers  or  outsiders,  —  and  it  is  not  alleged  that  it  will  be  able  to  sell 
to  either,  —  all  or  a  part  of  the  shares  of  stock,  i.ssued  to  it  by  the 
new,  can  any  money  come  from  the  transaction.  This  shows  that  the 
purpose  of  the  strange  action  proposed  is  to  increa.se  the  capital 
stock  of  the  old  company  without  complying  with  the  provisions  of 
the  statute  governing  the  sui)ject.  The  increase  is  to  be  obtained  by 
what  is  in  effect  a  forced  assessment  upon  the  full  paid  and  non-a.ssess- 
able  shares  of  the  stockholders,  for  unless  they  take  new  stock  they 
lose  a  material  part  of  their  intestment,  although  something  they  do 
not  want  is  given  in  exchange.  Thus  they  are  virtually  compelled  by 
an  unlawful  scheme  to  enter  into  new  contractual  relations  with 
strange  parties.  {Mason  v.  Peicabic  Mining  Co.,  133  U.S.  50.)  This 
would  be  an  obvious  evasion  of  the  law  which  the  courts  will  restrain 
when  applied  to  by  the  proper  party.  As  was  well  said  by  the  pre- 
siding justice  below  in  a  useful  opinion:  "But  it  is  evident  from  the 
allegations  of  this  complaint  and  from  the  inferences  that  fairly  may 
be  drawn  from  such  allegations  that  what  was  in  the  contemplation 
of  the  directors  and  majority  stockholders  of  the  defendant  corpora- 
tion was  not  to  have  that  corporation  make  an  actual  sale  of  the  real 
estate  to  another  corporation  and  receive  shares  of  stock  as  the  con- 
sideration therefor,  but  to  resort  to  a  device  l)y  which  to  increase  its 
capital  l\v  dismembering  itself  and  organizing  another  corporation 
of  which  it  should  be  the  only  stockholder,  and  thus  evade  the  pro- 
visions of  the  statute  relating  to  the  increase  of  the  capital  stock  of  a 
corporation.  The  defendant  corporation,  by  the  resolution,  is  au- 
thorized and  directed  to  create  a  new  corporation  at  the  expense  of  the 
old  one.  What  it  is  to  do,  therefore,  is  to  be  a  corporate  act  done  in 
its  capacity  as  a  corporation.  Instead  of  increasing  its  capital  stock 
in  the  manner  provided  by  law,  it  is  to  separate  its  assets,  deliver 
one  portion  of  them  to  its  own  creature,  capitalize  that  portion  at  a 
fixed  valuation,  and  receive  back  all  the  shares  of  stock  i.ssued  by  its 
creature;  and  there  that  transaction  really  ends.  Affording  an  oppor- 
tunity to  the  stockholders  of  the  old  corporation  to  subscribe  to  the 
stock  of  the  new  one  is  merely  an  offer  to  them  to  buy  from  the  old 


CHAP.  II.]  SCHWAB   V.  POTTER    CO.  979 

corporation  this  new  stock  after  it  comes  into  the  possession  of  the 
old  corporation."   (129  App.  Div.  36,  40.) 

We  cannot  assume  from  the  allegations  of  the  complaint  that  the 
old  corporation  will  be  able  to  sell  the  shares  of  new  stock  when 
issued  as  fully  paid  and  delivered  to  it.  Apparently  it  has  not  been 
able  to  sell  all  its  own  stock,  for  five  hundred  shares  of  the  amount 
authorized  have  not  been  issued.  It  is  possible,  therefore,  that  the 
old  corporation  will  be  compelled  to  permanently  hold  a  part  at  least 
of  the  new  shares,  while  the  new  corporation  will  have  no  individual 
stockholders  to  act  as  officers  or  directors.  The  law  permits  no  such 
anomaly  as  one  corporation  organized  by  another  corporation,  which 
fUi'nishes  all  its  capital,  takes  all  its  shares  of  stock  and  holds  them 
for  sale.  The  new  organization  could  never  have  a  valid  existence, 
for  the  disposition  of  the  shares  by  the  old  corporation  would  not 
validate  an  illegal  charter. 

Section  40  of  the  Stock  Corporation  Law  does  not  aid  the  defend- 
ants. That  statute  authorizes  a  stock  corporation,  if  permitted  by  its 
charter,  to  acquire,  hold  and  dispose  of  shares  of  stock  issued  by 
another  corporation,  and  in  any  case  to  acquire,  hold  and  dispose  of 
shares  of  stock  issued  by  certain  classes  of  corporations,  including 
those  engaged  in  a  similar  business  and  those  with  wliich  it  might  be 
consolidated.  (L.  1892,  chap.  688,  §  40.)  It  does  not  permit  one  cor- 
poration to  create  another,  endow  it  with  capital  from  its  own  assets 
and  take  all  its  shares  of  stock  in  exchange.  Moreover,  it  is  not 
alleged  in  the  complaint  that  the  defendant  company  is  authorized 
by  its  charter  to  acquire  stock  in  another  corporation,  or  that  it  is 
engaged  in  a  business  similar  to  that  of  the  corporation  it  proposes 
to  organize. 

Corporations  cannot  resort  to  ingenious  and  original  methods  of 
action  with  the  freedom  of  individuals,  for  they  are  confined  to  those 
expressly  authorized  by  statute  and  such  as  are  incidental  thereto 
and  necessary  to  carry  them  into  effect.  If  the  purpose  of  the  old 
corporation  was  to  increase  its  capital  stock,  the  object  was  lawful 
but  the  method  was  unlawful  and  this  is  true  if  its  object  was  merely 
to  sell  its  real  estate.  Whatever  the  purpose  may  have  been,  the 
plan  was  unlawful,  because  it  would  have  caused  an  increase  of  the 
capital  stock  of  the  corporation  by  an  unauthorized  method.  While 
the  majority  stockholders,  or  the  directors,  acting  as  individuals, 
could  have  organized  the  new  corporation,  they  could  not  use  the 
real  estate  of  the  old  corporation  to  provide  it  with  capital  stock,  for 
that  was  not  their  property.  According  to  the  scheme  adopted,  how- 
ever, the  majority  stockholders  were  not  to  effect  the  new  organiza- 
tion, but  the  board  of  directors,  acting  as  such,  were  "authorized, 
empowered  and  directed  to  cause"  the  new  corporation  to  be  organ- 
ized, "at  the  expense  of  the  old"  and  by  a  division  of  its  assets.  This 
was  beyond  the  powers  of  the  corporation,  its  stockholders  and  direc- 


980  SCHWAB    V.  POTTER    CO.  [CHAP.  II. 

tors.  Whatever  is  done  by  a  corporation  without  authority  is  done  in 
violation  of  law,  for  all  action,  not  authorized  directly  or  indirectly, 
is  prohibited.  (General  Corporation  Law  [L.  1890,  chap.  503,  as 
amended],  §  10.)  Any  minority  stockliolder  who  opposed  the  scheme 
was  entitled  to  an  injunction,  even  without  alleging  actual  injury, 
or  the  certaint}^  thereof  in  the  future,  for  he  is  entitled  to  stand  on 
his  legal  rights  and  may  refuse  to  accept  ".something  better"  in 
exchange.  His  legal  right  was  to  continue  a  member  of  one  corpora- 
tion and  not  to  ])e  forced  into  the  membership  of  a  second  corpora- 
tion, all  the  capital  of  which  was  to  be  taken  from  the  assets  of  the 
former.  The  plaintiff  is  now  the  equitable  owner  of  one-thirtieth  of 
the  assets  of  the  defendant  company.  By  the  proposed  plan  he  will 
be  deprived  of  his  one-thirtieth  interest  in  the  real  estate  and  either 
lose  it  altogether  or  be  forced  to  buy  stock  in  another  company, 
organized  without  the  sanction  of  law,  in  order  to  save  hinxself.  That 
would  in  effect  be  a  forced  sale  by  the  corporation  to  its  own  stock- 
holders, and  would  result  in  an  increase  of  the  capital  stock  by  an 
unauthorized  method. 

If  we  have  reasoned  correctly  thus  far,  it  is  obvious  that  the  alle- 
gations in  the  second  and  third  divisions  of  the  answer  constitute  no 
defense.  Even  if  a  sale  of  the  real  estate  was  "  necessary,"  as  alleged 
in  the  second  defense,  that  did  not  permit  the  organization  of  a  cor- 
poration without  authority,  nor  justify  the  spoliation  of  the  defend- 
ant company  in  order  to  give  it  capital;  and.  if  the  agreement  to  sell 
was  "ratified"  by  two-thirds  of  the  stockholders,  as  alleged  in  the 
third  defense,  that  did  not  validate  the  method  of  selling,  as  to  any 
stockholder  who  objected.  Ratification  may  confirm  a  voidable  act, 
but  not  one  utterly  void. 

We  think  that  the  complaint  sets  forth  a  good  cause  of  action  and 
that  the  answer,  so  far  as  before  us,  sets  foilh  no  defense. 

The  order  appealed  from  should  be  affirmed,  with  costs,  with 
leave  to  the  defendants  to  plead  over  within  twenty  days  on  payment 
of  costs,  and  the  question  certified  answered  in  the  affirmative. 

CuLLEN,  Ch.J.,  Haight,  Werner,  Willard  Bartlett,  Hiscock 
and  Chase,  J  J.,  concur. 

Order  afirmed. 

Note.  —  Such  a  sale  or  lease  as  is  considered  in  this  chapter  is, 
it  is  submitted,  usuall}^  objectionable  only  because  it  is  contrary  to 
the  compact  among  the  stockholders.  See  Farish  v.  Cieneguita 
Copper  Co.,  12  Ariz.  235,  239. 

But  it  may  be  objectionable  because  the  transaction  is  ultra  vires 
the  corporation,  using  that  word  in  the  sense  stated  at  p.  378,  supra. 
Thus,  (1)  of  a  sale  or  lease  of  the  assets  of  a  public  servdce  corpora- 
tion, without  legislative  sanction;  or  (2)  of  a  sale  or  lease  in  consider- 
ation of  stock  which  it  is  ultra  vires  for  the  corporation  to  acquire. 


CHAP.  II.]  SCHWAB    V.  POTTER    CO.  981 

For  cases,  in  addition  to  the  principal  case,  where  the  transaction 
was  objectionable  on  the  ground  that  it  involved  an  ultra  vires  hold- 
ing of  stock,  see  Byrne  v.  Schuyler  Co.,  65  Conn.  336;  Easun  v.  Buck- 
eye Brewing  Co.,  51  Fed.  156. 

Cf.  Holmes  Mfg.  Co.  v.  Holmes  Metal  Co.,  127  N.Y.  252,  holding 
that  it  is  not  ultra  vires  for  a  manufacturing  corporation,  with  the 
consent  of  all  its  stockholders  to  transfer  its  assets  for  the  stock  of 
another  corporation.  "Inasmuch  as  this  was  done  with  the  consent 
of  all  the  stockholders,  it  being  the  act  of  a  private  corporation,  not 
in  any  manner  harming  the  public,  we  see  no  reason  for  condemning 
its  title  to  the  stock  so  obtained." 


982  EWING    V.  COMPOSITE    BRAKE    SHOE    CO.  [CHAP.  III. 


CHAPTER   III. 

RIGHTS  OF  CREDITORS  AS  AFFECTED  BY 
REORGANIZATIONS. 


EWING  V.  COMPOSITE  BRAKE  SHOE  CO. 

169  Mass.  72.     1&97. 

Action  at  law  upon  a  contract. 

Lathrop,  J.  The  plaintiff  was  a  creditor  of  a  Maine  corporation 
to  the  amount  of  S787.  This  corporation  cea.sed  to  do  l)usiness,  and 
the  stockholders,  together  with  at  least  one  other  person,  formed  a 
new  corporation  with  a  different  name  under  the  laws  of  Massa- 
chusetts. The  new  corporation  is  the  defendant  in  this  case.  It  took 
all  the  assets  of  the  old  corporation  except  its  books,  but  it  did  not 
assume  to  pay  all  of  the  debts  of  the  old  corporation,  although  there 
was  evidence  that  one  Whitcomb,  who  was  the  manager  of  both  of 
the  corporations,  told  the  plaintiff  that  the  new  company  would  be 
liable  for  the  debts  of  the  old.  It  is  obvious,  however,  that  where  a 
new  corporation  is  formed,  the  creditors  of  the  old  corporation  do 
not,  without  something  further  being  done,  become  creditors  of  the 
new  corporation.  They  have  an  equitable  right  to  follow  the  assets 
of  the  old  corporation;  but  they  cannot  maintain  an  action  at  law 
against  the  new  corporation,  for  there  is  no  privity  of  contract.  To 
render  the  new  corporation  liable  there  must  be  a  new  contract  made, 
such  as  will  amount  to  a  novation.  See  Moraw.  Corp.  (2d  ed.)  §§  808 
et  seq. 

Note.  —  A  covenant  made  by  a  corporation  will  run  with  the  land 
owned  by  the  corporation  when  the  covenant  was  made  if,  but  only 
if,  a  similar  covenant  bj'  a  natural  person  would  run.  See  Warren, 
Cases  on  Property,  pp.  840  et  seq. 

But  there  is  no  rule  of  law,  special  to  corporations,  that  corporate 
lialjilities  run  with  corporate  assets,  even  if  those  assets  are  acquired 
as  an  entirety.  The  authorities  in  accord  with  the  principal  case  are 
numerous. 

A  fortiori,  the  purchaser  is  not  bound  if  the  purchase  is  made  at  a 
sale  in  foreclosure  of  a  mortgage  upon  the  corporate  assets.  Lake 
Erie  Co.  v.  Griffin,  92  Ind.  487;  Cook  v.  Detroit  Ry.  Co.,  43  Mich.  349; 
Smith  v.  Chicago  Ry.  Co.,  18  Wis.  17. 

Usually  the  vendee  promises  the  vendor,  in  consideration  of  the 


CHAP.  III.]      NEW  BEDFORD  RAILROAD  V.  OLD  COLONY  RAILROAD.      983 

transfer  of  the  assets,  to  discharge  all  the  liabilities  of  the  vendor. 
This  promise  is  an  asset  of  the  vendor  and  may  be  reached  in  equity 
by  the  creditors  of  the  vendor;  and  in  many  jurisdictions  the  creditors 
of  the  vendor  may  sue  the  vendee  at  law.  See  Wald's  Pollock  on 
Contracts  (3d  American  edition  by  Williston),  pp.  256  et  seq.;  Haw- 
kins V.  Central  of  Georgia  Ry.  Co.,  119  Ga.  159;  Harvey  v.  Milk  Co., 
92  Me.  115;  Tecumseh  National  Bank  v.  Saunders,  50  Neb.  521; 
Billmyer  Lumber  Co.  v.  Merchants  Coal  Co.,  66  W.Va.  696. 


NEW  BEDFORD  RAILROAD  v.   OLD  COLONY 
RAILROAD. 

120  Mass.  397.     1876. 

CoLT,  J.  The  Statute  of  1874,  chap.  55,  authorizes  the  defendant 
corporation  "to  purchase  the  rights,  franchise  and  property  of  the 
Middleborough  and  Taunton  Railroad  Corporation,"  and  gives  to 
the  latter  corporation,  upon  such  purchase,  power  to  convey  to  the 
Old  Colony  Railroad  Company  "its  franchises  and  property,  and  all 
the  rights,  easements,  privileges  and  powers  granted  to  it."  It  also 
declares  that  upon  such  conveyance  the  defendant  corporation  shall 
"have  and  enjoy  all  the  rights,  powers,  privileges,  easements,  fran- 
chises and  property  of  said  Middleborough  and  Taunton  Railroad 
Corporation,  and  be  subject  to  all  the  duties,  liabilities,  obligations 
and  restrictions  to  which  said  last  named  corporation  may  be 
subject." 

This  action  is  to  recover  damages  for  a  tortious  act  of  the  IMiddle- 
borough  and  Taunton  Railroad  Corporation,  for  which  it  was  liable 
previously  to  the  time  of  the  purchase;  and  the  questions  raised  by 
the  demurrer  are,  whether  the  defendant  is  liable  for  that  act,  and, 
if  so,  whether  an  action  can  be  maintained  directl}''  against  it,  or 
must  be  first  brought  against  the  other  corporation. 

The  answer  to  these  questions  depends  upon  the  intention  of  the 
Legislature,  to  be  deduced  from  the  terms  of  the  statute  and  the 
manifest  purpose  of  the  act.  The  language  is  broad  enough  to  place 
the  defendant  in  all  respects  in  the  position  of  the  other  corporation, 
upon  the  conveyance  and  assignment  provided  for.  It  is  equivalent 
to  an  amalgamation  of  the  two;  all  the  franchises,  privileges  and 
powers  are  transferred,  without  reservation;  not  merely  the  franchise 
to  own  and  manage  a  railroad,  but  the  franchise  of  being  a  body 
politic,  with  rights  of  succession,  of  acquiring,  holding  and  conveying 
property,  and  of  suing  and  being  sued  by  its  corporate  name.  It  puts 
out  of  the  reach  of  creditors  all  property  liable  to  attachment  to 
satisfy  claims,  either  in  contract  or  tort.  It  practically  terminates 
the  corporate  existence  of  the  selling  corporation,  except,  perhaps, 


984  IRVINE    V.  NEW    YORK    EDISON    CO.  [CHAP.  III. 

SO  far  as  such  existence  may  be  necessary  in  order  to  hold  and  distril)- 
ute  the  consideration  received  for  the  sale,  or  to  meet  the  ro(|uire- 
ments  of  the  statute  which  prolongs  the  life  of  all  corporations  for 
three  years  after  dissolution,  for  the  purpose  of  cnaijling  them  to 
close  their  concerns.  Gen.  Sts.  chap.  G8,  §  3G.  It  operates  as  a  dis- 
solution of  the  corporation  l)y  force  of  the  statute  and  of  the  a.ssent 
manifested  by  the  sale.  Lauman  v.  Lebanon  Valley  Railroad,  30 
Penn.  St.  42. 

In  view  of  these  results,  it  would  be  a  narrow  construction  to  hold 
that  when  the  statute  subjects  the  purchasinp;  corporation  "to  all 
the  duties,  liabilities,  obligations  and  restrictions"  of  the  other,  it 
only  intended  to  impose  those  ol)ligations  which  the  corporation 
owed  the  public  under  its  charter  and  the  laws  of  the  Common- 
wealth, and  that  the  property  transferred  was  only  that  l)y  which 
it  served  the  public  in  the  exercise  of  its  franchise.  In  the  absence  of 
express  provision,  it  cannot  be  inferred  that  it  was  the  intention  of 
the  act  to  impair  claims  of  third  parties  for  existing  liabilities,  or 
to  shorten  the  time  within  which  the  remedy  must  be  pursued.  The 
question  is  not  whether  the  statute  compels  the  cre<litor  to  accept 
the  defendant  corporation  as  a  new  debtor  against  his  will,  or  an 
injured  person  to  resort  to  a  stranger  for  satisfaction,  but  whether  it 
empowers  the  creditor  or  the  person  injuretl  to  resort,  if  he  chooses, 
in  the  first  instance,  to  the  corporation  which,  i)V  the  terms  of  the 
statute,  is  made  liable  to  him.  And  we  are  of  opinion  that  it  does, 
and  that  the  privity  necessary  to  support  this  action  is  created  by 
the  statute  and  the  purchase  and  conveyance  under  it. 

Demurrer  overruled. 


IRVINE  V.   NEW  YORK   EDISON  CO. 

207  N.Y.  425.     1913.  i 

Chase,  J.  The  Block  Lighting  and  Power  Company,  No.  1,  trans- 
ferred its  property,  real  and  personal,  including  its  franchises,  by  bill 
of  sale  to  the  Manhattan  Lighting  Company  on  December  13,  1898. 
The  consideration  of  such  transfer  does  not  appear.  The  Block 
Company  and  the  Manhattan  Company  were  merged  into  and  with 
the  New  York  Gas  and  Electric  Light,  Heat  and  Power  Company 
on  February  1,  1900.  The  gas  company  and  the  Edison  Electric 
Illuminating  Company  of  New  York  were  consolidated  and  became 
the  defendant.  The  New  York  Edison  Company,  on  May  20,  1901. 
The  transactions  mentioned  were  each  independent  acts,  not  having 
so  far  as  appears  any  relation  to  one  another.  The  plaintiff's  claim 
is  against  the  Block  Company.  The  assets,  if  any,  of  the  Block 
Company  are  in  the  possession  of  the  defendant,  expressly  subject, 


CHAP.  III.]  IRVINE    V.  NEW   YORK    EDISON    CO.  985 

as  will  hereinafter  appear,  to  the  rights  of  the  creditors  of  the  Block 
Company. 

The  question  in  this  case  is  reduced  to  a  consideration  of  the 
plaintiff's  remedy.  Can  the  plaintiff  maintain  this  action  as  one  of 
debt  against  the  defendant?  I  think  not,  and  I  concur  in  the  opinion 
written  by  Justice  McLaughlin  in  the  court  below. 

The  legislature  has  provided  two  ways  of  uniting  two  or  more 
corporations  by  transfer  of  their  property  to  a  single  corporation. 
One  statute  provides  that  "Any  two  or  more  corporations  organized 
under  the  laws  of  this  state  for  the  purpose  of  carrying  on  any  Idnd 
of  business  of  the  same  or  of  a  similar  nature"  which  a  corporation 
organized  under  the  Business  Corporations  Law  might  carry  on, 
may  consolidate  such  corporations  into  a  single  corporation.  (Busi- 
ness Corporations  Law,  §  7  [Cons.  Laws,  chap.  4].  See,  also,  §§  7  to  11 
inclusive;  former  Business  Corporations  Laws  [Laws  of  1890,  chap. 
567],  §§  8  to  12  inclusive,  as  amended  prior  to  1909.) 

Another  statute  provides  that  "Any  domestic  stock  corporation 
and  any  foreign  stock  corporation  authorized  to  do  business  in  this 
state  lawfully  owning  all  the  stock  of  any  other  stock  corporation 
organized  for,  or  engaged  in  business  similar  or  incidental  to  that 
of  the  possessor  corporation  may  file  in  the  office  of  the  secretary  of 
state,  under  its  common  seal,  a  certificate  of  such  ownership,  and  of 
the  resolution  of  its  board  of  directors  to  merge  such  other  corpora- 
tion, and  thereupon  it  shall  acquire  and  become,  and  be  possessed 
of  all  the  estate,  property,  rights,  privileges  and  franchises  of  such 
other  corporation,  and  they  shall  vest  in  and  be  held  and  enjoyed 
by  it  as  fully  and  entirely  and  without  change  or  diminution  as  the 
same  were  before  held  and  enjoyed  by  such  other  corporation,  and 
be  managed  and  controlled  by  the  board  of  directors  of  such  posses- 
sor corporation,  and  in  its  name,  but  without  prejudice  to  any  liabili- 
ties of  such  other  corporation  or  the  rights  of  any  creditors  thereof. 
..."  (Stock  Corporation  Law,  §  15  [Cons.  Laws,  chap.  59];  former 
Stock  Corporation  Law  [Laws  of  1890,  chap.  564],  §  58,  as  amended 
prior  to  1909.) 

It  is  also  provided  in  the  Transportation  Corporations  Law  (Laws 
of  1909,  chap.  219,  §  61  subd.  3  [Cons.  Laws,  chap.  63])  that  "subject 
to  the  permission  and  approval  of  the  proper  public  service  commis- 
sion, any  two  or  more  corporations  organized  under  this  article  or 
under  any  general  or  special  law  of  the  state  for  the  purpose  of 
carrying  on  any  business  which  a  corporation  organized  under  this 
article  might  carry  on,  may  consolidate  such  corporations  into  a 
single  corporation,  and  any  such  corporation  may  with  the  like  per- 
mission and  approval  be  merged  with  any  other  such  corporation, 
upon  complying  with  the  provisions  of  the  Business  Corporations 
Law  relating  to  the  consolidation  of  business  corporations  and  the 
Stock  Corporation  Law  relating  to  the  merger  of  stock  corporations." 


986  IRVINE   V.  NEW    YORK    EDISON    CO.  [CHAP.  III. 

The  Transportation  Corporations  Law  thus  expressly  recognizes 
the  right  of  corporations  to  consohdate  under  the  Business  Corpora- 
tions Law,  and  also  to  merge  under  the  Stock  Corporation  Law. 
Each  form  of  procedure  is  independent  of  the  other.  Where  a  consoli- 
dation is  consunmiated  pursuant  to  the  statute  it  is  expressly  pro- 
vided that  the  rights  of  creditors  of  any  corporation  that  shall  be  so 
consolidated  shall  not  in  any  manner  be  impaired,  and  also  "such 
new  corporation  shall  succeed  to  and  be  held  liable  to  pay  and  dis- 
charge all  such  debts  and  liabilities  of  each  of  the  corporations  con- 
solidated in  the  same  manner  as  if  such  new  corporation  had  itself 
incurred  the  obligation  or  lialjility  to  pay  such  debt  or  damages." 
(Cons.  Laws,  chap.  4,  §  U.) 

If  the  gas  company  was  liable  for  the  indebtedness  to  the  plaintiff 
described  in  the  complaint,  the  action  will  lie  against  the  defendant 
therefor  because  of  the  statute  ciuoted.  Whether  the  gas  company 
became  liable  for  the  debts  of  the  Block  Company  depends  upon  the 
statute,  pursuant  to  which  the  merger  took  place.  In  the  statute 
authorizing  a  merger  of  corporations,  there  is  no  provision  making 
the  possessor  corporation  liable  for  the  debts  of  the  corporation 
merged.  It  is  expressly  provided  in  that  statute  that  the  merging  of 
corporations  shall  be  "without  prejudice  to  any  liabilities  of  such 
other  corporation  or  the  rights  of  any  creditors  thereof." 

This  reservation  of  the  rights  of  creditors  permits  them  to  proceed 
against  the  debtor  corporation,  notwithstanding  such  corporation 
is  merged  into  another.  The  rights  of  creditors  include  the  right  to 
sue  the  debtor  corporation  and  to  take  the  property  which  was  of  the 
debtor  corporation  by  execution  issued  upon  a  judgment  obtained 
against  such  debtor.  Such  right  rests  upon  the  express  terms  of  the 
statute-and  does  not  necessarily  depend,  as  has  been  suggested,  upon 
the  existence  and  a  finding  of  a  fraudulent  transfer. 

This  court  has  recently  considered  the  effect  of  a  merger  of  bank- 
ing corporations.  {Matter  of  Bergdorf,  206  N.Y.  309.)  Upon  a  merger 
of  banking  corporations  (Banking  Law  [Cons.  Laws,  chap.  2],  §§36 
to  40  inclusive)  it  is  expressly  provided  that  the  corporation  into 
which  they  are  merged  shall  "be  held  liable  to  pay  and  discharge 
all  such  debts  and  liabilities,  and  to  perform  all  such  trusts  of  the 
merged  corporation  in  the  same  manner  as  if  such  corporation  into 
which  the  other  shall  become  merged  had  itself  incurred  the  obliga- 
tion or  liability."  But  it  is  provided  by  the  statute  that  no  "action 
or  other  proceeding  then  pending  before  any  court  or  tribunal  in 
which  any  corporation  that  may  be  merged  is  a  party  shall  be 
deemed  to  have  abated  or  discontinued  by  reason  of  any  such  mer- 
ger, but  the  same  may  be  prosecuted  to  final  judgment  in  the  same 
manner  as  if  the  said  corporation  had  not  entered  into  the  said 
agreement." 

This  court,  in  considering  the  effect  of  a  merger  in  the  Bergdorf 


CHAP.  III.]  IRVINE    V.  NEW    YORK    EDISON    CO,  987 

case,  say:  "It  could  not  have  taken  place  without  statutory  author- 
ity and  the  legislature  fixed  the  indisputable  and  exclusive  effects  of  it. 
{People  V.  N.Y.,  Chicago  &  St.  Louis  R.R.  Co.,  129  N.Y.  474.)" 

Referring  again  to  the  statutory  provisions  under  which  the  mer- 
ger was  consummated,  the  court  further  say:  "Those  statutory  pro- 
visions state  plainly  the  effects  of  the  merger  of  the  Morton  Com- 
pany into  the  Guaranty  Company.  The  former  company  became 
(with  the  nominal  exception  hereinafter  stated)  rightless,  property- 
less  and  powerless;  and  the  latter  company  was  enlarged  by  the 
absorption  of  all  that  the  former  surrendered.  .  .  .  But  the  Morton 
Company  did  not  surrender  its  corporate  existence.  It  was  not  dis- 
sol'/ed.  It  remained  a  corporation,  but  for  the  single  purpose  and 
with  the  sole  power  of  being  sued  or  proceeded  against  upon  and 
defending  against  causes  of  action  alleged  to  exist  against  it  at  the 
time  of  the  merger.  All  the  other  powers  bestowed  upon  it  and  which 
were  evidenced  by  its  certificate  of  incorporation  and  the  statute  law 
relating  to  it  were  by  the  merger  transferred  to  the  Guaranty  Com- 
pany. A  corporation  may  exist  though  it  possesses  no  property.  A 
corporation  may  have  a  partial  as  well  as  a  total  extinction,  and  a 
legislature  may  enact  that  the  merged  corporation  shall  be  extin- 
guished by  the  merger,  except  in  so  far  as  the  statute  shall  keep  it 
nominally  alive  for  a  specified  purpose.  Our  conclusion  is  that  the 
Morton  Trust  Company  does  not  exist  within  or  as  a  part  of  the 
Guaranty  Company,  and  the  two  are  not  identical.  As  a  legal  being, 
a  corporate  entity,  it  retained  the  one  activity  and  power,  and  other- 
wise is  non-existent"  (p.  315). 

The  language  of  the  court  in  the  Bcrgdorf  case  is  applicable  to  this 
case.  The  Block  Company  never  existed  within  the  gas  company, 
and  does  not  exist  within  or  as  a  part  of  the  defendant.  Although  the 
Block  Company  has  become  extinct,  its  corporate  existence  is  re- 
tained for  the  one  purpose  of  carrjdng  out  in  good  faith  the  reserva- 
tion in  the  statute  of  the  rights  of  the  creditors  thereof.  We  repeat 
that  for  that  purpose  the  Block  Company  can  be  sued.  The  plaintiff 
after  obtaining  judgment  against  the  Block  Company  may,  bj^  execu- 
tion or  otherwise,  reach  the  assets  of  such  company  as  though  the 
merger  had  never  taken  place. 

The  provisions  of  the  merger  statute  and  of  the  consolidation 
statute  were  considered  together  by  the  legislature  in  1890,  and  they 
have  since  been  considered  by  it  from  time  to  time.  There  would 
seem  to  be  little  or  no  objection  and  much  reason  for  making  a  cor- 
poration which  takes  all  of  the  assets  of  other  corporations  by  con- 
solidation or  merger  liable  for  the  indebtedness  of  such  consolidated 
or  merged  corporations.  The  acceptance  of  such  property  could  be 
made  an  assent  to  such  liability.  The  whole  matter  was,  however, 
clearly  before  the  legislature  for  its  consideration,  and  it  was  con- 
sidered by  it,  and  it  made  a  corporation  accepting  the  assets  of 


988  IRVINE    V.  NEW    YORK    EDISON    CO.  [cHAP.  III. 

other  corporations  under  the  statute  authorizing  the  consoUdation  of 
corporations  liable  for  the  indebtedness  of  the  corporations  so  con- 
solidated. It  declined  so  to  do  in  the  case  of  corporations  transferring 
assets  under  the  merger  statute.  The  rights  of  creditors  were  not 
overlooked,  as  the  legislature  expressly  provided  that  the  rights  of 
such  creditors  should  be  preserved  and  that  the  merger  should  be 
without  prejucUce  as  to  them. 

In  view  of  the  history  of  the  acts  referred  to  it  must  be  assumed 
that  the  omission  to  make  the  possessor  company  directly  liable  for 
the  debts  of  the  merged  corporations  was  intentional.  The  courts 
should  not  attempt  to  supplement  the  legislative  provision  relating 
to  the  creditors  of  the  merged  corporations  by  making  the  pos- 
sessor company  liable  as  upon  contract  for  the  indebtedness  of  such 
companies,  either  wholly  or  to  the  extent  of  the  property  trans- 
ferred to  it,  particularly  in  view  of  the  fact  that  it  appears  that  the 
subject  has  been  fully  considered  and  acted  upon  by  the  legisla- 
ture itself. 

The  reservation  by  the  legislature  of  the  rights  of  creditors  nega- 
tives the  suggestion  that  a  transfer  in  pursuance  of  the  statute  would 
be  a  crime.  Such  a  transfer  is  not  one  made  "with  intent  to  dcfi-aud 
prior  or  subseciuent  purchasers,  or  to  hinder,  delay  or  defraud  cred- 
itors or  other  persons"  within  the  meaning  of  §  1170  of  the  Code  of 
Criminal  Procedure. 

If  the  property  of  the  Block  Company  is  not  of  such  a  nature  that 
it  can  be  reached  directly  by  execution  or  otherwise,  it  constitutes  a 
trust  fund  for  the  benefit  of  such  creditors  and  can  be  reached  as 
such  precisely  as  if  a  merger  of  the  Block  Company  had  never  taken 
place. 

The  rule  in  equity  is  that  as  between  cestui  que  trust  and  trustee, 
and  all  parties  claiming  under  the  trustee  otherwise  than  by  purchase 
for  a  valuable  consideration,  without  notice,  all  property  belonging 
to  a  trust,  however  much  it  may  be  changed  or  altered  in  its  nature 
or  character,  and  all  the  fruit  of  such  property,  whether  in  its  original 
or  altered  state,  continues  to  be  subject  to  or  affected  by  the  trust. 
{Matter  of  Hicks,  170  N.Y.  195.) 

A  creditor  of  a  corporation  has  the  right  to  follow  the  assets  of  a 
corporation  and  appropriate  the  property  by  due  process  of  law, 
including  any  property  which  has  been  changed,  provided  the  trust 
fund  can  be  clearly  ascertained,  traced  and  identified.  {Matter  of 
Hicks,  supra.) 

In  my  view  the  objection  to  sustaining  the  action  now  before  us 
may  be  summarized  by  stating  that  the  defendant  has  never  con- 
tracted directly  or  by  inference  to  pay  the  debts  of  the  Block  Com- 
pany; and  the  statute,  which  is  the  authority  for  the  transfer  of  the 
property,  if  any,  from  the  Block  Company  to  the  gas  company,  does 
not  provide  that  the  possessor  company  shall  assume  the  indebted- 


CHAP.  III.]  COLE    V.  MILLERTON    IRON    CO.  989 

ness  of  the  merged  company,  but  expressly  provides  that  the  rights  of 
creditors  of  the  merged  compan}^  are  preserved.  The  statute  was  not 
carelessly  drawn  and  the  omission  to  make  the  possessor  company 
liable  for  the  debts  of  the  merged  company  was  not  an  oversight. 


COLE  V.  MILLERTON  IRON  CO. 

133  N.Y.  164.     1S92. 

Appeal  from  order  of  the  General  Term  of  the  Supreme  Court 
in  the  second  judicial  department,  made  May  12,  1891,  which  re- 
versed a  judgment  in  favor  of  defendants,  entered  upon  a  decision  of 
the  court  on  trial  at  Special  Term,  and  granted  a  new  trial. 

This  action  was  brought  by  plaintiff,  a  judgment  creditor  of  the 
National  Mining  Company  of  Pawling,  to  set  aside  a  conveyance 
made  by  it  of  all  its  property  to  defendant,  the  Millerton  Iron  Com- 
pany, and  also  to  release  said  property  from  the  lien  of  a  mortgage 
executed  by  that  company  to  defendant,  the  Mercantile  Trust  Com- 
pany, and  for  the  appointment  of  a  receiver,  etc. 

Finch,  J.  *rhe  plaintiff  is  a  creditor  of  the  National  Mining  Com- 
pany, a  corporation  formed  and  existing  under  the  laws  of  this  state. 
He  commenced  an  action  to  recover  damages  done  to  his  property 
by  the  wrongful  act  of  the  corporation,  serving  the  summons  in 
October,  1887,  and  recovering  judgment  in  July  of  the  next  year. 
During  the  pendency  of  the  action  all  the  property  and  assets  of  the 
debtor  corporation  were  transferred  to  the  Millerton  Iron  Company, 
also  a  domestic  corporation,  upon  a  nominal  consideration,  except  an 
assumption  by  the  vendee  of  the  debts  of  the  vendor,  and  thereupon 
the  former  executed  a  mortgage  to  the  Mercantile  Trust  Company 
covering  all  its  property,  including  that  acquired  from  the  National 
Mining  Company.  When  the  plaintiff  obtained  his  judgment  nothing 
remained  upon  which  it  was  a  lien  and  his  execution  was  returned 
unsatisfied.  He  then  began  this  action,  in  wliich  he  assailed  the 
transfers  made,  with  a  view  of  subjecting  the  property  of  the  debtor 
corporation  to  the  satisfaction  of  his  debt.  Upon  the  trial  his  com- 
plaint was  dismissed,  but  the  General  Term  reversed  the  judgment 
and  ordered  a  new  trial.  From  that  order  the  Trust  Co.  alone  appeals 
and  has  given  the  usual  stipulation  for  judgment  absolute. 

The  trial  court  has  refused  to  find  that  the  National  Company  was 
insolvent  at  the  date  of  its  transfer,  but  did  find  that  such  transfer 
suspended  and  terminated  the  regular  business  of  the  grantor,  and 
was  made  and  accepted  with  that  purpose  and  intention.  The  prac- 
tical effect  was  to  cUssolve  the  grantor  corporation  and  subject  its 
charter  to  forfeiture  at  the  hands  of  the  state,  for  it  voluntarily 
stripped  itself  of  all  its  property  and  assets  and  became  incapable, 


990  COLE    V.  MILLERTON    IRON    CO.  [ciIAP.   III. 

and  intended  to  \,v  and  remain  incapal)le  of  {XTfonning  its  corporate 
duties.  SiK'h  a  transfer,  which  involves  the  destruction  of  the  cor- 
poration and  an  abandonment  of  tlie  purposes  of  its  organization,  i.s 
illegal  as  against  creditors  whose  rights  are  then^hy  sacrificed  and 
their  remedies  destroyed.  The  transfer  was  illegal  also  because  made 
in  contemplation  of  insolvency.  Those  who  accomplished  it  knew 
that  its  necessary  and  inevitable  effect  would  be  to  make  the  cor- 
poration unable  to  pay  its  debts  and  must  be  held  to  have  intended 
that  consequence  of  their  acts.  I  do  not  agree  to  that  reading  of  the 
statute  which  limits  its  prohibition  to  cases  in  which  payment  of 
some  note  or  obligation  has  been  previously  refused.  An  interpreta- 
tion so  narrow  would  seriously  maim  and  distort  th(>  obvious  pur|)Ose 
of  the  statute  and  make  a  transfer,  in  contemplation  of  in.solvency, 
good  the  day  before  a  note  matured  and  bad  the  day  after.  As 
against  the  creditor  the  transfer  to  the  Millerton  Comj^any  was  il- 
legal and  in  fraud  of  his  rights.  The  a.^.sets  of  a  corporation  are  a 
trust  fund  for  the  payment  of  its  debts  upon  which  the  creditors 
have  an  ecjuitaiile  lien  both  as  against  the  stockholders  and  all  trans- 
ferees, except  those  purchasing  in  good  faith  and  for  value.  {Bartlett 
V.  Drew,  57  N.Y.  587;  Brum  v.  Ins.  Co.,  1(5  Fed.  Rep.  143;  Morawetz 
on  Corporations,  §  791.)  The  Millerton  Company  was  not  such  a 
purchaser.  It  parted  with  nothing.  It  knew  and  participated  in  the 
illegal  purpose  to  destroy  the  National  Company,  to  make  it  utterly 
insolvent,  and  to  deprive  its  creditors  of  the  trust  fund  upon  which 
they  had  a  right  to  rely,  and  so  they  were  at  liberty  to  .set  aside  the 
transfer  so  far  as  it  barred  their  remed\',  antl  to  enforce  their  equita- 
ble lien  upon  the  property  in  the  hands  of  the  transferee. 

It  is  not  a  sufficient  answer  to  say  that  the  transfer  was  rather 
formal  than  real,  because  before  its  occurrence  the  Millerton  ( 'om- 
pany,  having  the  same  stockholders  and  officei-s,  managed  and  con- 
ducted the  business  of  the  National  Company  before  the  transfer, 
as  well  as  after,  and  that  what  occurred  was  a  practical  consolida- 
tion. Companies  may  consolidate,  but  under  the  permission  and 
safeguards  of  the  statute,  all  of  which  were  ilisregarded,  and  what 
is  called  the  formal  transaction  cuts  off  and  destroys  the  right  of  the 
creditor,  and  is  being  used  for  that  exact  purpose. 

Neither  is  it  an  answer  to  say  that  the  creditor  is  not  harmed  by  a 
change  of  the  party  lialjle  to  pay,  unless  there  be  some  disproportion 
in  the  assets.  He  cannot  be  forced  to  change  his  debtor  against  his 
will,  and  it  appears  in  the  proof  that  the  transfer  to  the  Millerton 
Company  was  followed  by  a  mortgage  sweeping  in  to  its  lien  and 
peril  the  very  property  transferred. 

The  rights  of  the  mortgagee,  who  is  the  present  appellant,  need 
not  now  be  accurately  determined.  Whether  that  mortgage  was 
valid  at  all  for  want  of  proper  consents,  or  whether  any  of  the  bond- 
holders have  acquired  equities  superior  to  those  of  the  plaintiff,  may 


CHAP.  III.]  COLE    V.  MILLERTON    IRON    CO.  991 

or  may  not  become  questions  in  the  future.  Enough  appears  to  show 
that  some  of  them  do  not  stand  in  the  attitude  of  bona  fide  creditors, 
and  that  the  remedies  of  all  may  be  confined  to  the  property  of  the 
Millerton  Company  not  derived  from  the  National,  until  at  least 
the  former  is  exhausted.  Those  questions,  however,  may  be  left  to 
the  developments  consequent  upon  further  proceedings. 

The  order  of  the  General  Term  should  be  affirmed  and  judgment 
absolute  for  the  plaintiff  be  rendered  upon  the  stipulation,  with 
costs.   All  concur.  Order  affirmed  and  jvdgment  accordingly. 

Note.  —  It  is  plain  that  the  assets  of  a  corporation  should  not 
pass  to  the  stockholders  (except  as  dividends  properly  declared  and 
paid)  until  the  creditors  have  been  satisfied  or  protected. 

If  stockholders  of  a  corporation  cause  its  assets  to  be  transferred 
to  a  new  corporation  organized  by  them,  the  stock  of  which  is  issued 
in  payment  thereof  to  the  old  stockholders,  the  new  corporation 
should  be  liable,  to  the  extent  of  the  value  of  the  assets  received,  to 
any  creditor  of  the  old  corporation.  San  Francisco  R.R.  Co.  v.  Bee, 
48  Cal.  398;  Hancock  v.  Holhrook,  40  La.  Ann.  53.  It  is  not  necessary 
to  disregard  the  corporate  fiction  to  reach  this  result.  Cf.  Bank  v. 
Trebein,  p.  125,  supra,  and  the  note  thereto.  Usually  the  corporation 
would  be  chargeable  with  knowledge  that  it  was  participating  in  an 
act  which  was  a  wrong  to  creditors.  If  the  case  can  be  imagined 
where  the  new  corporation  would  not  be  chargeable  with  notice,  it 
might  well  be  held  that  the  issue  of  stock,  which  had  no  value  except 
as  it  represented  an  interest  in  the  assets  transferred,  did  not  con- 
stitute a  purchase  for  value. 

If  all  the  assets  of  a  corporation  are  transferred  to  a  second  cor- 
poration having  other  assets,  and  the  vendee  issues  its  stock  for  such 
assets  directly  to  the  old  stockholders,  and  is  chargeable  with  notice 
that  there  are  creditors  of  the  old  corporation,  it  has  participated  in 
a  wrong  to  those  creditors,  and  should  be  liable  to  them  to  the  extent 
of  the  value  of  the  assets  received.  Luedecke  v.  Des  Moines  Co.,  140 
Iowa,  223;  Grenell  v.  Detroit  Gas  Co.,  112  Mich.  70;  Hurd  v.  New 
York  Laundry  Co.,  167  N.Y.  89. 

If  all  the  assets  are  transferred  to  a  second  corporation  ha\dng 
other  assets,  and  the  vendee  issues  its  stock  for  such  assets  directly 
to  the  old  stockholders,  it  is  submitted  that  the  vendee  should  be 
exposed  to  the  liability  stated  in  the  preceding  paragraph,  even  if  it 
was  not  chargeable  with  notice  that  there  were  creditors  of  the  old 
corporation.  The  second  corporation  knows  that  it  is  participating 
in  an  act  which  will  embarrass  such  creditors  as  there  may  be.  See 
Camden  Ry.  Co.  v.  Lee,  84  S.W.  (Ky.)  332;  Grenell  v.  Detroit  Gas  Co., 
112  Mich.  70,  72;  Railway  Co.  -v.  Catar,  103  Miss.  616;  Cooper  v. 
Light  &  Power  Co.,  35  Utah,  570,  591;  Tacoma  Ledger  Co.  v.  Western 
Home  As^'n,  37  Wash.  4o7. 


992  PEXNS'i'LVANIA  TRANSPORTATION  CO.'s  APPE.\L.      [CHAP.  III. 

If  the  sccoiul  corporation  purchases  all  the  stock  of  the  first  cor- 
poration, and  then  causes  the  assets  of  the  first  corporation  to  Ijc 
transferred  without  any  consideration  paid  therefor  to  the  first  cor- 
poration, the  same  result  should  follow.  Standard  Distilling  Co.  v. 
Coal  Co.,  2;i9  111.  000.  But  there  is  a  re<?rettable  decision  to  the 
contrary.   Ilageman  v.  Railroads,  202  Mo.  249. 

If  all  the  assets  of  a  corporation  are  transferred  for  a  consideration 
paid  into  the  corporate  treasury,  is  the  purchaser  liable  to  the  credi- 
tors of  the  corporation,  who.  as  it  turns  out,  cannot  collect  their 
judgments  from  the  corporation  hecau.se  the  proceeils  of  the  sale 
have  been  improperly  divided  amonj;  the  stockhoUlers  without  pro- 
viding for  creditoi-s?  In  Standard  OiMilling  Co.  v.  Coal  Co.,  2  >9  111. 
()()(),  the  court  said  (p.  fiOr)):  "The  Company  might  rightfully  di.^con- 
tinue  its  business  and  dispose  of  its  a.^.^ets  and  projM'rty  and  a  pur- 
cha.ser  dealing  in  g(jod  faith  and  paying  for  the  pro|K'rty  with  money 
or  other  property  would  not  assume  any  liability."  But  what  con- 
stitutes acting  in  good  faith  toward  creditors,  known  or  unknown? 
If  it  is  improper  for  tlu'  purchast-r  to  pay  the  consideration  directly 
to  the  stockholdei"s,  it  would  seem  aUo  to  1k«  improixT  for  him  to  pay 
it  to  the  corporation  where  he  luus  notice  that  the  cor|)oration  is  to 
act  as  a  mere  conduit,  and  that  the  consideration  is  forthwith  to  be 
divided  up  among  the  stockholders.  It  is  suggested  that  a  purchaser, 
who  is  unwilling  to  assume  the  liabilities  of  the  old  corporation, 
.should  not  only  pay  the  consideration  into  the  corporate  treasury, 
but  should  also  make  it  a  condition  of  the  purchase  that  the  old  cor- 
poration should  be  forthwith  tli.ssolved.  In  dissolution  proceedings 
the  rights  of  all  creditors  would  be  protected. 

The  law  on  this  point  is  not  clear. 


PENNSYLVANIA  TRANSPOllTATION   COMPANY'S 
WVVAL. 

101  Pa.  576.     1882. 

Mr.  Justice  Mercur.  This  bill  prays  for  a  decree  that  the  Pitts- 
burgh, Titusville  &  Buffalo  Railway  Company  shall  pay  to  the 
appellant  a  certain  judgment  which  the  latter  holds  against  the  Oil 
Creek  &  Allegheny  River  Railway  Company.  The  claim  against  the 
appellee  is  ba.>^ed  mainly  on  the  following  facts. 

In  1808,  under  certain  agreements  and  an  Act  of  A.ssembly,  the 
Farmers'  Railroad  Company,  the  Warren  &  Franklin  Railroad 
Company,  and  the  Oil  Creek  Railroad  Company  were  consolidated, 
and  the  new  corporation  took  the  name  of  "Oil  Creek  &  Allegheny 
River  Railway  Company." 

In  1874  the  mortgage  indebtedness  of  the  three  several  corpora- 


CHAP.  III.]      PENNSYLVANIA  TRANSPORTATION  CO.'s  APPEAL.  993 

tions,  resting  on  their  property  prior  to  the  consoHdation,  aggregated 
more  than  two  and  a  half  milHons  of  dollars;  and  the  consolidated 
company  had  executed  a  mortgage  on  the  whole  property  for  more 
than  one  million  of  dollars.  With  this  load  of  indebtedness,  exceeding 
three  and  a  half  millions  of  dollars  resting  on  its  property,  the  Oil 
Creek  &  Allegheny  River  Railway  Company  on  the  1st  of  May,  1874, 
made  default  in  payment  of  the  interest  due  on  its  consolidated 
mortgage.  In  July  following  a  receiver  was  placed  in  possession  of 
the  property  of  the  company.  Soon  thereafter  a  bill  was  filed  for  a 
foreclosure  of  the  mortgage,  and  a  decree  therefor  made.  This  was 
afterwards  set  aside  for  want  of  jurisdiction.  In  July,  1875,  a  bill 
was  filed  in  the  United  States  Circuit  Court  against  the  Oil  Creek 
and  Allegheny  River  Railway  Company  for  a  foreclosure  of  the  con- 
solidated mortgage.  In  September  following  upon  full  hearing  of  the 
bill  and  answer  a  decree  was  made  for  the  sale  of  all  the  railroad 
property  and  its  franchises.  The  sale  was  made,  and  in  January, 
1876,  was  duly  confirmed.  Afterwards  and  pursuant  to  law  the  per- 
sons, for  whose  benefit  the  property  was  purchased,  proceeded  and 
erected  themselves  into  a  new  corporation  under  the  name  of  the 
"Pittsburgh,  Titusville  &  Buffalo  Railway  Company,"  which  is  the 
appellee  in  this  case.  The  Oil  Creek  and  Allegheny  River  Railway 
Company  was  indebted  to  the  appellant  before  the  decree  for  a  sale 
of  the  property  was  made;  but  no  judgment  therefor  was  recovered 
until  April  thereafter.  After  the  sale  was  decreed,  but  before  it  was 
made,  the  appellant  as  a  creditor  presented  its  petition  to  the  court 
and  asked  to  intervene,  and  that  the  decree  of  sale  be  vacated;  but 
the  court  refused  to  allow  the  intervention.  The  master  found  as  a 
fact  that  in  that  petition  the  appellant  "did  set  up  and  charge  more 
fully  than  in  the  present  bill  the  fraudulent  purpose  of  the  default 
and  sale,"  but  it  was  dismissed,  and  the  specific  grounds  of  that 
judgment  are  not  shown.  On  the  hearing  in  the  present  case  before 
the  master,  it  was  urged  that  the  default  in  the  payment  of  interest 
on  the  1st  of  May,  1874,  was  not  bo7ia  fide,  but  fraudulent,  and  that 
the  default  and  sale  were  brought  about  with  intent  to  defraud  the 
appellant.  The  master  found  "that  these  facts  are  nowhere  charged 
in  the  bill  and  are  not  sufficiently  shown  by  the  testimony."  He 
further  found  that  three  months  after  the  default,  certain  of  the 
bondholders  held  a  meeting  at  which  it  was  resolved  to  take  measures 
to  foreclose  the  mortgage  and  sell  the  road. 

It  is  conceded  that  if  the  sale  was  fair  and  valid,  it  passed  the 
property  to  the  purchasers  discharged  from  all  claim  of  the  appellant 
thereon.  The  argument  is  that  a  certain  written  agreement,  entered 
into  between  the  purchasers  before  the  sale,  changed  the  effect 
thereof  —  in  substance  that  it  operated  as  a  fraud  on  the  appellant. 

It  was  entered  into  between  the  bondholders,  all  of  the  stockhold- 
ers, and  by  most  of  the  unsecured  creditors  entitled  to  sign  by  the 


994  PENNSYLVANIA  TRANSPORTATION  CO.'s  APPEAL.       [cHAP.   Ill, 

terms  of  the  agreement.  It  recited  the  default  of  the  company  in 
payiiif^  interest  and  the  tlucatened  sale  of  its  properly,  and  then 
declared,  for  the  protection  of  their  several  and  resiK'ctive  interests 
in  the  property  from  great  loss  and  sacrifice,  they  desired  to  unite 
together  for  the  purpose  of  bidding  on  the  property,  should  the  same 
be  offered  for  sale,  and  of  purehusing  it  for  and  on  their  resjK'ctive 
accounts,  as  therein  more  particularly  stated,  and  to  organize  a  new 
company.  It  proceeded,  inter  alia,  to  classify  the  parties  to  the  con- 
tract according  to  the  nature  of  their  several  dainm,  and  stated  the 
sum  each  should  pay  towards  the  purchase  of  the  property,  and  the 
character  of  the  i)onds  that  the  bondholders  should  be  entitled  to  in 
the  corporation  to  be  formed,  and  the  shares  of  capital  stock  therein 
to  which  each  should  be  entitled. 

What  then  was  there  illegal  or  invalid  in  so  agreeing?  It  was  not 
to  depress  the  property  or  cau.se  it  to  Ix*  .sold  for  a  sum  le.^s  than  its 
value  but  to  enhance  it.  It  has  been  held  that  bondholders  may 
unite  for  the  purchase  of  the  property:  Ktichum  v.  Duncan,  G  Otto, 
659;  Sage  v.  R.Ii.  Co.,  9  id.  342.  It  is  a  fair  and  wise  course  for  them 
to  pursue,  to  prevent  a  sacrifice  of  their  property.  If  they  may  so 
unite,  we  see  no  valitl  rea.son  why  stockholders  may  not  unite  with 
them,  in  a  purchase  at  a  sale  made  in  good  faith.  They  as  well  as 
bondholders  are  interested  in  protecting  their  property  from  sacri- 
fice, and  may  resort  to  like  lawful  means  to  protect  it.  So,  when  an 
agreement  was  made  between  a  railroad  company,  its  bondholders 
and  most  of  its  creditors,  whereby  the  property  of  the  company  was 
to  be  sold  under  judicial  process  and  a  new  company  organized  in 
which  the  bondholders  were  to  have  a  like  amount  of  new  bonds, 
and  the  stockhoklers  and  general  creditors  take  new  stoek,  in  the 
absence  of  actual  fraud,  it  was  held  that  the  new  company  duly 
organized  took  title  to  the  property  purchased  clear  of  incumbrances 
and  equities  existing  against  the  old  company:  Smith  v.  Chicago  & 
North-W ester n  R.R.  Co.,  IS  Wis.  17.  In  that  case  there  was  an  agree- 
ment to  sell  and  work  the  conversion.  In  the  present  case  the  agree- 
ment was  merely  contingent  on  a  sale  occurring.  The  property  of 
the  corporation  was  about  to  be  sold  at  a  judicial  sale  on  a  mortgage 
executed  by  the  consolidated  company.  The  sale  was  to  be  subject 
to  prior  mortgages  aggregating  more  than  two  and  a  half  millions 
of  dollars.  Any  small  number  of  those  interested  in  the  property 
might  be  unable  or  unwilling  to  buy  property  of  such  value  and  so 
incumbered.  Why  then  shall  the  appellees  be  denied  the  privilege 
of  uniting  in  a  legal  manner  to  protect  their  property  by  buying  at 
an  honest  and  fair  sale?  Their  agreement  was  neither  hurried  nor 
secret.  Its  execution  extended  over  more  than  one  year.  The  first 
names  were  put  to  it  on  the  23d  November,  1874,  and  the  last  on  the 
29th  December,  1875.  The  appellant  had  ample  knowledge  of  the 
sale  and  an  opportunity  of  bidding  thereat.   He  laid  by  for  nearly 


CHAP.  III.]       NORTHERN    PACIFIC    RAILWAY    CO.  V.  BOYD.  995' 

three  and  a  half  years;  without  objection  permits  the  new  company 
to  be  organized,  and  then  files  this  bill.  We  fully  concur  in  the  con- 
clusion of  the  learned  judge  that  the  whole  evidence  is  insufficient 
to  establish  a  fraud  on  the  part  of  the  appellees  or  create  a  trust  in 
them  for  the  benefit  of  the  appellant.  We  deem  many  of  the  authori- 
ties cited  by  counsel  for  appellant  inapphcable  to  the  facts  as  we 
understand  them.  We  will  therefore  not  review  them,  nor  answer 
the  specifications  of  error  seriatim.  We  discover  no  error  in  dismiss- 
ing the  bill. 

Decree  affirmed  and  appeal  dismissed  at  the  costs  of  the  appellajit. 


NORTHERN  PACIFIC  RAILWAY  CO.  v.  BOYD. 

228  U.S.  482.     1912. 

Boyd  was  entitled  to  a  judgment  for  $71,278  agamst  the  Cceur 
D'Alene  Railway  and  Navigation  Company.  The  litigation  in  this 
matter  was  begun  in  1887,  and  was  not  concluded  until  1905.  The 
Northern  Pacific  Railroad  Company  was  indebted  to  the  Cceur 
D'Alene  Railway  and  Navigation  Company,  owing  to  an  improper 
diversion  of  its  assets,  to  an  amount  greater  than  the  amount  of  this 
judgment.  The  Railroad  Company's  property  passed  in  1896  to  the 
Northern  Pacific  Railway  Company.  The  question  was  whether 
the  Railway  Company  could  be  charged  with  the  obhgation  of  the 
Railroad  Company  to  the  Cceur  D'Alene  Company,  and  hence  to 
Boyd. 

The  circumstances  attending  the  acquisition  of  the  property  of 
the  Railroad  Company  by  the  Railway  Company  were  as  follows:  — 

On  August  15, 1893,  Winston  and  others  filed  in  the  United  States 
Court  for  the  Eastern  District  of  Wisconsin  a  creditors'  bill  against 
the  Northern  Pacific  Railroad  alleging  that  it  was  insolvent,  its 
mortgage  bonds  amounting  to  about  $140,000,000  and  its  floating 
debts  to  $11,000,000,  and  praying  for  the  appointment  of  a  receiver 
to  preserve  the  property  as  an  entirety  and  to  prevent  it  from  being 
dismembered  by  separate  sales  under  attachments  and  other  liens. 
The  company  owned  or  controlled  54  subsidiary  companies,  and 
main  and  branch  lines  4700  miles  in  length.  It  also  owned  or  was 
entitled  to  receive  about  40,000,000  acres  under  land  grants.  There 
were  six  mortgages  —  some  on  one  part  of  the  property,  some  on 
another  and  a  general  mortgage  on  the  entire  railroad  lines.  It  also 
owned  a  large  body  of  land  which  was  not  encumbered  by  Hens. 
Interest  had  been  paid  on  some  of  the  bonds,  but  there  had  been 
a  default  in  the  interest  on  those  secured  by  the  junior  mortgages. 

Shortly  after  the  filing  of  the  creditors'  bill  a  suit  was  brought  in 
the  same  court  by  the  trustees  to  foreclose  these  latter  mortgages. 


996  NORTHERN    PACIFIC    RAILWAY    CO.  V.  BOYD.       [cHAI».   III. 

The  cases  were  consolidated  and  the  receivership  continued  under 
the  consolidated  causes.  The  Railroad  demurred.  As  the  road  ran 
through  several  States,  there  were  many  (juestions  of  conflicting 
jurisdiction  which  were  not  settled  until  January  31,  1896,  so  that 
except  for  administrative  orders,  no  steps  were  taken  in  the  litigation 
proper. 

The  representatives  of  the  stockholders  intended  to  resist  the 
foreclosure,  and  while  recognizing  the  sujierior  claim  of  the  bonds, 
advised  that  "if  properly  protected,  stockholders  can  secure  efjuit- 
able  terms  in  any  reorganization."  There  were  also  representatives 
of  the  bondholders,  and  ultimately  the  two  interests  agreed  upon  a 
plan,  the  terms  of  which  were  stated  by  the  Reorganization  Commit- 
tee which,  March  16,  1896.  issued  a  circular  to  "  holdei-s  of  bonds  and 
stocks  i.ssued  or  guaranteed  by  the  Northern  Pacific  Railroad."  This 
circular  outlined  a  plan  under  which  all  of  the  stocks  and  bonds  of 
the  Railroad  were  to  be  transferred  to  a  new  company  (the  present 
Northern  Pacific  Railway  Company)  which  was  to  purchase  the 
property  of  the  Railroad,  i.ssue  new  bonds,  part  of  which  were  to 
be  sold  to  raise  money  with  which  to  di.scharge  Receivers'  Certifi- 
cates, purcha.se  needed  eciuipment  and  make  nece.s.sar>'  betterments. 
The  balance  was  to  be  issued  in  exchange  for  the  bonds  of  the  old 
company. 

The  plan  also  contemplated  the  issuance  of  preferred  and  common 
stock,  part  to  be  used  in  paying  debts  of  the  sui)sidiary  companies, 
for  which  the  Northern  Pacific  Railroatl  was  liable,  part  for  the  ex- 
penses of  the  reorganization,  and  the  balance  to  be  issued  in  exchange 
for  the  outstanding  stock  of  the  Northern  Pacific  Railroad.  Under 
the  proposed  plan  the  holder  of  SlUO  of  preferred  stock  in  the  old 
company,  upon  paying  SIO  per  share  was  to  receive  -SoO  of  preferred 
and  $50  of  common  stock  in  the  new  company.  For  each  SI 00  of 
common  stock  the  holder  was  to  receive  one  share  of  common  in  the 
new  corporation  upon  paying  Slo  per  share.  The  aggregate  of  these 
cash  payments  on  stock  was  about  .?I1,()()0.()0(). 

The  records  showing  the  cost  of  the  original  construction  were  not 
accessible,  and  in  some  particulars,  the  costs  of  the  main  and  sub- 
sidiary lines  appear  to  have  been  combined.  But  there  is  testimony 
tending  to  show  that  the  cost  of  the  railroad  property,  subject  to 
the  mortgage,  was  about  §241,000,000.  What  was  the  value  of  the 
40,000,000  acres  of  land  is  not  stated.  For  several  years  prior  to  the 
receivership  the  road's  net  earnings  had  varied  between  $10,000,000 
and  $4,449,000.  Its  fixed  charges  amounted  to  .?1 1,000,000  —  show- 
ing an  annual  deficit  of  about  $5,000,000.  The  bonds,  vinjiaid  interest 
and  Receivers'  Certificates  aggregated  at  date  of  sale  $157,000,000. 
The  unsecured  debts  proved  before  the  master  amounted  to  about 
$15,200,000.  The  reorganization  contemplated  an  issue  of  new 
bonds  for  $190,000,000  at  lower  rates  of  interest,  $75,000,000  of 


CHAP.   III.]       NORTHERN    PACIFIC    RAILWAY    CO.  V.  BOYD.  997 

preferred  stock,  $80,000,000  of  common  stock  —  a  total  in  bonds 
and  stock  of  $345,000,000. 

The  reorganization  agreement  contained  a  statement  that  the 
property  intended  to  be  purchased  was  mutually  agreed  to  be  of  the 
value  of  $345,000,000,  payable  in  the  stocks  and  bonds  as  above 
described. 

The  plan  of  reorganization  was  accepted,  and  on  April  27,  1896, 
the  decree  of  foreclosure  was  entered  and  the  property  ordered  to  be 
sold,  on  a  date  later  fixed  for  July  25,  1896. 

On  July  22,  1896,  Paton  and  others,  holding  contingent  and  unse- 
cured claims  for  $5,500,000  against  the  Northern  Pacific  Railroad, 
filed  a  Bill,  in  the  same  court  that  had  jurisdiction  of  the  Creditors' 
Bill  and  Foreclosure  suit,  charging  that  the  sale  was  the  result  of  a 
conspiracy  between  bondholders  and  stockholders  to  exclude  general 
creditors,  and  to  award  to  stockholders  in  the  old  company  rights  in 
the  new  which  were  valuable  and  could  not  be  legally  reserved  for 
the  stockholders  until  first  offered  to  and  declined  by  the  general 
creditors.  It  prayed  that  the  decree  of  foreclosure  should  be  opened ; 
that  the  court  would  formulate  a  just  and  fair  plan  for  distribution, 
and  that  the  sale  be  enjoined.  This  was  later  modified  so  as  to  per- 
mit the  sale  to  proceed,  but  asking  an  injunction  to  prevent  the  dis- 
tribution of  the  proceeds  and  securities.  The  court  held  that  the 
company  was  insolvent;  that  the  assets  were  insufficient  to  pay  the 
mortgage  debts;  that  practical  operation  had  demonstrated  that 
the  net  earnings  would  not  pay  the  fixed  charges;  that  there  was  no 
equity  in  the  property  out  of  which  unsecured  creditors  could  be 
paid  and  no  reason  existed  why  the  stockholders  could  not  go  into  a 
reorganization  plan  whereby  they  would  become  stockholders  in  the 
new  company,  if  it  should  become  the  purchaser.  The  prayer  for 
injunction  was  denied.   No  appeal  was  taken. 

On  July  25  the  railroad  property  was  sold  at  public  outcry  to  the 
newly  organized  Railway  Company  at  a  price  representing  $61,500,- 
000,  or  $86,000,000  less  than  the  secured  debts.  On  July  27  the  sale 
was  reported  to  the  court,  and,  all  parties  consenting,  was  tlu-ee  days 
later  confirmed.  The  Railway  Company  entered  into  possession,  and 
the  first  year  its  earnings  were  $489,000  above  fixed  charges,  which 
had  been  lessened  under  the  reorganization.  The  second  year  it  de- 
clared a  dividend  of  $3,000,000  and  carried  $3,000,000  to  surplus. 
Since  that  time  the  earnings  have  been  continually  large,  the  business 
profitable  and  the  value  of  the  securities  correspondingly  great;  but 
for  a  year  after  the  sale,  stock  on  which  $10  and  $15  had  been  paid 
in  cash  sold  at  prices  varydng  from  $18  to  $51  for  preferred  and  $13 
and  $18  for  common. 

In  addition  to  the  property  covered  by  the  mortgage,  the  Northern 
Pacific  Railroad  owned  large  quantities  of  land  which  were  not  en- 
cumbered, and  in  May,  1893,  the  Farmers'  Loan  and  Trust  Company 


998  NORTHERN    PACIFIC    RAILWAY    CO.  r.  BOTD.       [CUAP.  UI. 

filed  its  Supplemental  Bill  deseribinK  this  unmortgaged  property  and 
alleging  that  various  inter\ening  cretlitora  had  obtained  judginent« 
against  the  Railroad  Company,  some  of  which  liad  lx>en  ax.signed 
to  the  trust  company.  It  prayed  that  these  lands  of  the  Itailroad 
should  Ije  in)\d  and  the  proceetls  applietl  to  the  satisfaction  of  the 
unsecured  claims.  On  the  same  day  that  this  Supplemental  Bill  was 
filetl,  the  Railroad  Company  and  other  parties  to  the  consohdated 
causes  answered,  the  court  adjudged  t'    *    '  '      mt  was  en- 

titles! to  the  decree  asked  for,  and  :^  ;vor  of  the 

proi>erty. 

It  was  not,  however,  until  April  27,  1899,  ti...;  :■>  -.i..  ...^  or- 
dered. The  property  was  thereupon  sold  to  the  Northern  Pacific 
Railway  for  SI. 623 .000.   The  parti-  •  the  sale  should 

be  confirmed  and  on  the  same  day  i     ~  .  •  *.  this  was  done. 

Mr.  Justice  L.\mar.  Boyd  claimed  that  the  foreclosure  sale  w^as 
voifl  l)ecause  made  in  pursuance  of  an  illegal  plan  of  reorganization, 
Ix'twcen  Ixjndholders  and  stockholders  of  the  Itiiilroad.  in  which, 
though  no  provision  was  made  for  the  pa>Tnent  of  uasecuretl  credi- 
tors, the  stockholders  retaineti  their  interest  by  receiving  an  equal 
number  of  shares  in  the  new  Railway.  There  was  no  question  as  to 
parties  and  no  demurrer  to  the  bill.  The  Railway  answere<l  and  on 
the  trial  of  the  merits  ofTere<i  evidence  tending  to  support  its  con- 
tention that  the  decree  was  regular  in  form,  free  from  fraud  and  that 
the  property  brought  a  fair  price  at  public  outcrj'.  .  .  . 

The  original  and  supplemental  decrees  were  free  from  any  moral 
or  actual  fraud  and  were,  in  form  and  nature,  sufficient  to  have 
passed  a  title  gfxxl  against  him,  unless  the  contract  of  re<^)rganiz:ition, 
reserving  a  stock  interest  in  the  new  company  for  the  old  share- 
holders, left  the  property  still  subject  to  the  claims  of  DOD-asscnting 
creditors  of  the  Northern  Pacific  Rai\road. 

Corporations,  insolvent  or  financially  embarrassed,  often  find  it 
necessarj'  to  scale  their  debts  and  readjust  stock  issues  with  an  agree- 
ment to  conduct  the  same  business  with  the  same  property  under  a 
reorganization.  This  may  be  done  in  pursuance  of  a  private  contract 
l)etween  bondholders  and  stockholders.  And  though  the  corporate 
property  is  thereby  transferred  to  a  new  company,  ha\'ing  the  same 
shareholders,  the  transaction  would  be  binding  between  the  parties. 
But,  of  course,  such  a  transfer  by  stockholders  from  themselves  to 
themselves  cannot  defeat  the  claim  of  a  non-assenting  creditor.  As 
against  him  the  sale  is  void  in  equity,  regardless  of  the  motive  with 
which  it  was  made.  For  if  such  contract  reorganization  was  consum- 
mated in  good  faith  and  in  ignorance  of  the  existence  of  the  creditor, 
yet  when  he  appeared  and  established  his  debt  the  subordinate  in- 
terest of  the  old  stockholders  would  still  be  subject  to  his  claim  in 
the  hands  of  the  reorganized  company.  Cf.  San  Francisco  d*  \.P. 
R.R.  V.  Bee,  48  California,  398;  GreneUv.  Deirmt  Gas  Co.,  112  Michi- 


CHAP.    III.]       XORTHEJIN    P.^CIFIC    RAILWAY    CO.  V.  BOYD.  999 

gan.  70.  There  is  no  difference  in  principle  if  the  contract  of  reor- 
ganization, instead  of  being  effectuated  by  private  sale,  is  consum- 
mated by  a  master's  deed  under  a  consent  decree. 

It  is  argued  that  this  is  true  only  when  there  is  fraud  in  the  decree, 
—  the  appellants  insisting  that  in  all  other  cases  a  judicial  sale  oper- 
ates to  pass  a  title  which  cuts  off"  all  claims  of  imsecm"ed  creditors 
against  the  property.  They  rely  on  Wenger  v.  Chicago,  <&c.,  R.R., 
114  Fed.  Rep.  34;  Fanners'  Loan  &  Trust  Co.  v.  LouisviUe,  d'c,  Ry. 
Co.,  103  Fed.  Rep.  110:  Pennsylvania  Tra?isportation  Co.'s  Appeal, 
101  Pa.  St.  576;  Kurtz  v.  R.R.,  187  Pa.  St.  59;  Paton  v.  X.P.  R.R., 
85  Fed.  Rep.  838:  Shoeynaker  v.  Katz,  74  Wisconsin.  374:  Bame  v, 
Dreu\  4  Denio,  287;  Ferguson  v.  Ann  Arbor  R.R..  17  App.  Div.  336; 
McArdell  v.  OlcoU,  104  App.  Div.  263:  S.C.  189  X.Y.  368.  384; 
Candee  v.  Lord.  2  X.Y.  269.  Some  of  these  cases  hold  directly,  and 
others  ioferentially,  that,  in  the  absence  of  fraud,  as  here,  a  judicial 
sale  is  binding  upon  non-assenting  creditors  even  though  the  decree 
was  entered  and  the  sale  was  made  in  pursuance  of  a  contract,  to 
wliich  the  stockholders  were  parties,  and  by  which  they  were  to  re- 
tam  a  stock  interest  in  the  purchasing  company.  This  makes  the 
creditor's  legal  right  against  the  shareholders'  interest  depend  upon 
the  motive  with  which  they  act  and  the  method  by  which  they  carry 
out  the  scheme.  If  they  do  so  by  means  of  a  private  contract,  though 
in  ignorance  of  the  existence  of  the  creditor,  the  property  remains 
hable  for  his  debts.  If  they  do  so  by  means  of  a  judicial  sale  under  a 
consent  decree  and  in  like  ignorance  or  disregard  of  his  existence,  the 
result  is  said  to  be  different,  although  the  shareholders  should  reserve 
exactly  the  same  interest  and  deprive  the  creditor  of  exactly  the 
same  right. 

Such  and  similar  possibilities  at  one  time  caused  doubts  to  be  ex- 
pressed as  to  whether  a  comt  could  peiToit  a  foreclosure  sale  which 
left  any  mterest  to  the  stockholders.  But  it  is  now  settled  that  such 
reorganizations  are  not  necessarily  illegal,  and,  as  proceedings  to  sub- 
ject the  property  must  usually  be  in  a  court  where  those  who  ask 
equity  must  do  equity,  such  reorganizations  may  even  have  an  effect 
more  extensive  than  those  made  without  judicial  sale,  and  bind  cred- 
itors who  do  not  accept  fair  tenns  offered.  The  enormous  value  of 
corporate  property  often  makes  it  impossible  for  one.  or  a  score,  or  a 
hmidi-ed  bondholders  to  pmchase,  and  equally  so  for  stockholders 
to  protect  then-  interests.  A  combuiation  is  necessary-  to  seciu-e  a 
bidder  and  to  prevent  a  sacrifice.  Cooperation  being  essential,  there 
is  no  reason  why  the  stockholders  should  not  unite  with  the  bond- 
holders to  buy  in  the  property. 

That  was  done  in  the  present  case.  And  while  the  agreement  con- 
tained no  pro^ision  as  to  the  pa^inent  of  misecured  creditors,  yet  the 
Railwiw  Company  purchased  unsecured  claims  aggregating  §14.000.- 
000.   Whether  they  were  acquhed  because  of  their  value,  to  avoid 


1000  NORTHERN    PACIFIC    RAILWAY    CO.  V.  BOYD.       [CHAP.  III. 

litigation,  or  in  recognition  of  the  fact  that  such  claims  were  superior 
to  the  rights  of  stockholders,  does  not  appear,  nor  is  it  material.  For, 
if  purposely  or  unintentionally  a  single  creditor  was  not  paid,  or 
provided  for  in  the  reorganization,  he  could  assert  his  superior  rights 
against  the  subordinate  interests  of  the  old  stockholders  in  the  prop- 
erty transferred  to  the  new  company.  They  were  in  the  p<jsition  of 
insolvent  debtors  who  could  not  reserve  an  interest  as  against  credi- 
tors. Their  original  contribution  to  the  capital  stock  wa.s  subject 
to  the  payment  of  deljts.  The  property  was  a  trust  fund  charged 
primarily  with  the  payment  of  corporate  liabihties.  Any  device, 
whether  by  private  contract  or  judicial  sale  under  consent  decree, 
whereby  stockholders  were  preferred  before  the  creditor,  was  invalid. 
Being  bound  for  the  debts,  the  purchase  of  their  property,  by  their 
new  company,  for  their  benefit,  put  the  stockholders  in  the  position 
of  a  mortgagor  l)uying  at  his  own  sale.  If  they  chd  so  in  good  faith 
and  in  ignorance  of  Boyd's  claim,  they  were  none  the  less  i)Ound  to 
recognize  his  superior  right  in  the  property,  when  years  later  his 
contingent  claim  was  liciuidated  and  established.  That  such  a  sale 
woukl  be  void,  even  in  tlie  ab.sence  of  fraud  in  the  tiecree,  appears 
from  the  reasoning  in  Louisville  Trust  Co.  v.  Louisville  Ry.,  174  U.S. 
674,  683,  684,  where  "assuming  that  foreclosure  proceedings  may 
be  carried  on  to  some  extent  at  least  in  the  interests  and  for  the  ben- 
efit of  both  mortgagee  and  mortgagor  (that  is,  bondholder  and  stock- 
holder) "  the  court  said  that  "no  such  proceedings  can  be  rightfully 
carried  to  consummation  which  recognize  and  preserve  any  inter- 
est in  the  stockholders  without  also  recognizing  and  preserving  the 
interests,  not  merely  of  the  mortgagee,  but  of  ever>'  creditor  of  the 
corporation.  .  .  .  Any  arrangement  of  the  parties  by  which  the  sub- 
ordinate rights  and  interests  of  the  stockhoklers  are  attempted  to 
be  secured  at  the  expense  of  the  prior  rights  of  either  class  of  creditors 
comes  within  judicial  denunciation." 

The  Railway  seeks  to  distinguish  that  case  from  this,  insisting 
that  even  if  the  stockholders'  participation  in  the  reorganization 
would  have  invalidated  the  proceeding,  such  result  does  not  follow 
here  because  the  court  having  charge  of  the  foreclosure  passed  on 
this  very  question  before  the  sale  in  1896  and  dismissed  the  Bill  of 
Baton,  an  unsecured  creditor,  when  he  made  exactly  the  same  at- 
tack upon  the  reorganization  as  that  by  Boyd  in  this  l)ill.  That  court 
then  held  that  as  the  property  was  insufhcient  to  pay  the  mortgage 
debts  of  S157,000,000,  there  was  nothing  which  could  come  to  the 
unsecured  creditors,  and  they,  therefore,  had  no  ground  to  complain 
if  the  bondholders  were  willing  to  give  new  shares  to  the  old  stock- 
holders. No  appeal  was  taken  from  that  decision  —  possibly  because 
the  Baton  claim  was  purchased  by  the  Railway.  But  inasmuch  as 
Boyd  was  not  a  party  to  the  record  that  decree  was  not  binding  upon 
him  as  res  adjudicata,  and  the  opinion  not  being  controlling  author- 


CHAP.  III.]      NORTHERN    PACIFIC    RAILWAY  CO.  V.  BOYD.  1001 

ity,  cannot  be  followed  in  view  of  the  principles  declared  in  Chicago, 
R.I.  &  P.  R.R.  V.  Howard,  7  Wall.  392;  Louisville  Trust  Co.  v.  Louis- 
ville R.R.,  174  U.S.  674. 

In  saying  that  there  was  nothing  for  unsecured  creditors  the  argu- 
ment assumes  the  very  fact  which  the  law  contemplated  was  to  be 
tested  by  adversary  proceeding  in  which  it  would  have  been  to  the 
interest  of  the  stockholders  to  interpose  every  valid  defense.  If, 
after  a  trial,  a  sale  was  ordered,  they  were  still  interested  in  making 
the  property  bring  its  value,  so  as  to  leave  a  surplus  for  themselves 
as  ultimate  owners.  Even  after  sale  they  could  have  opposed  its 
confirmation  if  the  bids  had  been  chilled,  or  other  reason  existed  to 
prevent  its  approval.  In  the  present  case  all  these  tests  and  safe- 
guards were  withdrawn.  The  stockholders,  who,  in  lawfully  pro- 
tecting themselves,  would  necessarily  have  protected  unsecured 
creditors,  abandoned  the  defense  that  the  foreclosure  suit  had  been 
prematurely  brought.  The  law,  of  course,  did  not  require  them  to 
make  or  insist  upon  that  defense  if  it  was  not  meritorious,  nor  does  it 
condemn  the  decree  solely  because  it  was  entered  by  consent.  But 
the  shareholders  were  not  merely  quiescent.  They,  though  in  effect  de- 
fendants, became  parties  to  a  contract  with  the  creditors,  who  were 
in  effect  complainants,  by  which,  in  consideration  of  stock  in  the  new 
company,  they  transferred  their  shares  in  the  Railroad  to  the  Rail- 
way. The  latter  then  owning  the  bonds  of  the  complainant  and  con- 
trolling the  stock  in  the  defendant,  became  the  representative  of 
both  parties  in  interest.  In  such  a  situation  there  was  nothing  to 
litigate,  and  so  the  demurrer  to  the  bill  was  withdrawn.  An  answer 
was  immediately  filed  admitting  all  the  allegations  of  the  bill.  On 
the  same  day,  "no  one  opposing,"  a  decree  of  foreclosure  and  sale 
was  entered.  Two  months  later  the  property  was  sold  to  the  agreed 
purchaser  at  the  upset  price  named  in  the  decree.  In  a  few  days  and 
by  consent  that  sale  was  confirmed.  As  between  the  parties  and  the 
public  generally,  the  sale  was  valid.  As  against  creditors,  it  was  a 
mere  form.  Though  the  Northern  Pacific  Railroad  was  divested  of 
the  legal  title,  the  old  stockholders  were  still  owners  of  the  same 
railroad,  encumbered  by  the  same  debts.  The  circumlocution  did 
not  better  their  title  against  Boyd  as  a  non-assenting  creditor.  They 
had  changed  the  name  but  not  the  relation.  The  property  in  the 
hands  of  the  former  owners,  under  a  new  charter,  was  as  much  sub- 
ject to  any  existing  liability  as  that  of  a  defendant  who  buys  his  own 
property  at  a  tax  sale. 

The  invalidity  of  the  sale  flowed  from  the  character  of  the  reor- 
ganization agreement  regardless  of  the  value  of  the  property,  for  in 
cases  like  this,  the  question  must  be  decided  according  to  a  fixed 
principle,  not  leaving  the  rights  of  the  creditors  to  depend  upon  the 
balancing  of  evidence  as  to  whether  on  the  day  of  sale  the  property 
was  insufficient  to  pay  prior  encumbrances.  The  facts  in  the  present 


1002  NORTHERN    PACIFIC    RAILWAY    CO.    V.  BOYD.      (cHAP.  III. 

case  illustrate  the  necessity  of  adhering  to  the  rule.  The  railroad 
cost  S241,()()(),()()0.  The  lien  debts  were  $157.(X)0.000.  The  roiid  sold 
for  $01,000,000  and  the  purchaser  at  once  i.ssued  $100,000,000  of 
bonds  and  !Sir)r),000,0(XJ  of  stock  on  property  which,  a  month  Ix'fore, 
had  been  bought  for  S()1,(K)0.(KX). 

It  is  insisteil,  however,  that  not  only  the  bid  at  public  outcr>',  but 
the  specific  finding  in  the  Paton  case,  establishe<l  that  the  property 
was  worth  less  than  the  encumbrances  of  S157,0(K),(X)0,  and  hence 
that  Boyd  is  no  worse  off  than  if  the  sale  had  been  made  without  the 
reorganization  agreement.  In  the  last  analysis,  this  means  that  he 
cannot  complain  if  worthless  stock  in  the  new  company  was  given 
for  worthless  stock  in  the  old.  Such  contention,  if  true  in  fact,  would 
come  perilously  near  proving  that  the  new  shares  had  been  i.ssued 
without  the  [)ayment  of  any  part  of  the  implied  stoek  subscrii)tions 
except  the  SIO  and  §15  a.sses.snients.  But  there  was  an  entirely  differ- 
ent estimate  of  the  value  of  the  road  when  the  reorganization  con- 
tract was  made.  For  that  agreement  contained  the  distinct  recital 
that  the  property  to  l)e  pinchased  was  agre<Ml  to  be  "of  the  full  value 
of  .S;Mr),000,000,  jjayablc  in  fully  paid  non-asse.ssable  stock  and  the 
prior  lien  and  general  lien  bonds  to  be  executed  and  delivered  as 
hereinafter  provided." 

The  fact  that  at  the  sale,  where  there  was  no  competition,  the 
property  was  bid  in  at  ?()1,(MM),(MK)  does  not  disprove  the  truth  of 
that  recital,  and  the  shareholders  cannot  now  be  heard  to  claim  that 
this  material  statement  was  untrue  and  that  as  a  fact  there  was  no 
equity  out  of  which  unsecured  cnnlitors  could  have  been  paid,  al- 
though there  was  a  value  which  authorized  the  issuance  of .? ill ,000,- 
000  fully  paid  stock.  If  the  value  of  the  road  justified  the  i.ssuance 
of  stock  in  exchange  for  old  shares,  the  creditors  were  entitled  to  the 
benefit  of  that  value,  whether  it  was  present  or  pro.spective,  for  divi- 
dends or  only  for  purposes  of  control.  In  either  event  it  was  a  right 
of  property  out  of  which  the  cretlitoi-s  were  entitled  to  be  i)aid  l)efore 
the  stockholders  could  retain  it  for  any  purpose  whatever. 

Mr.  Justice  Lurton,  dissenting.  (Mr.  Chief  Justice  White,  Mr. 
Justice  Holmes,  and  Mr.  Justice  Van  Devanter  concurred  in  the 
dissent.) 

I  find  myself  unable  to  agree  with  the  opinion  of  the  court.  The 
consequences  which  may  result  from  the  decision  to  the  numerous 
reorganizations  of  railroad  companies  which  occurred  about  the  time 
of  this  reorganization  or  since,  arc,  to  my  mind,  alarming.  Arrange- 
ments and  agreements  in  advance  of  judicial  sales  between  creditors 
interested  for  the  common  benefit  are  the  usual  incidents  of  fore- 
closures, and  if  fairly  and  openly  entered  into  and  approved  by  the 
court  are  not  subject  to  criticism. 

Nor  do  I  agree  that  every  plan  of  reorganization  which  in  any  way 
includes  stockholders  of  the  reorganized  company  is  for  that  reason 


CHAP.  III.]      NORTHKEiN    PACIFIC   RAILWAY    CO.    V.  BOYD.  1003 

alone  to  be  regarded  as  an  illegal  withholding  from  creditors  of  cor- 
porate property  which  should  go  to  the  payment  of  corporate  debts. 
That  corporate  property  must  be  applied  to  corporate  debts  before 
shareholders  can  participate,  is  plain.  But  I  think  every  case  should 
stand  upon  its  own  facts,  and  the  remedy  be  shaped  to  do  justice  and 
equity  in  the  particular  case,  and  not  tried  out  by  any  hard  and  fast 
rule  such  as  indicated  when  this  court  says  that  the  invalidity  of  a 
judicial  sale  must  turn  upon  the  character  of  the  reorganization 
agreement  and  is  not  affected  by  actual  consequences  to  creditors. 

Here  is  a  single  creditor  who  comes  forward  many  years  after  a 
judicial  sale  under  a  general  creditors'  bill  and  a  mortgage  foreclos- 
ure bill  which  had  been  pending  several  years,  and  asserts  the  right 
to  ignore  the  judicial  sale  and  the  title  resulting  and  asks  to  have 
the  property  of  the  old  company  subjected  to  his  non-lien  claim,  not 
because  of  any  actual  fraud  in  the  sale,  nor  because  he  can  show  that 
he  has  in  any  way  suffered  a  loss  by  reason  of  the  plan  of  reorganiza- 
tion under  which  the  sale  was  conducted,  but  solely  and  simply  be- 
cause the  shareholders  of  the  debtor  company  are  said  to  have  partic- 
ipated in  some* way  in  the  benefits  of  the  sale.  I  think  this  goes  too 
far  and  that  there  is  no  just  foundation  for  upsetting  a  judicial  sale 
upon  the  complaint  of  an  unsecured  creditor  of  the  debtor  company 
in  the  absence  of  proof  of  fraud  in  the  decree.  The  cases  supporting 
this  view  which  I  venture  to  say  should  control  this  case  are  cited  in 
the  opinion  of  the  court.  It  is  not  a  case  of  the  transfer  by  stockliold- 
ers  of  one  company  to  themselves  as  stockholders  of  another.  The 
railroad  company  was  hopelessly  insolvent.  Its  annual  deficit  was 
about  five  million  dollars.  Its  general  creditors,  represented  by  the 
general  creditors'  bill,  and  its  mortgage  creditors,  represented  in  the 
mortgage  foreclosure  proceeding,  were  endeavoring  to  prevent  a  dis- 
integration and  to  bring  the  property  to  sale.  The  stockholders, 
represented  by  the  company,  were  resisting.  The  receivership  had 
already  lasted  for  several  years  and  the  situation  was  growing  stead- 
ily worse.  The  lien  creditors,  to  save  themselves,  devised  a  plan  for 
the  sale  and  purchase  of  the  property  by  a  new  company  which 
should  assume  their  claims,  so  far  as  possible,  and  put  the  new  com- 
pany in  shape  to  meet  its  obligations.  A  large  sum  of  actual  money 
was  necessary,  and  also  the  consent  of  the  stockholders,  to  bring 
about  a  speedy  sale.  This  money  might  be  in  part  procured  by  the 
sale  of  the  bonds  of  the  new  company;  but  if  fixed  charges  were  to  be 
reduced,  and  the  deficit  of  the  old  company  turned  into  a  surplus,  the 
bonded  debt  and  interest  must  be  reduced.  Therefore  it  was  that 
most  of  this  necessary  money  must  come  from  the  sale  of  stock. 
That  was  not  a  hopeful  outlook.  The  value  of  this  new  stock  was 
obviously  speculative.  The  very  basis  of  the  plan  to  receive  any 
large  sum  upon  stock  sales  was  believed  to  depend  upon  making  a 
market  among  the  stockholders  of  the  old  company.   This  was  the 


1004  NORTHERN    PACIFIC    RAILWAY    CO.  V.  BOYD.      [CHAP.  III. 

motive  that  led  to  the  proposal  that  they  should  exchange  their 
shares  for  those  in  the  new  company,  paying  the  price  stated.  Thi.s 
actually  produced  about  eleven  of  the  twenty-five  million  dollars 
deemed  essential  to  any  arrangement  which  would  save  to  the  bond- 
holders any  large  part  of  their  tlebt.  The  price  fixed  turned  out  to  be 
little  below  what  the  stock  actually  sold  for  on  the  open  market  for 
the  year  following  the  operation  of  the  i)roperty  by  the  purcha.scrs. 
The  subscription  price  to  the  sharehoklers,  as  the  situation  then  ap- 
peared, was  deemed  fair,  full  and  just  by  the  very  court  which  had 
approved  the  plan  and  decreed  the  sale,  as  is  shown  by  the  opinion 
of  Judge  Jenkins  in  the  Pciton  Case,  85  Fed.  Rep.  8^38. 

It  is  true  that  Boyd  was  not  a  party  to  that  suit.  But  it  was  a  bill 
filed  after  the  decree  and  before  the  sale,  attacking  the  reorganiza- 
tion plan  upon  the  precise  grounds  here  advanced,  and  is  highly 
persuasive  as  to  the  good  faith  of  the  plan  and  the  fairness  of  the 
subscrii)tion  price. 

The  upset  price  of  sixty-one  million  dollars  was  fixed  by  the  court, 
—  probably  as  large  as  could  be  expected  at  the  sale.  As  observed 
by  this  court  in  LouismUe  Trust  Co.  v.  Louisville,  &t.,  Ry.,  174  U.S. 
G74,  083,  "railroad  mortgages,  or  trust  tleeds,  are  ordinarily  so  large 
in  amount  that  on  foreclosure  thereof  only  the  mortgagees,  or  their 
representatives,  can  be  considereil  as  probable  purchasers."  Hence 
it  was  that  the  upset  price  must  be  fixed  at  such  a  sum  as  was  rea- 
sonably within  the  range  of  any  bidding  which  the  property  might 
be  started  at  by  the  only  probable  biddei-s.  The  case  last  cited  goes 
to  the  very  verge  of  the  law,  but  in  that  case  the  denunciation  of  such 
a  plan  of  reorganization  goes  no  farther  than  to  condemn  any  ar- 
rangement by  which  the  subordinate  rights  of  stockholders  are  saved 
at  the  expense  of  creditors.  That  was  not  done  here.  The  sale  price 
was  about  eighty  million  iloUars  less  than  the  lien  claims  entitled  to 
be  paid  before  creditors  of  the  class  to  which  Boyd  belongs.  Many 
of  his  class  were  actual  parties  to  the  consolidated  cause  in  which  the 
reorganization  plan  was  approved  and  the  sale  decreed.  Thej'  might 
have  sought  a  larger  upset  price,  but  did  not.  Thej'  might  have 
objected  to  the  plan  upon  the  grounds  now  brought  forward,  but 
they  did  not.  They  consented  to  the  decree.  They  were  doubtless 
hopeless  of  any  sale  price  which  could  by  any  possibility  save  them, 
and  therefore  they  stood  aside. 

Note.  —  The  discussion  of  the  question  whether  the  complainant 
was  barred  by  iaches  has  been  omitted.  It  was  held  that  he  was  not 
barred. 

There  was  a  brief  filed  by  an  amicus  curicc  insisting  that  the  com- 
plainant's remedy  was  against  stockholders  of  the  Railroad  Com- 
pany, and  not  against  the  Railway  Company  or  its  property,  but 
this  brief  was  not  discussed  in  the  opinions. 


CHAP.  III.]      NORTHERN    PACIFIC    R.ULWAY    CO.  V.  BOYD.  1005 

Condenser  Co.  v.  Electric  Co.,  87  Kan  843.  Property  of  the  cor- 
poration had  been  sold  at  a  receiver's  sale,  and  transferred  to  a  new 
corporation  pursuant  to  a  plan  of  reorganization  m  which  he  stock- 
holders had  participated.  An  unsecured  creditor  of  the  old  corpora- 
tion was  allowed  to  enforce  his  claim  against  the  new  corporation. 


APPENDIX 

OF 

CORPORATE  FORMS 

CERTIFICATE   OF   INCOEPORATION 

OP 

UNITED   STATES   STEEL    CORPORATION. 

We,  the  undersigned,  in  order  to  form  a  corporation  for  the  pur- 
poses hereinafter  stated,  under  and  pursuant  to  the  provisions  of  the 
Act  of  the  Legislature  of  the  State  of  New  Jersey,  entitled  "  An  Act 
concerning  corporations  (Revision  of  1896),"  and  the  acts  amenda- 
tory thereof  and  supplemental  thereto,  do  hereby  certify  as  follows : 

I.  The  name  of  the  corporation  is  United  States  Steel  Corpo- 

RATIOX. 

II.  The  location  of  its  principal  office  in  the  State  of  New  Jersey 
is  at  Xo.  51  Newark  Street,  in  the  City  of  Hoboken,  County  of  Hud- 
son. The  name  of  the  agent  therein  and  in  charge  thereof,  upon  whom 
process  against  the  corporation  may  be  served  is  Hudson  Trust  Com- 
pany. Said  office  is  to  be  the  registered  office  of  said  corporation. 

III.  The  objects  for  which  the  corporation  is  formed  are :  — 

To  manufacture  iron,  steel,  manganese,  coke,  copper,  lumber  and 
other  materials,  and  all  or  any  articles  consisting,  or  partly  consist- 
ing, of  iron,  steel,  copper,  wood  or  other  materials,  and  all  or  any 
products  thereof. 

To  acquire,  own,  lease,  occupy,  use  or  develop  any  lands  containing 
coal  or  iron,  manganese,  stone,  or  other  ores,  or  oil,  and  any  wood 
lands,  or  other  lands  for  any  purpose  of  the  Company. 

To  mine,  or  otherwise  to  extract  or  remove,  coal,  ores,  stone  and 
other  minerals  and  timber  from  any  lands  owned,  acquired,  leased 
or  occupied  by  the  Company,  or  from  any  other  lands. 

To  buy  and  sell,  or  otherwise  to  deal  or  to  traffic  in,  iron,  steel, 
manganese,  copper,  stone,  ores,  coal,  coke,  wood,  lumber  and  other 
materials,  and  any  of  the  products  thereof,  and  any  articles  consist- 
ing, or  partly  consisting  thereof. 

To  construct  bridges,  buildings,  machinery,  ships,  boats,  engines, 
cars  and  other  equipment,  railroads,  docks,  slips,  elevators,  water 
works,  gas  works  and  electric  works,  viaducts,  aqueducts,  canals  and 
other  water-ways,  and  any  other  means  of  transportation,  and  to  sell 
the  same,  or  otherwise  to  dispose  thereof,  or  to  maintain  and  operate 
the  same,  except  that  the  Company  shall  not  maintain  or  operate  any 
railroad  or  canal  in  the  State  of  New  Jersey. 

To  apply  for,  obtain,  register,  purchase,  lease,  or   otherwise   to 


1008  APPENDIX    OF    CORPOR.-TE    FORMS. 

acquire,  and  to  hold,  use,  own,  operate  and  introduce,  and  to  sell, 
assign,  or  otherwise  to  dispose  of,  any  trade-marks,  trade  names, 
l)atents,  invt-ntions,  improvements  and  processes  used  in  cunneetion 
wir.h,  or  secured  under  letters  patent  ot  the  United  States,  or  else- 
where, or  otherwise;  and  to  use,  exercise,  develop,  grant  licenses  in 
res[)eet  of,  or  otherwise  to  turn  to  account  any  sueh  trade-marks,  pa- 
tents, licenses,  jirocesses,  and  the  like,  or  any  sueh  property  or  rights. 

To  engage  in  any  other  manufacturing,  mining,  constructiun  or 
transi)ortation  business  of  any  kind  or  character  whatsoever,  and  to 
that  end  to  acquire,  hold,  own  and  dispose  of  any  and  all  property, 
assets,  stocks,  bonds  and  rights  of  any  and  every  kind ;  but  not  to 
engage  in  any  business  hereunder  which  shall  require  the  exercise  of 
the  right  of  eminent  domain  within  the  State  of  New  ilersey. 

To  acquire  by  purchase,  subscription  or  otherwise,  and  to  hold  or 
to  dispose  of,  stocks,  bonds  or  any  other  obligations  of  any  corpora- 
tion formed  for,  or  then  or  theretofore  engaged  in  or  pursuing  any 
one  or  more  of  the  kinds  of  business,  purposes,  objects  or  operations 
above  indicated,  or  owning,  or  holding  any  property  of  any  kind 
herein  mentioned;  or  of  any  corporation  owning  or  holding  the  stocks 
or  the  obligations  of  any  such  corporation. 

To  hold  for  investment,  or  otherwise  to  use,  sell,  or  dispose  of,  any 
stock,  bonds  or  other  obligations  of  any  sueh  other  corporation  ;  to 
aid  in  any  manner  any  corporation  whose  stock,  Ixmds  or  other  obli- 
gations are  held  or  are  in  any  manner  guaranteed  by  the  Company, 
and  to  do  any  other  acts  or  things  for  the  preservation,  protection, 
improvement  or  enhancem«'nt  of  the  value  of  any  such  stock,  bonds 
or  other  obligati(ms,  or  to  do  any  acts  or  things  designed  for  any  such 
purpose;  and,  while  owner  of  any  such  stock,  lx)nds  or  other  obliga- 
tions, to  exercise  all  the  rights,  ])owers  and  privileges  of  ownership 
thereof,  and  to  exercise  any  and  all  voting  jiower  thereon. 

The  business  or  purpose  of  the  Company  is  from  time  to  time  to 
do  any  one  or  more  of  the  acts  and  things  herein  set  forth  ;  and  it 
may  conduct  its  business  in  other  States  and  in  the  Territories  and 
in  foreign  countries,  and  may  have  oiu?  office  or  more  than  one  office, 
and  keep  the  books  of  the  Company  outside  of  the  State  of  New 
Jersey,  except  as  otherwise  may  ho  provided  by  law;  and  may  hold, 
purchase,  mortgage  and  convey  real  and  personal  property  either  in 
or  out  of  the  State  of  New  Jersey. 

Without  in  any  particular  limiting  any  of  the  objects  and  powers 
of  the  corporation,  it  is  hereby  expressly  declared  and  provided  that 
the  cor]ioration  shall  have  power  to  issue  bonds  and  other  obligations, 
in  payment  for  property  purchased  or  acquired  by  it,  or  for  any  other 
object  in  or  about  its  business ;  to  mortgage  or  pledge  any  stocks, 
bonds  or  other  obligations,  or  any  property  which  may  be  acquired 
by  it,  to  secure  any  bonds  or  other  obligations  by  it  issued  or  incurred  ; 
to  guarantee  any  dividends  or  bonds  or  contracts  or  other  obliga- 
tions;  to  make  and  perform  contracts  of  any  kind  and  descrijition  ; 
and  in  carrying  on  its  business,  or  for  the  purpose  of  attaining  or 
furthering  any  of  the  objects,  to  do  any  and  all  other  acts  and  things ; 
and  to  exercise  any  and  all  other  powers  which  a  copartnership  or 
natural  person  could  do  and  exercise,  and  which  now  or  hereafter 
may  be  authorized  by  law. 


APPENDIX    OF    CORPORATE    FORMS. 


1009 


IV.  The  total  authorized  capital  stock  of  the  corporation  is  tliree 
thousand  dollars,  divided  into  thirty  shares  of  the  par  value  of  one 
hundred  dollars  each.  Of  such  tutal  authorized  capital  stock,  tifteen 
shares,  amounting  to  fifteen  hundred  dollars,  shall  be  preferred  stock, 
and  fifteen  shares,  amounting  to  fifteen  hundred  dollars,  shall  be 
common  stock. 

From  time  to  time,  the  preferred  stock  and  the  common  stock  may- 
be increased  according  to  law,  and  may  be  issued  in  such  amounts 
and  proportions  as  shall  be  determined  by  the  board  of  directors,  and 
as  may  be  permitted  by  law. 

The  holders  of  the  preferred  stock  shall  be  entitled  to  receive 
when  and  as  declared,  from  the  surplus  or  net  profits  of  the  corpora- 
tion, yearly  dividends  at  the  rate  of  seven  per  centum  per  annum, 
and  no  more,  payable  quarterly,  on  dates  to  be  fixed  by  the  by-laws. 
The  dividends  on  the  preferred  stock  shall  be  cumulative,  and  shall 
be  payable  before  any  dividend  on  the  common  stock  shall  be  paid  or 
set  apart;  so  that,  if  in  any  year  dividends  amounting  to  seven  per 
cent,  shall  not  have  been  paid  thereon,  the  deficiency  shall  be  pay- 
able before  any  dividends  shall  be  paid  upon  or  set  apart  for  the 
common  stock. 

Whenever  all  cumulative  dividends  on  the  preferred  stock  for  all 
previous  years  shall  have  been  declared  and  shall  have  become  pay- 
able, and  the  accrued  quarterly  installments  for  the  current  year 
shall  have  been  declared,  and  the  company  shall  have  paid  such  cumu- 
lative dividends  for  previous  years  and  such  accrued  quarterly  install- 
ments, or  shall  have  set  aside  from  its  surplus  or  net  profits  a  sum 
sufficient  for  the  payment  thereof,  the  Board  of  Directors  may  declare 
dividends  on  the  common  stock,  payable  then  or  thereafter,  out  of 
any  remaining  surplus  or  net  profits. 

In  the  event  of  any  liquidation  or  dissolution  or  winding  up 
(whether  voluntary  or  involuntary)  of  the  corporation,  the  holders  of 
the  preferred  stock  shall  be  entitled  to  be  paid  in  full  both  the  par 
amount  of  their  shares,  and  the  unpaid  dividends  accrued  thereon 
before  any  amount  shall  be  paid  to  the  holders  of  the  common  stock ; 
and  after  the  payment  to  the  holders  of  the  preferred  stock  of  its  par 
value,  and  the  unpaid  accrued  dividends  thereon,  the  remaining 
assets  and  funds  shall  be  divided  and  paid  to  the  holders  of  the  com- 
mon stock  according  to  their  respective  shares. 

V.  The  names  and  post-office  addresses  of  the  incorporators,  and 
the  number  of  shares  of  stock  for  which  severally  and  respectively 
we  do  hereby  subscribe  (the  aggregate  of  our  said  subscriptions, 
being  three  thousand  dollars,  is  the  amount  of  capital  stock  with  which 
the  corporation  will  commence  business),  are  as  follows: 


Post  Office  Address 

Number  of  Shares 

Name 

Preferred 
Stock 

Common 
Stock 

Charles  C.  Cluff   .    . 

■William  J.  Curtis     . 
Charles  MacVeagh   . 

51  Newark  Street,  Hoboken, 

New  Jersey 

Ditto 

Ditto 

5 
5 
5 

o 
5 
5 

1010  APPENDIX    OF    CORPORATE    FORMS. 

VI.  The  duration  of  the  corporation  shall  be  perpetual. 

VII.  The  number  of  directors  of  the  Company  shall  be  fixed  from 
time  to  time  by  the  by-l;i\vs ;  but  the  niiiuber  if  tixed  at  nion'  than 
three,  shall  be  some  multiple  of  tliree.  The  directors  shall  be  classi- 
iied  with  rt'spect  to  the  time  f(jr  which  tht-y  shall  severally  hold  (tthce 
by  dividing  them  into  three  classes,  each  consisting  of  one-third  of 
the  whohi  number  of  the  Hoard  of  Directors.  The  directors  of  the  first 
class  shall  be  elected  for  a  term  of  one  year;  the  directors  of  the 
second  class  for  a  term  of  two  years;  and  the  directors  of  the  tliird 
class  for  a  term  of  three  years ;  and  at  each  annual  election  the  suc- 
cessors to  the  (dass  of  directors  whose  terms  shall  expire  in  that  year 
shall  be  elected  to  hold  office  for  the  term  iri  three  years,  so  that  the 
term  of  ofH(!e  of  one  class  of  directors  shall  expire  in  each  year. 

The  number  of  the  directors  nuiy  be  increased  as  may  be  ]»rovided 
in  the  by-laws.  Incase  of  any  increase  of  the  number  of  the  directors 
the  additional  directors  shall  be  elected  as  may  be  provided  in  the 
by-laws,  by  the  directors  or  by  the  stockholders  at  an  annual  or  spe- 
cial nu'eting;  and  one-third  of  their  numlK>r  shall  be  elected  for  the 
then  unexpired  portion  of  the  term  of  the  directors  of  the  first  class, 
—  one-third  of  their  luimber  for  the  unexpired  portion  of  the  term  of 
the  directors  of  the  second  class,  and  one-third  of  their  number  for 
the  unexpired  portion  of  the  terra  of  the  directors  of  the  third  class, 
so  that  each  class  of  directors  shall  be  increased  equally. 

In  case  of  any  vacancy  in  any  class  of  directors  through  death, 
resignation,  disqualification  or  other  cause,  the  remaining  directors, 
by  affirmative  vote  of  a  majority  of  the  lioard  of  Directors,  may  elect 
a  successor  to  hold  office  for  the  unexpired  portion  of  the  term  of  the 
director  whose  place  shall  be  vacant,  and  until  the  election  of  a  suc- 
cessor. 

The  Board  of  Directors  shall  have  ])Ower  to  hold  their  meetings 
oiitside  of  the  State  of  New  Jersey  at  siwh  j daces  as  from  time  to 
time  may  be  designated  by  the  by-laws  or  by  resolution  of  the  Board. 
The  by-laws  may  prescribe  the  number  of  directors  necessary  to 
constitute  a  quorum  of  the  Board  of  Directors,  which  number  may  be 
less  tlian  a  majority  of  the  whole  number  of  the  directors. 

Unless  authorized  by  votes  given  in  person  or  by  proxy  by  stock- 
holders holding  at  least  two-thirds  of  the  capital  stock  of  the  corpo- 
ration, which  is  represented  and  voted  upon  in  person  or  by  proxy  at 
a  meeting  specially  called  for  that  purpose  or  at  an  annual  meeting, 
the  Board  of  Directors  shall  not  mortgage  or  pledge  any  of  its  real 
property,  or  any  shares  of  the  capital  stock  of  any  other  corporation ; 
but  this  prohibition  shall  not  be  construed  to  apply  to  the  execution 
of  any  purchase-money  mortgage  or  any  other  purchase-money  lien. 

Any  officer  elected  or  appointed  by  the  l^oard  of  Directors  may  be 
removed  at  any  time  by  the  affirmative  vote  of  a  majority  of  the 
whole  Board  of  Directors.  Any  other  officer  or  employe  of  the  Com- 
pany may  be  removed  at  any  time  by  vote  of  the  Board  of  Directors, 
or  by  any  committee  or  superior  officer  upon  whom  such  power  of 
removal  may  be  conferred  by  the  by-laws  or  by  vote  of  the  Board  of 
Directors. 

The  Board  of  Directors,  by  the  affirmative  vote  of  a  majority  of  the 
whole  board,  may  appoint  from  the  directors  an  executive  committee, 


APPENDIX    OF    CORPORATE    FORMS.  1011 

of  which  a  majority  shall  constitute  a  quorum  ;  and  to  sucli  extent  as 
shall  be  provided  in  the  by-laws,  such  committee  shall  have  and  may 
exercise  all  or  any  of  the  powers  of  the  Board  of  Directors,  includ- 
ing power  to  cause  the  seal  of  the  corporation  to  be  affixed  to  all 
papers  tliat  may  require  it. 

The  Board  of  Directors,  by  the  affirmative  vote  of  a  majority  of  the 
whole  board,  may  appoint  any  other  Standing  Committee,  and  such 
Standing  Committees  shall  have  and  may  exercise  such  powers  as  shall 
be  conferred  or  authorized  by  the  by-laws. 

The  Board  of  Directors  may  appoint  not  only  other  officers  of  the 
Company,  but  also  one  or  more  vice-presidents,  one  or  more  assist- 
ant treasurers  and  one  or  more  assistant  secretaries;  and,  to  the 
extent  provided  in  the  by-laws,  the  persons  so  appointed  respectively 
shall  have  and  may  exercise  all  the  powers  of  the  president,  of  the 
treasurer  and  of  the  secretary,  respectively. 

The  Board  of  Directors  shall  have  power  from  time  to  time  to  fix 
and  to  determine  and  to  vary  the  amount  of  the  working  capital  of 
the  Company ;  and  to  direct  and  determine  the  use  and  disposition  of 
any  surplus  or  net  profits  over  and  above  the  capital  stock  paid  in  ; 
and  in  its  discretion  the  Board  of  Directors  may  use  and  apply  any 
such  sur[)lus  or  accumulated  profits  in  purchasing  or  acquiring  its 
bonds  or  other  obligations,  or  shares  of  its  own  capital  stock,  to  such 
extent  and  in  such  manner  and  upon  such  terms  as  the  Board  of 
Directors  shall  deem  expedient ;  but  shares  of  such  capital  stock  so 
purchased  or  acquired  may  be  resold,  unless  such  shares  shall  have 
been  retired  for  the  purpose  of  decreasing  the  Company's  capital  stock 
as  provided  by  law. 

The  Board  of  Directors  from  time  to  time  shall  determine  whether 
and  to  what  extent,  and  at  what  times  and  places,  and  under  what 
conditions  and  regulations,  the  accounts  and  books  of  the  corpora- 
tion, or  any  of  them,  shall  be  open  to  the  inspection  of  the  Stock- 
holders, and  no  Stockholder  shall  have  any  right  to  inspect  any 
account  or  book  or  document  of  the  corporation,  except  as  conferred 
by  Statute  or  aiithorized  by  the  Board  of  Directors,  or  by  a  resolution 
of  the  Stockholders. 

Subject  always  to  by-laws  made  by  the  Stockholders,  the  Board  of 
Directors  may  make  by-laws,  and,  from  time  to  time,  may  alter, 
amend  or  repeal  any  by-laws ;  but  any  by-laws  made  by  the  Board  of 
Directors  may  be  altered  or  repealed  by  the  Stockholders,  at  any 
annual  meeting,  or  at  any  special  meeting,  provided  notice  of  such 
proposed  alteration  or  repeal  be  included  in  the  notice  of  the  meet- 
ing. 

In  witness  whereof,  we  have  hereunto  set  our  hands  and  seals 


the  23rd  day  of  February,  1901. 


Signed,  sealed  and  delivered 
in  the  presence  of 

Francis  Lynde  Stetson. 
Victor  Morawetz. 


Charles  C.  Cluff  [L.S.] 
William  J.  Curtis  [L.S.] 
Charles  MacVeagh     [L.S.] 


1012  APPENDIX  OF  CORPORATE  FORMS. 

State  of  New  Jersey,  >  ^^^ . 
County  of  Hudson.        )       ' 

Be  it  remembered  that  on  this  23r(l  day  of  February,  1901,  before 
the  undersif^ned,  personally  appeared  Charles  C.  Cluff,  William  J. 
Curtis  and  Charles  ^NlacVeugh,  who,  I  am  satisfied,  are  the  persons 
named  in  and  who  executed  the  forej^oing  certificate;  and  1  having 
first  made  known  to  them,  and  to  eacli  of  them,  the  contents  thereof, 
they  did  each  acknowledge  that  they  signed,  sealed  and  delivered 
the  same  as  their  voluntary  act  and  deed. 

Geo.  Holmes, 
Master  in  Chancery  of  Ntxc  Jersey. 
(100  I.  K.  Stamp  Can.) 

Endorsed:  "Received  in  the  Hudson  Co.,  N.J.,  Clerk's  Office 
reby25th  a.d.  1901,  and  Kecorded  in  Clerks  Record,  No.  on 

Page  "Maurice  J.  Stack, 

ClerkP 
"Filed  Feb.  25,  1901. 
"George  Wurts, 

"  Secretary  of  State." 


APPENDIX   OF   COKPORATE   FORMS.  1013 


BY-LAWS 

OF 

CONSOLIDATED  STEEL  COMPANY. 
ARTICLE  I. 

STOCKHOLDERS. 

1.  Annual  Meeting.  A  meeting  of  the  stockholders  shall  be  held 
annually  at  the  principal  office  of  the  company  in  New  Jersey  at  ten. 
o'clock  in  the  forenoon  on  the  second  Monday  in  June,  for  the  purpose 
of  electing  directors,  and  for  the  transaction  of  any  other  business  au- 
thorized or  required  to  be  transacted  by  the  stockholders.  In  case  such 
second  Monday  shall  be  a  legal  holiday,  the  meeting  shall  be  held  on 
the  next  succeeding  day  which  is  not  a  legal  holiday. 

iSTotice  of  the  annual  meeting  shall  be  mailed  at  least  ten  days 
prior  to  the  meeting  to  each  stockholder  at  the  address  last  furnished 
by  him  to  the  company,  provided  he  shall  have  furnished  such 
address. 

2.  Special  Meeting.  Special  meetings  of  the  stockholders  shall 
be  held  at  the  principal  office  of  the  company  in  New  Jersey. 

The  board  of  directors  may  at  any  time  call  a  special  meeting  of  the 
stockholders,  and  it  shall  call  the  same  whenever  the  holders  of  not 
less  than  one  quarter  of  the  stock  of  the  company  outstanding  shall  in 
writing  make  application  therefor  to  the  president,  stating  the  object 
or  objects  of  such  meeting. 

Notice  of  such  special  meeting  and  of  the  object  or  objects  thereof 
shall  be  mailed  to  each  stockholder  in  like  manner  as  notice  of  an 
annual  meeting. 

3.  Quorum.  The  holders  of  one-third  of  all  the  shares  of  the  cap- 
ital stock  of  the  company  outstanding  shall  constitute  a  quorum  atnny 
meeting  for  all  purposes,  including  the  election  of  directors ;  but  the 
holders  of  a  majority  of  the  stock  represented  at  any  meeting  ma_y.  at 
the  end  of  one  hour  from  the  time  for  which  the  meeting  was  called,  ad- 
journ the  meeting  from  time  to  time  without  farther  notice,  and  at  any 
such  adjourned  meeting  at  which  a  quorum  shall  attend  all  business 
may  be  transacted  which  might  have  been  transacted  at  the  meeting 
as  originally  called. 

4.  Organization.  The  president,  or  in  his  absence  a  vice-presi- 
dent, shall  call  meetings  of  stockholders  to  order,  and  act  as  chairman 


1014  APPENDIX    OF  CORPORATE   FORMS. 

thereof.  In  case  neither  the  president  nor  any  vice-president  is  pre- 
sent, any  stockholder  jjresent  may  call  the  meeting  to  order,  and  the 
stockholders  present  may  then  elect  a  chairman  of  such  meeting. 

The  secretary  of  the  company  sliall  act  a.s  secretary  at  all  meetings 
of  the  stockholders.  In  his  absence,  the  chairman  may  appoint  any 
jterson  to  act  as  secretary. 

5.  Voting.  At  any  annual  or  special  meeting  each  stockholder  shall 
have  one  vote  for  each  share  of  stock  standing  in  his  name  on  the  books 
of  the  company  at  the  time  of  the  closing  of  the  transfer  books  for 
said  meeting. 

Every  stockholder  shall  be  entitled  to  vote  in  person,  or  by  proxy 
appointed  by  an  instrument  in  writing,  signed  by  such  stockholder  or 
by  his  duly  authorized  agent,  and  delivered  to  such  person  or  i^ersons 
as  the  cliairman  of  the  meeting  may  direct.  A  stockholder  shall  be 
deemed  to  be  present  whether  present  in  person  or  represented  by 
proxy. 

Voting  for  directors  shall  be  by  ballot,  and  upon  the  demand  of 
any  stockholder  present  the  voting  upon  any  question  shall  be  by 
ballot. 

6.  Inspectors.  Whenever  the  vote  of  the  stockholders  shall  be 
taken  by  ballot,  the  chairman  of  the  meeting  shall  appoint  two  j^Msons 
to  be  inspectors.  The  inspectors  shall  be  sworn  to  the  faithful  per- 
formnnce  of  their  duties;  they  shall  open  and  close  the  ])olls  ;  they 
shall  decide  all  questions  as  to  the  validity  of  proxies  and  the  quali- 
fication of  voters;  and  they  shall,  in  writing,  certify  to  the  results. 


ARTICLE  II. 

BO.VRD    OF    1)1  RECTO R.S. 

1.  Number.  The  board  of  directors  shall  consist  of  fifteen  mem- 
bers. 

2.  Term  of  Office.  At  the  first  election  of  directors,  five  directors 
shall  be  elected  to  hold  office  until  the  first  annual  meeting  thereafter; 
five  to  hold  office  until  the  second  annual  meeting  thereafter,  and  five 
to  hold  office  until  the  third  annual  meeting  thereafter.  At  each  an- 
nual meeting,  the  successors  to  the  directors  whose  term  shall  expire 
in  that  year  shall  be  elected  to  hold  office  for  the  term  of  three  years, 
so  that  the  term  of  office  of  five  directors  shall  expire  in  each  year.  A 
majority  of  votes  cast  shall  be  necessary  to  elect. 

Each  director  sliall  serve  for  the  term  for  which  he  shall  have  been 
elected,  and  until  his  successor  shall  have  been  duly  elected  and 
qualified. 

3.  Vacancies.  In  case  of  an}'  vacancy  in  any  class  of  directors, 
through  death,  resi,2:nation,  disqualification  or  other  cause,  the  remain- 
ing directors,  by  affirmative  vote  of  a  majority  of  their  number,  whether 


APPENDIX    OF   CORPORATE   FORMS.  1015 

constituting  a  quorum  or  not,  may  elect  a  successor  to  hold  office  for 
the  unexpired  portion  of  the  term  of  the  director  whose  place  shall 
be  vacant,  and  until  his  successor  sliall  have  been  duly  elected  and 
qualified. 

4,  Meetings.  The  board  of  directors  may  hold  its  meetings  and 
have  one  or  more  offices  and  keep  the  books  of  the  company,  except 
the  stock  and  transfer  books,  at  such  place  or  places  in  the  State  of 
New  Jersey  or  outside  of  the  State  of  New  Jersey  as  it  may  from  time 
to  time  determine. 

Stated  meetings  shall  be  held  on  the  first  Wednesday  of  each 
month  at  12  o'clock  noon.  If  such  day  is  a  legal  holiday,  the  meeting 
shall  be  held  on  the  next  succeeding  day  which  is  not  a  legal  holiday. 
No  notice  shall  be  required  for  any  stated  meeting. 

Special  meetings  may  be  called  by  the  president  or  any  three  direc- 
tors. Each  director  shall  furnish  to  the  secretary  an  address  to  which 
notices  of  special  meetings  may  be  sent.  Notice  of  the  time  and  place 
of  each  special  meeting  shall  be  sent  to  each  director  who  has  fur- 
nished such  address,  and  such  notice  shall  be  sent,  if  by  mail,  at  least 
two  days,  or,  if  by  telegram,  at  least  six  hours,  prior  to  the  meeting. 

A  majority  of  the  directors  in  office  shall  constitute  a  quorum.  A 
majority  of  those  present  at  the  time  and  place  of  any  stated  or  special 
meeting,  although  less  than  a  quorum,  may  adjourn  the  meeting  from 
time  to  time,  without  notice. 

6.  Powers.  The  board  of  directors  shall  have  the  management  of 
the  business  of  the  compan3^  The  board  may  exercise  all  such  powers 
of  the  company  and  do  all  such  lawful  acts  and  things  as  are  not  by 
statute,  or  by  the  certificate  of  the  company,  or  by  these  by-laws 
directed  or  required  to  be  exercised  or  done  by  the  stockholders. 

6.  Compensation.  Each  director  shall  receive  $10  for  attendance 
at  any  meeting  of  the  board. 

7.  Executive  Committee.  The  directors  shall  elect  from  their 
number  an  executive  committee,  to  consist  of  six  members,  and  shall 
designate  one  of  such  six  members  to  be  the  chairman  of  the  commit- 
tee. The  members  of  the  committee  and  the  chairman  thereof  shall 
serve  during  the  pleasure  of  the  board. 

During  the  intervals  between  the  meetings  of  the  board  of  directors 
the  executive  committee  shall  possess  and  may  exercise  all  the  powers 
of  the  board  of  directors  in  such  manner  as  the  executive  committee 
shall  deem  best  for  the  interests  of  the  company  in  all  cases  in  which 
specific  directions  shall  not  have  been  given  by  the  board  of  directors. 
All  action  by  the  executive  committee  shall  be  reported  to  the  board 
of  directors  at  its  meeting  next  succeeding  such  action,  and  shall  be 
subject  to  revision  or  alteration  by  the  board  of  directors  ;  provided 
that  no  rights  or  acts  of  third  parties  shall  be  affected  by  any  such 
revision  or  alteration. 

The  executive  committee  may  hold  its  meetings  at  such  times  and 
places  as  it  may  determine. 


1016  APPENDIX  OF  CORPORATE  FORMS. 

In  every  case  the  affirmative  vote  of  a  majority  of  all  the  members 
of  the  committee  shall  be  necessary  to  the  adoption  of  any  resolu- 
tion. 

The  compensation  of  members  of  the  executive  committee  shall  be 
fixed  by  the  board  of  directors. 


ARTICLE   III. 

OFFICERS. 

1.  Election  or  Appointment.  The  board  of  directors  shall  elect 
from  their  number  a  president,  and  shall  appoint  a  treasul-er  and  a  sec- 
retary. The  board  may  also  appoint  one  or  more  vice-presidents,  one 
or  more  assistant  treasurers,  one  or  more  assistant  secretaries,  and 
such  other  officers  as  it  may  deem  advisable. 

The  same  person  may  be  treasurer  and  an  assistant  secretary,  or 
secretary  and  an  assistant  treasurer,  or  an  assistant  treasurer  and  an 
assistant  secretary. 

2.  Term  of  Offilce  and  Compensation.  The  oflicers  so  elected  or 
appointed  shall  hold  ottiee  during  the  pleasure  of  the  board,  and  tlieir 
compensation  shall  be  iixed  by  the  board. 

3.  Duties  of  Ofiacers.  The  president  shall  preside  at  meetings  of 
the  stockholders  and  of  the  Ijoard  of  directors.  He  shall  be  the  chief 
executive  officer  of  the  conii)any  and  shall  have  general  charge  of  the 
business  of  the  company,  subject  to  the  executive  committee  and  the 
board. 

The  treasurer  shall  give  such  bond  for  the  faithful  discharge  of  his 
duties  as  the  board  may  require.  He  shall  have  custody  of  all  the 
funds  and  securities  of  the  company  which  may  have  come  into  liis 
hands,  and  shall  keep  full  and  accurate  accounts  of  all  moneys  received 
and  paid  by  him  on  account  of  the  company. 

The  secretary  shall  keep  the  minutes  of  all  meetings  of  the  stock- 
holders and  of  the  board,  and  of  the  executive  committee ;  he  shall 
attend  to  the  giving  and  serving  of  all  notices;  and  he  shall  have  the 
custody  of  the  seal  of  the  company. 

The  president,  treasurer,  and  secretary  shall,  in  general,  perform 
the  duties  incident  to  their  offices,  and  any  other  duties  designated  by 
the  board.  All  other  officers  shall  perform  such  duties  as  may  be 
designated  by  the  board. 

4.  Execution  of  Instruments  on  behalf  of  the  Company.  All 
certificates  for  shares  of  the  capital  stock  of  the  company,  all  bills  of 
exchange,  promissory  notes  and  checks  issued,  drawn,  or  made  by  the 
company  shall  be  signed  by  the  president  or  a  vice-president,  and  by 
the  treasurer  or  an  assistant  treasurer.  All  other  contracts  or  obliga- 
tions of  the  company  shall  be  executed  by  such  officer  or  officers  as 
the  board  may  direct.  The  seal  of  the  company  shall  be  affixed  to  such 


APPENDIX   OF   CORPORATE  FORMS.  1017 

instruments  as  the  board  may  direct,  and,  when  so  affixed,  shall  be 
attested  by  a  secretary  or  an  assistant  secretary,  if  the  board  shall  so 
direct. 


AKTICLE  IV. 

CAPITAL    STOCK.       DIVIDENDS.       SEAL. 

1.  Certificates  of  Shares,  The  certificates  for  shares  of  the  cap- 
ital stock  shall  be  in  such  form,  not  inconsistent  with  the  certiticate 
of  incorporation,  as  shall  be  approved  by  the  board  of  directors. 

No  certificate  shall  be  valid  unless  it  is  sealed  with  the  corporate 
seal  of  the  company,  and  signed  by  the  president,  or  a  vice-president, 
and  the  treasurer,  or  an  assistant  treasurer,  and  such  other  persons  as 
the  board  may  determine. 

All  certificates  shall  be  consecutiveh'  numbered.  The  name  of  the 
person  owning  the  shares  represented  thereby,  with  the  number  of  such 
shares  and  the  date  of  issue,  shall  be  on  the  company's  books. 

2.  Transfer  of  Shares.  Shares  of  the  capital  stock  of  the  com- 
pany shall  be  transferred  only  on  the  books  of  the  company  by  the 
holder  thereof  iw  person,  or  by  his  attorney,  upon  surrender  and  can- 
cellation of  certificates  for  a  like  number  of  shares,  or  (iu  case  of  lost 
or  destroyed  certificates)  upon  the  receipt  of  a  bond  satisfactory  to 
the  board. 

The  board  of  directors  shall  have  pow'er  to  make  all  such  rules  and 
regulations  as  they  may  deem  expedient  concerning  the  issue,  ti'ansfer, 
and  registration  of  certificates  for  shares  of  the  capital  stock  of  the 
company  ;  and  to  appoint  a  transfer  agent  and  a  registrar  of  transfers, 
and  to  require  all  stock  certificates  to  bear  the  signature  of  such  trans- 
fer agent  and  of  such  registrar  of  transfers. 

The  stock  transfer  books  shall  be  closed  for  the  meetings  of  stock- 
holders and  for  the  payment  of  dividends  during  such  periods  as  may 
be  fixed  by  the  board,  and  during  such  periods  no  stock  shall  be  trans- 
ferable. 

3.  Dividends.  The  board  of  directors  in  its  discretion  may  from 
time  to  time  declare  dividends  upon  tlie  capital  stock  from  the  surjilus 
or  net  profits  of  the  company,  subject  to  the  provisions  of  the  certifi- 
cate of  incorporation. 

4.  Working  Capital.  The  board  of  directors  may  fix  a  sum  which 
may  be  set  aside  or  reserved,  over  and  above  the  companj^'s  capital 
stock  paid  in,  as  a  working  capital  for  the  company,  and  from  time  to 
time  the  board  may  increase,  diminish,  and  vary  the  same  in  its  abso- 
lute judgment  and  discretion. 

6.  Corporate  Seal.  The  board  of  directors  shall  provide  a  suitable 
seal  containing  the  name  of  the  company,  which  shall  be  in  the  cus- 
tody of  the  secretary. 


1018  APPENDIX    OF   CORPORATE   FORMS. 


ARTICLE  V. 

AMENDMENTS. 

These  by-laws  may  be  altered  or  amended  by  the  stockliolders  at  any 
regular  or  special  meeting,  or  by  the  directors  at  any  regular  or  special 
meeting,  jirovided  not  less  than  eight  directors  shall  vote  in  favor  of 
such  alteration  or  amendment. 


APPENDIX    OF   CORPORATE   FORMS.  1019 

MINUTES    OF   FIRST   MEETIXG   OF   INCORPORATORS 

OF 

CONSOLIDATED   STEEL   COMPANY. 

The  first  meeting  of  the  incorporators  of  Consolidated  Steel  Com- 
pany was  held  at  Number  10  Day  Street,  Hoboken,  New  Jersey, 
designated  in  the  certificate  of  incorporation  as  the  location  of  the 
principal  and  registered  olfice  of  the  company,  on  the  sixth  day  of 
April,  1909,  at  ten  o'clock  in  the  forenoon,  pursuant  to  a  written 
waiver  of  notice  signed  by  all  the  incorporators,  fixing  the  time  and 
place  aforesaid. 

The  following  incorporator  was  present  in  person : 


NAME. 

NUMBER 

OF 

SHARES. 

John  Adams, 

10. 

The  following 

incoi 

■porators  were  represented  by  proxy 

NAME. 

NAME    OF   PROXY.                       NUMBER 

OF 

SHARES. 

James  Brown, 

John  Adams, 

10. 

Charles  Clark, 

John  Adams, 

10. 

Mr.  John  Adams  was  elected  chairman,  and  Mr.  Hugh  Knowles 
was  appointed  secretary  of  the  meeting. 

The  chairman  reported  that  the  certificate  of  incorporation  of  the 
company  was  recorded  in  the  ofiice  of  the  Clerk  of  Hudson  County 
on  the  fifth  day  of  April,  1909,  and  was  filed  on  the  same  date  in  the 
office  of  the  Secretary  of  State  of  New  Jersey.  The  chairman  pre- 
sented a  certified  copy  of  said  certificate  of  incorporation,  which  Avns 
ordered  to  be  filed,  and  a  copy  thereof  to  be  spread  upon  the  records 
of  the  meeting. 

The  said  certified  copy  was  as  follows  : 

[Here  take  in  certified  copy  of  certificate  of  incorporation.] 

The  secretary  presented  and  read  the  waiver  of  notice  of  the  meet- 
ing, which  was  Ordered  to  be  filed,  and  a  copy  thereof  to  be  spread 
upon  the  records  of  the  meeting. 

The  said  waiver  was  as  follows : 

"WAIVER  OF  NOTICE  OF  FIRST  MEETING  OF  INCORPORATORS 

OF 
CONSOLIDATED   STEEL  COMPANY. 
"We,  the  undersigned,  being  all  of  the  incorporators  of  Consolidated 


1020  APPENDIX   OF   CORPORATE   FORMS. 

Steel  Company,  a  New  Jersey  corporation,  do  hekeby  waive  notice 
of  the  time,  place,  and  purpose  of  the  first  meeting  of  the  incorpora- 
tors of  said  comiKiny,  and  do  fix  the  sixth  day  of  April,  11)09,  at  ten 
o'clock  in  the  forenoon,  as  the  time,  and  the  office  of  the  Security 
Trust  Company,  Number  10  Day  Street,  Holwken,  New  Jersey,  as 
the  place  of  said  meeting,  and  do  hereby  waive  all  the  requirements 
of  the  statutes  of  New  Jersey  as  to  notice  of  such  meeting,  and  the 
publication  thereof,  and  we  do  consent  to  the  transaction  of  such 
business  as  may  come  before  said  meeting. 
Dated,  April  Gth,  I'JOD. 

John  Adams. 

James  Hkown. 

Chaklks  Clakk." 

The  secretary  presented  a  form  of  by-laws  for  the  regulation  of  the 
affairs  of  the  company  which  were  read,  article  by  article,  and  unani- 
mously adopted. 

Tiie  said  by-laws  were  as  follows : 

[Here  take  in  by-laws.] 

Upon  motion, 

Jiesoli'fd,  that  the  meeting  proceed  to  the  election  of  directors. 

Messrs.  G.  H.  Ivins  and  K.  L.  Munro  were  appointed  inspectors  of 
election,  and  the  oath  was  duly  administered  to  them. 

Messrs.  Henry  Chamberlain,  Frank  M.  Converse,  Richard  T. 
Frances,  Lawrence  K.  Melntyre,  and  IMiiliit  Talbot  were  nominated 
for  directors  to  hold  office  until  the  next  annual  meeting  of  the  com- 
pany ;  Messrs.  George  Bathurst,  Arthur  K.  Livingston,  Samuel  P. 
Stacy,  Amasa  Thompson,  and  William  K.  Waring  were  nominated 
for  directors  to  hold  office  until  the  second  animal  meeting  of  tho 
company;  Messrs.  Hiram  .V.  Hilbreth,  (Jcorge  Ivins,  Isaac  Jtmes, 
Herbert  S.  Pendreigh  and  Walter  M.  Stickney  were  nominated  for 
directors  to  hold  office  until  the  third  annual  meeting  of  the  com- 
pany. 

No  other  nominations  having  been  made,  the  polls  were  declared 
open.  All  the  stockholders  having  voted  by  ballot,  the  polls  were 
declared  closed,  and  the  insjjectors  presented  their  certificate  showing 
that  the  aforesaid  gentlemen  had  been  elected  directors  of  the  com- 
pany for  the  aforesaid  terms.  ' 

Upon  motion. 

Resolved,  that  the  principal  and  registered  office  of  the  company  in 
New  Jersey  be  established  and  maintained  at  Number  10  Day  Street, 
Hoboken,  County  of  Hudson,  and  that  the  Security  Trust  Company 
be,  and  it  hereby  is,  appointed  the  agent  of  this  corporation  in  charge 
of  such  principal  and  registered  office,  upon  whom  process  against 
this  company  may  be  served. 

Upon  motion  duly  made  and  seconded,  and  by  the  affirmative  vote 
of  all  the  stockholders,  it  was 


APPENDIX   OF   CORPORATE   FORMS.  1021 

Resolved,  that  the  board  of  directors  be  and  they  hereby  are  author- 
ized to  issue  shares  of  the  capital  stock  of  this  company  to  the  full 
amount  authorized  by  the  certificate  of  incorporation,  in  such  amounts, 
and  at  such  time  or  times,  and  for  such  consideration  as  the  board 
may  determine. 

Upon  motion  duly  made  and  seconded,  and  by  the  affirmative  vote 
of  all  the  stockholders,  the  following  preambles  and  resolution  were 
adopted : 

Whereas,  Mr,  James  Wakefield,  of  Pittsburg,  Pennsylvania,  has 
offered,  in  consideration  of  the  issue  to  him  or  upon  his  order  of  pre- 
ferred stock  in  this  company  to  the  amount  of  one  hmidred  thousand 
dollars  ($100,000)  par  value,  and  of  common  stock  in  this  company 
to  the  amount  of  one  hundred  and  fifty  thousand  dollars  ($150,000) 
par  value,  to  sell  to  this  company  the  following  described  property, 
to  wit : 

[Here  take  in  description  of  property] ;  and 

Whereas,  in  the  judgment  of  the  stockholders  such  property  is  neces- 
sary for  the  business  of  this  company,  and  is  of  the  fair  value  of  two 
hundred  and  fiftj'  thousand  dollars  ($250,000) ; 

Resolved,  that  the  directors  of  this  company  be  and  they  hereby 
are  authorized,  in  their  discretion,  to  purchase  the  aforesaid  property 
for  the  aforesaid  price,  and  to  issue  stock  as  aforesaid  in  payment 
thereof. 

On  motion,  the  meeting  adjourned. 

Hugh  Kxowles, 
Secretary  of  the  Meeting. 


1022  APPENDIX  OF  CORPORATE  FORMS. 


MINUTES  CF  FIRST  MEETING  OF  BOARD  OF  DIRECTORS 

OF 

CONSOLIDATED   STEEL   COMPANY. 

The  first  meeting  of  the  board  of  directors  of  Consolidated  Steel 
Company  was  held  at  Number  17  Wall  Street,  New  York  City,  on  the 
sixth  day  of  April,  1909,  at  two  o'clock  in  the  afternoon,  pursuant  to  a 
written  waiver  of  notice  signed  by  all  the  directors,  fixing  the  time  and 
place  aforesaid. 

The  following  directors  were  present :  Messrs.  Chamberlain,  Con- 
verse, Talbot,  IJathurst,  Livingston,  Stacy,  Jones,  and  Tendreigh,  being 
a  quorum  of  the  board. 

On  motion,  ]Mr.  Talbot  was  chosen  temporary  chairman,  and  Mr. 
Hugh  Knowles  was  appointed  secretary  of  the  meeting. 

The  secretary  presented  and  read  the  waiver  of  notice  of  the  meeting, 
which  was  ordered  to  be  filed,  and  a  copy  thereof  to  be  spread  upon 
the  records  of  the  meeting. 

The  said  waiver  was  as  follows : 

[Here  take  in  waiver  of  notice.] 

The  minutes  of  the  first  meeting  of  the  incorporators  of  the  com- 
pany were  read. 

Upori  motion,  the  following  gentlemen  were  elected  officers  of  the 
company,  to  hold  office  during  the  pleasure  of  the  board. 

President :  Mr.  George  Bathurst. 

Vice-Presidents :  Mr.  John  Adams  and  Mr.  Philip  Livermore. 

Treasurer:  Mr.  John  G.  Holmes. 

Assistant  Treasurer :  Mr.  Hugh  Knowles. 

Secretanj :  Mr.  Hugh  Knowles. 

Assistant  Secretary :  ^[r.  John  G.  Holmes. 

Upon  motion,  the  following  gentlemen  were  chosen  to  constitute 
the  executive  committee  of  the  company  :  Messrs.  Bathurst,  Chamber- 
lain, Converse,  Livingston,  Jones,  and  Pendreigh. 

Upon  motion,  Mr.  Converse  was  designated  to  be  chairman  of  the 
executive  committee. 

Upon  motion,  Mr.  Brandon  Livermore  was  appointed  counsel  to 
the  company. 

The  president  thereupon  took  tbe  chair. 

The  secretary  thereupon  took  and  subscribed  the  oath  of  office,  and 
entered  upon  the  discharge  of  his  duties.  The  said  oath  was  as  fol- 
lows : 


APPENDIX   OF   CORPORATE   FORMS.  1023 

"OATH  OF  SECRETARY 

OF 

CONSOLIDATED   STEEL  COMPANY. 


State  of  New  York,  , 

V  SS. 

CouxTY  OF  New  Yokk 


1} 


Hugh  Knowles,  secretary  of  Consolidated  Steel  Company,  a  New 
Jersey  corporation,  being  by  me  duly  sworn,  upon  his  oath  deposes 
and  says  that  he  will  faithfully  discharge  the  duties  of  secretary  of 
the  aforesaid  corporation  to  the  best  of  his  skill  and  ability. 

Hugh  Knowles. 
Subscribed  and  sworn  to  before  me, 
this  sixth  day  of  April,  1909. 

John  K.  Andrews, 

Notary  Public  (17), 

New  York  County." 

Upon  motion. 

Resolved,  that  the  treasurer  give  a  bond  in  the  sum  of  fifty  thou- 
sand dollars  (^50,000). 

The  treasurer  thereupon  presented  his  bond,  signed  by  himself  as 
principal  and  by  the  Attorneys  Surety  Company  as  surety,  and  the 
same  was  approved,  and  ordered  to  be  filed  with  the  secretary. 

Upon  motion, 

Resolved,  that  the  seal  presented  at  this  meeting,  an  impression  of 
which  is  directed  to  be  made  in  the  minute  book,  be  and  the  same 
hereby  is  adopted  as  the  seal  of  the  company. 

The  impression  of  said  seal  follows : 

[Seal.] 

Upon  motion, 

Resolved,  that  the  stock  book  and  transfer  book  presented  at  this 
meeting  be  and  the  same  hereby  are  adopted  as  the  stock  book  and  the 
ti-ansfer  book  of  the  company,  and  the  secretary  is  hereby  directed  to 
send  the  same  to  the  registered  office  of  the  company. 

Upon  motion, 

Resolved,  that  the  treasurer  be,  and  he  hereby  is,  authorized  to  open 
a  bank  account  in  behalf  of  the  company  with  the  Empire  State  Na- 
tional Pank. 

Further  Resolved,  that,  until  otherwise  ordered,  checks,  notes,  and 
other  obligations  may  be  endorsed  on  behalf  of  tlie  company  for  col- 
lection, by  either  the  treasurer,  or  an  assistant  treasurer,  and  deposited 
to  the  credit  of  the  company  in  the  said  bank. 


1024  APPENDIX    OF   CORPORATE  FORMS. 

Further  Resolved,  that,  until  otherwise  ordered,  the  said  bank  be 
and  it  hereby  is  authorized  to  make  ])ayinents  from  the  funds  of  this 
company  on  deposit  with  it,  according  to  the  check  of  this  company 
signed  by  its  president,  or  a  vice-president,  and  countersigned  by  the 
treasurer  or  an  assistant  treasurer. 

Upon  motion, 

Resolved,  that  the  forms  of  certificates  for  shares  of  the  common 
and  preferred  stock  of  the  company  presented  at  this  meeting  be  and 
they  hereby  are  adopted,  and  that  such  forms  be  spread  upon  the 
records  of  the  meeting. 

The  forms  of  stock  certificates  were  as  follows  : 

[Here  take  in  forms  of  stock  certificates.] 

Upon  motion, 

Resolved,  that  the  Security  Trust  Company,  a  Kew  Jersey  corpora- 
tion, be  and  it  hereby  is  designated  as  the  transfer  agent  of  this 
company,  and  the  New  Jersey  Bonding  Company,  a  New  Jersey  cor- 
poration, be  and  it  hereby  is  designated  as  the  registrar  of  transfers, 
and  that  all  certificates  for  shares  of  the  capital  stock  of  the  company 
shall  be  countersigned  by  such  transfer  agent  and  also  by  such  regis- 
trar of  transfers. 

Upon  motion. 

Resolved,  that  this  company  establish  and  maintain  an  office  in 
Room  10,  Number  17  Wall  Street,  New  York  City,  and  that  all  meet- 
ings of  the  board  of  directors  shall  be  held  at  such  office  until  other- 
wise ordered. 

Upon  motion  duly  made  and  seconded,  and  on  the  affirmative  vote 
of  all  present,  the  following  preambles  and  resolutions  were  adopted  : 

Wherens,  Mr.  James  AVakefield,  of  I'ittsburg,  Pennsylvania,  has 
offered,  in  consideration  of  the  issue  to  him  or  upon  his  order  of  pre- 
ferred stock  in  this  company  to  the  amount  of  one  hundred  thousand 
dollars  ($100,000)  par  value,  and  of  common  stock  in  this  company 
to  the  amount  of  one  hundred  and  fifty  thousand  dollars  ($150,000) 
par  value,  to  sell  to  this  company  the  following  described  property, 
to  wit : 

[Here  take  in  description  of  property] ;  and 

Whereas,  in  the  judgment  of  the  directors  such  property  is  necessary 
for  the  business  of  this  company,  and  is  of  the  fair  value  of  two  hun- 
dred and  fifty  thousand  dollars  ($250,000) ; 

Resolved,  that  it  be  adjudged  and  declared  that  said  property  is  of 
the  fair  value  of  two  hundred  and  fifty  thousand  dollars  ($250,000), 
and  that  the  same  is  necessary  for  the  business  of  the  company. 

FuHher  Resolved,  that  the  form  of  agreement  for  the  purchase  of 
said  property  presented  at  this  meeting  by  the  counsel  to  the  com- 
pany, be,  and  the  same  hereby  is,  approved,  and  the  president  or  a 
Yice-president,  and  the  secretary  or  the  assistant  secretary  are  hereby 


APPENDIX   OF   CORPORATE   FORMS.  1025 

authorized  and  directed  to  exec\ite  the  same,  in  the  name  of,  and  on 
behalf  of  the  company,  and  under  its  corporate  seal. 

Further  Besolved,  that  upon  the  conveyance  or  transfer  to  this  com- 
pany of  the  said  property  by  instruments  of  conveyance  or  transfer 
satisfactory  to  the  counsel  to  the  company,  the  officers  of  this  com- 
pany be  and  they  hereby  are  authorized  and  directed  to  prepare,  sign, 
and  seal  certificates  of  stock  pursuant  to  the  by-laws,  and  to  issue  cer- 
tificates of  the  full  paid  preferred  stock  of  this  company  to  the  aggre- 
gate amount  of  one  hundred  thousand  dollars  (100,000),  and  of  the 
common  stock  of  this  company  to  the  aggregate  amount  of  one  hun- 
dred and  fifty  thousand  dollars  ($150,000)  to  the  said  James  Wakefield, 
or  upon  his  order. 

Upon  motion,  the  meeting  adjourned. 

Hugh  Knowles, 

iSecretan/. 


1026  APPENDIX   OF  CORPORATK   FORMS. 

LISTING   OF  SECURITIES 

OF 

CONSOLIDATED   STEEL   COMPANY. 

To  the  Committee  on  Stock  List  of  the  Stock  Exchange  : 

Consolidated  Steel  Company  hereby  makes  ajjplication  to  liave  the 
following  bonds  and  stock  of  said  company  placed  on  the  regular  list 
of  the  Stock  Exchange  : 

Ten  million  dollars  (310,000,000)  first  mortgage  five  per  centum 
gold  bonds,  consisting  of  nine  thousand  (9000)  bonds  for  one  thousand 
dollars  ($1000)  each,  numbered  from  Ml  to  ^I  UOOO  both  inclusive, 
and  of  two  thousand  (20()0)  bonds  for  five  hundred  dollars  ($500) 
each,  numbered  from  D9()01  to  1)  11000  both  inclusive; 

Ten  million  dollars  (.1!  10,000,000)  seven  per  centum  cumulative  pre- 
ferred stock  ; 

Ten  million  dollars  (.'§10,000,000)  common  stock. 

Consolidated  Steel  Company  was  organized  on  April  6,  1909,  u:ider 
the  laws  of  the  State  of  New  Jersey,  and  its  certificate  of  incorpora- 
tion was  amended  on  April  20,  1909. 

The  company  has  accjuired  under  the  laws  of  the  States  of  New 
Jersey,  I'ennsylvania,  and  New  York,  by  direct  conveyance,  free  of 
liens,  the  following  property : 

The  plant,  stock  in  trade,  good  will,  and  all  other  assets  of  the  iron 
business  formerly  carried  on  in  I'ittsburg.  rennsylvania,  by  James 
Wakefield,  doing  business  as  James  Wakefield  and  Company  ; 

The  plant,  stock  in  trade,  good  will,  and  all  other  assets  of  the 
business  formerly  carried  on  in  Lebanon,  Pennsylvania,  by  the  Leba- 
non Iron  Company,  a  I'ennsylvania  corporation  ; 

The  plant  located  in  liuft'alo.  New  York,  formerly  owned  by  the 
Delaware  Iron  Company,  a  Pennsylvnnia  corporation,  and  commonly 
known  as  the  Butfalo  Mill,  together  with  all  the  stock  in  trade  in  said 
plant. 

The  company  has  also  acquired  the  following  securities : 

Three  million  dollars  ($."% 000,000)  six  per  centum  first  mortgage 
bonds  of  the  Delaware  Iron  Company,  part  of  a  total  of  four  million 
eight  hundred  thousand  dollars  ($4,800,000)  of  such  bonds  issued  by 
said  company  and  now  outstanding; 

Five  thousand  nnd  thirty-three  (50.33)  shares  of  the  common  stock 
of  the  Delaware  Iron  Company  out  of  a  total  of  ten  thousand  (10.000) 
shares  of  common  stock  issued  by  said  company  and  now  outstanding 
(no  preferred  stock  having  been  issued  by  said  company). 

Consolidated  Steel  Company  had  on  the  27th  day  of  April,  1909,  one 


APPENDIX   OF   CORPORATE   FORMS.  1027 

nnllion  ei^^ht  hundred  seventy-three  thousand  four  hundred  thirty-two 
dolirand  forty-three  cents  ($1,873,432.43)  m  its  treasury. 

First  Mortgage  Five  Per  Centum  Gold  Bonds. 
These  bonds  bear  date  April  27,1909;  mature  ^---^^)^^l\ 

m  the  city  of  :se^v   ior^       f^andard  of  weight  and  fineness  without 

[Z;  of  New  York.     The  transte.  agejcy  £or  «-  -8-'-^<l  ^^^^ 

viU  be  at  the  offlee  of  the  company  in  Hew  ^  "''k  C.tJ- 

To  secure  said  bonds  the  company  has  executed  and  delneiea  lo 

io  secuie  sai  Y  ^^  it^  fi,st  mortgage  dated 

Interboroug.  ru  t  Compa  y  o         ^^.^^  .^  ^.^^^^^^^^.^^  j^^^^^^^,^_  ^„^^ 

B  ffllo  a'bormentTon  I,  and  Ihe' stock  and  bonds  also  above  men- 
tionetandsueh  other  properties  as  are  in  said  mortgage  more  par- 
ticularly  described. 

Setes  Pee  Centum  Cumulative  Preferred  Stock. 
The  holders  of  such  preferred  stock  are  entitled  to  receive  from  the 
surplus  o  net  profits  arising  from  the  business  of  the  eorporatron  a 
fixed  yea  ly  dividend  of  seven  per  centum,  payable  sem-annually  on 
fhe  2d  toyl  of  January  and  July  in  each  year,  before  any  dividend  is 
cof  nnart  or  naid  on  the  common  stock. 

Should  the  surplus  or  net  profits  arising  from  the  business  of  the 
co^oialtn  priori  any  dividend  day  be  insufficient  topay«ied,vK^^^^^ 
„non  the  creterred  stock,  such  dividends  are  payable  from  the  future 
Zfit  a'd  no  dividend  is  at  any  time  to  be  paid  upon  the  common 
sock  until  the  full  amount  of  seven  per  centum  per  annum  up  to  that 
me  upon  all  the  preferred  stock  shall  have  been  paid  or  set  apart^ 
The  holders  of  preferred  stock  are  entitled  to  no  dividends  beyond  the 

"T^'i::ireroTp"d  stock  are  entitled  in  case  of  the  liquidation 
or  dUsol  ition  of  the  company  to  be  paid  in  full  both  the  pnncipal  of 
their  shares  and  accrued  dividends  before  any  amount  is  paid  to  the 
holders  of  the  common  stock. 


1028  APPENDIX   OF   CORPORATE   FORMS. 

The  total  amount  of  the  preferred  stock  authorized  is  twenty  mil- 
lion dollars  (1120,000,000),  ten  million  dollars  ($10,000,000)  of  which 
has  been  issued. 

Common  Stock, 

The  total  amount  of  the  common  stock  authorized  is  twenty  million 
dollars  ($20,000,000),  of  which  ten  million  dollars  ($10,000,000)  has 
been  issued. 

The  board  of  directors  of  Consolidated  Steel  Company  is  constituted 
as  follows : 

Messrs.  Henry  Chamberlain,  Frank  M.  Converse,  Richard  T.  Frances, 
Lawrence  K.  Mclntyre,  Philip  Talbot,  George  Bathurst,  Artluir  K. 
Livingston,  Samuel  P.  Stacy,  Amasa  Thompson,  William  K.  Waring, 
Hiram  A.  Hilbreth,  George  Ivins,  Isaac  Jones,  Herbert  S.  Pendreigh, 
and  Walter  M.  Stickney. 

The  officers  of  Consolidated  Steel  Company  are  as  follows : 

President:  Mr.  George  Bathurst. 

Vice-Presidents :  INIr.  John  Adams  and  Mr.  I'hilip  Livermore. 

Treasurer:  Mr.  John  G.  Holmes. 

Assistant  Treasurer :  Mr.  Hugh  Knowles. 

Secretary:  Mr.  Hugh  Knowles. 

Assistant  Secretary :  !Mr.  John  G.  Holmes. 

The  principal  office  of  Consolidated  Steel  Company  is  at  No.  10 
Day  Street,  in  the  city  of  Hoboken,  County  of  Hudson,  State  of  New 
Jersey ;  the  company  also  maintains  offices  at  No.  17  Wall  Street, 
New  York  City,  and  at  No.  3  Scranton  Street,  Lebanon,  Pennsylvania. 

Herewith  are  submitted: 

1.  Copy  of  the  certificate  of  incorporation  of  Consolidated  Steel 
Company. 

2.  Copy  of  the  amended  certificate  of  incorporation  of  Consolidated 
Steel  Company. 

.3.  Seven  copies  of  the  first  mortgage  of  Consolidated  Steel  Com- 
pany, including  one  copy  certified  by  Interborough  Trust  Company  of 
New  York  to  be  a  true  copy  of  the  original. 

4.  Certificate  of  Interborough  Trust  Company  of  New  York  ac- 
knowledging the  acceptance  of  the  trust  under  said  first  mortgage, 
stating  the  securities  held  under  the  trust,  and  giving  the  numbers  of 
the  first  mortgage  bonds  executed  in  accordance  with  the  terms  of  tlie 
mortgage. 

5.  Copy  of  the  by-laws  of  Consolidated  Steel  Company. 

6.  Opinion  of  counsel. 

7.  Balance  sheet  of  Consolidated  Steel  Company,  as  of  May  1, 1909, 
certified  by  Strong,  Longmead,  and  Company. 

8.  Statement  of  earnings  and  expenses  of  the  three  businesses  car- 


APPENDIX    OF   CORPOKATE   FORMS.  1029 

ried  on  in  the  plants  above  mentioned  for  the  year  ending  January  1, 
1909,  also  certified  by  Strong,  Longmead,  and  Company. 
9.  Sample  copies  of  bonds,  coupons,  and  stock  certificates. 

Consolidated  Steel  Company, 
By  George  Bathurst, 

President. 

Accompanying  the  foregoing  application  was  the  following  opinion 
of  counsel : 

To  the  Committee  on  Stock  List  of  the  Stock  Exchange : 

Gentlemen  : 

We  have  examined  the  certificate  of  incorporation  of 
Consolidated  Steel  Company,  a  New  Jersey  corporation,  and  the 
amendments  thereto,  and  the  proceedings  relating  to  the  organization 
of  that  company  and  to  the  issue  of  its  preferred  and  common  stock. 

We  are  of  opinion  that  said  company  has  been  legally  incorporated 
and  organized  under  the  laws  of  the  State  of  New  Jersey  ;  that  it  has 
power  to  issue  seven  per  centum  cumulative  preferred  stock  to  the  par 
amount  of  twenty  million  dollars  ($20,000,000)  and  common  stock  to 
the  par  amount  of  twenty  million  dollars  (J^20,000,000) ;  that  pre- 
ferred stock  to  the  amount  of  ten  million  dollars  ($10,000,000)  and 
common  stock  to  the  amount  of  ten  million  dollars  ($10,000,000)  has 
been  issued  in  due  form,  and  that  the  action  of  the  directors  and  stock- 
holders of  said  company  in  respect  of  said  stock,  both  preferred  and 
common,  was  in  conformity  with  the  laws  of  the  State  of  New  Jersey. 

We  have  also  examined  the  first  mortgage  dated  April  27,  1909, 
made  by  said  company  to  Interborough  Trust  Company  of  New  York 
as  trustee  to  secure  an  issue  of  its  five  per  centum  first  mortgage  gold 
bonds,  and  we  are  of  opinion  that  the  action  of  the  directors  and  stock- 
holders of  said  company  in  respect  to  this  mortgage  was  in  conformity 
with  law,  that  the  said  mortgage  is  a  valid  lien  on  the  properties 
therein  mentioned,  and  that  the  bonds  issued  under  said  mortgage  are 
valid  and  binding  obligations  of  said  company. 

Yours  faithfully, 

Stockton  and  Livermork. 


1030  APPENDIX   OF  CORPORATE   FORMS. 


SYNDICATE   AGREEMENT. 

Agreement,  made  this  fifth  clay  of  April,  one  thousand  nine  hun- 
dred and  nine,  by  and  between  Brown  &  Company  and  Jones  &  Com- 
pany, of  New  York,  and  Smith  &  Comi)any,  of  London,  as  Readjust- 
ment Managers  (hereinafter  called  the  *' Readjustment  Managers"), 
parties  of  the  first  part ;  Talbot  &  Com])any,  of  London,  VVatkins  & 
Company  and  Weill  &  Company,  of  New  York,  as  Syndicate  Man- 
agers (hereinafter  called  the  "  Syndicate  Managers  "),  i)arties  of  the 
second  part;  and  the  Syndicate  Subscribers  hereto  (hereinafter  called 
the  "  Subscribers  "),  parties  of  the  third  part,  who  together  with  the 
Syndicate  Managers  constitute  the  Syndicate,  each  subscriber  being 
bound  only  ratably  to  the  extent  of  his  own  subscription  and  not  for 
any  other  subscriber  or  subscription. 

Whereas,  pursuant  to  a  certain  i)lan  and  agreement  of  readjustment, 
dated  April  5, 1909,  about  to  be  issued,  it  is  j)roposed  to  undertake  a 
readjustment  of  the  affairs  of  the  New  York  &  Buffalo  Railroad  Com- 
pany on  the  basis  of  an  issue  of  twenty  million  dollars  ($20,000,000) 
Prior  Lien  4^  per  cent  Gold  Mortgage  Bonds  (which  issue  may  for  the 
purposes  in  said  plan  specified  be  increased  as  therein  stated),  and 
fifteen  million  dollars  ($15,000,000)  First  Consolidated  Mortgage  4  per 
cent  Gold  Bonds  (which  issue  may  be  increased  for  the  purposes  in 
the  said  plan  specified  as  therein  stated),  and  of  an  issue  of  twenty- 
five  million  dollars  ($25,000,000)  in  Four  Per  Cent  Non-Cumulative 
Preferred  Stock  (which  issue  may  for  the  purposes  in  said  ])lan  speci- 
fied be  increased  as  therein  stated),  and  of  thirty-three  million  three 
hundred  and  fifty  thousand  dollars  ($33,350,000)  in  New  Common 
Stock  ;  it  being  understood  that  to  the  extent  that  the  existing  bonds 
shall  not  be  exchanged  for  new  securities  under  the  offer  in  the  plan, 
or  not  retired  by  payment  on  redemption  or  in  dissolution  proceedings, 
or  otherwise,  the  new  securities  respectively  apportioned  to  such 
bonds  under  the  plan  shall  be  reserved  for  the  ultimate  redemption 
thereof;  and 

Whereas,  in  order  to  provide  the  cash  requirements  of  said  plan  as 
hereinafter  set  forth,  the  Readjustment  Managers  have  undertaken  to 
form  a  syndicate  to  which  the  parties  of  the  third  part  desire  to  be 
admitted  as  subscribers,  and  it  is  proposed  that  to  the  extent  and  in 
the  manner  hereinafter  provided  the  Syndicate  shall  provide  sucli  cash 
requirements  of  the  said  plan  and  purchase  the  new  securities  as  here- 
inafter provided ; 

Noiv,  this  Agreement  Witnesseth,  that  in  consideration  of  the  mutual 
promises  herein  contained,  the  parties  hereto  agree  with  each  other 
and  with  the  Readjustment  Managers  and  the  Syndicate  Managers, 
the  said  Syndicate  Subscribers  agreeing  each  for  himself  and  not  for 
any  other,  as  follows  : 


APPENDIX    OF   CORPORATE   FORMS.  1031 

First.  The  parties  of  the  second  and  third  parts  hereto  hereby 
form  a  syndicate  for  the  purpose  of  providing  the  cash  requirements 
of  the  said  Plan  of  Keadjustment  of  the  New  York  &  Buffalo  Railroad 
Company.  The  maximum  amount  or  obligation  of  the  syndicate  shall 
not  exceed  the  sum  of  twenty-live  million  dollars  ($25,000,000),  and 
such  obligations  shall  be  divided  and  ap[)ortioned  as  recited  in  this 
agreement.  This  agreement  shall  not  take  effect  until  the  said  maxi- 
mum amount  shall  have  been  subscribed. 

Second.  The  syndicate  agrees  to  take  and  pay  for  and  the  Read- 
justment Managers  will  sell  and  deliver  the  following  new  securities 
when  issued,  or  certificates  therefor  entitling  the  holders  to  the  new 
securities  when  issued,  viz. : 

(1)  $9,221,000.00  Prior  Lien  4i  Per  Cent  Gold  Mortgage  Bonds. 
13,595,312.50  First  Consolidated  Mortgage  4  Per  Cent  Gold  Bonds. 
$2,400,000.00  New  4  Per  Cent  Preferred  Stock  (Trust  Certificates) 

for  the  sum  of  twelve  million  nine  hundred  and  sixty-seven  thousand 
three  hundred  and  sixty-seven  dollars  ($12,907,367),  plus  any  interest 
accrued  on  said  bonds  when  delivered. 

(2)  The  S^-ndicate,  if  so  requested  by  the  Readjustment  Managers, 
will  farther  take  and  pay  for  such  part  of  the  $10,779,000  new  Prior 
Lien  4J  Per  Cent  Gold  Mortgage  Bonds  (or  Certificates  therefor  en- 
titling the  holders  to  such  new  Bonds  when  issued),  which  under  the 
Plan  are  to  be  offered  to  the  holders  of  the  present  outstanding  New 
York  &  Buffalo  Railroad  Company  First  Mortgage  (Prior  Lien)  6  Per 
Cent  Bonds,  as  may  not  be  taken  by  them  within  the  time  limit  fixed 
by  the  Readjustment  Managers,  at  the  price  of  $985  per  bond,  plus 
any  interest  accrued  on  said  bonds  when  delivered. 

(3)  The  Syndicate  further  agrees  with  the  Readjustment  Managers 
to  advance  to  them  or  on  their  order  cash  not  exceeding  in  the  aggre- 
gate the  sum  of  ten  million  dollars  ($10,000,000)  if  the  Readjustment 
Managers  shall  in  their  discretion  deem  that  such  cash  advances  will 
tend  to  promote  the  consummation  of  the  Plan  of  Readjustment,  as 
follows,  viz. : 

(a)  To  advance  moneys  on  the  security  of  the  existing  bonds  or 
coupons  or  stock  trust  certificates  of  the  New  York  &  Buffalo  Rail- 
road or  certificates  issued  by  the  Readjustment  Managers  entitling 
their  holders  to  new  securities  when  issued,  or  upon  other  securities 
satisfactory  to  the  Syndicate  Managers. 

{h)  To  advance  cash  to  purchase  any  properties  whose  securities 
are  owned  by  the  New  York  &  Buffalo  Railroad  Company,  or  any 
part  thereof,  on  any  sale  of  said  properties  in  dissolution  proceed- 
ings or  otherwise. 

The  Syndicate  shall  make  such  advances  from  time  to  time  upon 
twenty  days'  written  notice  from  tlie  Readjustment  Managers  to  the 
Syndicate  Managers.  Such  advances  shall  be  repaid  with  interest  at 
the  rate  of  6  per  cent  per  annum  out  of  the  proceeds  of  the  new  secu- 
rities deliverable  hereunder.     The  Readjustment  Managers,  however, 


1032  APPENDIX   OF   CORPORATE   FORMS. 

shall  in  no  event  be  personally  liable  in  respect  of  any  obligation, 
advance,  purcliase  or  loan  hereunder. 

Third.  Each  subscriber  signing  this  agreement  shall  set  opposite 
his  name  and  address  the  amount  of  his  subscription  to  the  Syndicate, 
and  shall  from  time  to  time  and  at  any  time  on  call  of  the  Syndicate 
Managers  make  cash  payments  on  account  of  his  subscription  here- 
under. Not  over  live  million  dollars  ($5,000,000)  (twenty  per  cent) 
in  money  in  the  aggregate  shall  be  called  from  the  Syndicate  sub- 
scribers in  any  one  montli.  Payments  from  the  subsoril^ers  shall  be  due 
ten  days  after  the  sending  of  written  notice  from  the  Syndicate  Man- 
agers to  the  subscribers,  and  such  notice  shall  be  by  letter  to  the  sub- 
scribers in  the  United  States  and  by  cable  or  letter  to  those  in  Europe 
at  the  addresses  of  the  respective  subscribers  written  below,  or  at  such 
other  addresses  as  may  be  furnished  in  writing  to  the  Syndicate  Man- 
agers by  the  subscribers  respectively.  Each  subscriber  shall  be  called 
upon  to  pay  and  shall  be  liable  only  for  such  amount  as  shall  bear  to 
the  total  obligation  payable  by  the  Syndicate  as  ascertained  from  time 
to  time  the  same  ratio  or  proportion  as  his  subscription  hereunder 
written  bears  to  the  maximum  obligation  of  the  Syndicate  as  fixed  in 
this  agreement.  The  Syndicate  ^lanagers  may  at  any  time  in  their 
discretion  distribute  among  the  subscribers  pro  rata  any  securities 
acquired  or  held  hereunder;  but  until  the  termination  of  the  Syndi- 
cate, unless  the  Syndicate  Managers  shall  otherwise  notify  the  sub- 
scribers in  writing,  no  securities  so  delivered  to  subscribers  shall  be 
sold  by  them,  but  they  shall  all  be  held  by  the  subscribers  subject  to 
the  order  and  control  of  the  Syndicate  Managers,  to  be  returned  to  said 
Syndicate  Managers  upon  demand  or  their  order,  for  sale  or  exchange 
on  Syndicate  account. 

Fourth.  The  Readjustment  Managers  shall  pay  to  the  Syndicate 
Managers  for  the  benefit  of  the  several  Syndicate  subscribers  in  pro- 
portion to  their  respective  subscriptions  a  commission  or  compensation 
of  three  per  cent  (3  per  cent)  in  cash  on  the  amount  of  their  subscrip- 
tions hereunder  regardless  of  the  iimount  which  the  Syndicate  shall 
be  called  upon  to  pay  or  advance.  Such  compensation  shall  be  paid 
from  time  to  time,  as  the  Readjustment  Managers  and  Syndicate  Man- 
agers shall  determine. 

Fifth.  Deliveries  of  the  respective  new  securities  shall  be  made  with 
reasonable  promptness  after  completion  of  the  readjustment  in  Kew 
York  and  London  in  such  proportions  as  the  Syndicate  Managers 
shall  request.  The  Syndicate  shall  continue  in  force  and  operation 
until  one  year  after  the  delivery  of  the  new  securities,  unless  sooner 
terminated  by  the  Syndicate  Manngers  in  their  discretion  and  at  their 
option  upon  notice  to  the  subscribers. 

Sixth.  The  Plan  of  Readjustment  may  be  modified  from  time  to 
time  by  the  Readjustment  Managers  as  provided  in  the  Readjustment 
Agreement.  Thereupon  this  agreement  shall  apply  to  such  modified 
plan,  and,  if,  as  a  result  of  such  modification,  a  less  amount  of  cash  shall 


APPENDIX  OF  CORrORATE  FORMS.  1033 

be  required  for  the  purposes  of  the  readjustment,  the  amount  of  any- 
class  or  classes  of  securities  to  be  sold  as  specilied  in  Paragraph 
Second,  may  be  reduced.  In  such  case  the  amount  to  be  paid  by  the 
Syndicate  shall  be  diminished,  as  may  be  agreed  upon,  between  tlie 
Syndiiiate  Managers  and  the  Readjustment  Managers.  The  Readjust- 
ment ^lanagers  may  finally  abandon  the  plan,  including  all  modifica- 
tions tliereof,  and  in  such  event  this  agreement  shall  cease  to  be  of 
any  future  effect,  and  no  compensation  thereunder  shall  be  due  to  the 
Syndicate ;  but  any  advance  theretofore  made  by  the  Syndicate  under 
subdivision  3  of  Article  Second  of  this  agreement  shall  be  repaid  with 
interest  at  the  rate  of  six  per  cent  per  annum,  and  any  securities  there- 
tofore purchased  and  then  held  for  Syndicate  account  may  thereafter 
be  sold  and  the  proceeds  distributed  among  the  Syndicate  subscribers 
at  such  time  or  times  and  in  such  amounts  as  the  Syndicate  Managers 
shall  determine,  not  later,  however,  than  one  year  after  the  final  aban- 
donment of  the  plan. 

Seventh.  The  failure  of  any  Syndicate  subscriber  to  perform  any  of 
his  undertakings  hereunder  shall  not  affect  or  release  any  other  Syndi- 
cate subscriber,  and  upon  such  failure  the  Syndicate  Managers  shall 
have  the  right  at  their  option  to  exclude  such  subscriber  from  further 
interest  and  participation  in  the  Syndicate  and  to  forfeit  any  payments 
he  may  have  theretofore  made  thereunder,  and  to  recover  all  damages 
resulting  from  his  failure.  The  Syndicate  jNlanagers  may  in  their  dis- 
cretion by  written  consent  release  any  subscriber,  and  may  accept  new 
subscribers  from  time  to  time  in  the  place  of  any  subscriber  so  failing 
or  released.  Each  subscriber  shall  be  liable  hereunder  solely  to  the 
Syndicate  Managers  and  the  Readjustment  Manages  and  their  as- 
signs and  only  for  such  ratable  part  of  the  obligations  of  the  Syndicate 
as  the  amount-of  his  subscription  bears  to  $25,000,000.  Nothing  con- 
tained in  this  agreement  or  otherwise  shall  constitute  the  subscribers 
partners  with  one  another  or  with  the  Syndicate  Managers  or  render 
them  liable  to  contribute  in  any  event  more  than  their  ratable  amount 
as  aforesaid.  The  Readjustment  Managers  shall  in  no  event  be  per- 
sonally liable  in  respect  to  any 'loss  incurred  hereunder. 

Eighth.  All  the  bonds  and  stocks  purchased  by  the  Syndicate  as 
aforesaid,  and  all  net  proceeds  resulting  from  the  sales  of  any  such 
bonds  or  stock,  or  from  any  other  transaction  of  the  S^'udicate  ]Man- 
agers  for  account  of  the  Syndicate  under  any  of  the  provisions  hereof, 
after  payment  of  any  and  all  expenses  and  obligations  incurred  by  the 
Syndicate  Managers  under  the  provisions  of  this  agreement,  and  the 
repayment  of  any  advances  made  by  the  Syndicate,  shall  be  distributed 
among  the  Syndicate  subscribers  pro  rata  by  the  Syndicate  ^Nlanagi^rs 
at  any  time  when  they  shall  decide  to  terminate  this  agreement,  or 
from  time  to  time  when  and  as  the  Syndicate  Managers  may  deem  ex- 
pedient. The  word  "  stock,"  whenever  used  herein  to  describe  any 
securities  to  be  deposited  hereunder,  shall  include  stock  voting  trust 
certificates. 


1034  APPENDIX   OF   CORPORATE   FORMS. 

Ninth.  The  Syndicate  Managers  uia}'  sell  any  bonds  or  stocks  held 
hereunder  to  any  other  subscriber,  and  any  such  other  subscriber  may 
make  any  jmrcliase  from  tlie  Syndicate  Managers.  The  Syndieato 
Managers  shall  have  absolute  control  over  tlie  dis|>osition  of  all  stock 
held  by  them,  and  they  niay  cause  tlie  same  to  l>o  transferred  to  them- 
selves, or  as  they  deem  exi)edient,  to  any  ]>erson  or  jwrsons,  eor|)ora- 
tion  or  corporations.  While  so  held  by  them  or  under  their  control 
the  Syndicate  Managers  shall  have  the  exclusive  right,  and  discreti«)n- 
ary  power  is  hereby  conferred  upon  them,  to  vote  ujhju  such  stock 
or  to  cause  the  same  to  be  voted  by  their  nominees  or  by  any  proxies 
ap{)ointed  or  selected  by  them  at  all  meetings  of  stockholders  for  the 
election  of  directors  of  the  company,  stock  in  whiih  is  so  held,  and  for 
any  and  all  i>urposes  whatstKJver.  The  Syndicate  Manaj,'ers  shall  have 
the  sole  nmnagement  and  conduct  of  the  Syndicate.  The  subscrilx^rs 
therefore  nominate  and  irrevociibly  api)oint  the  Syndicate  Managers 
their  agents  and  attorneys,  with  full  {wwer  and  authority  to  do  any 
and  all  acts  and  enter  into  and  executo  any  ;uid  all  agret-ments  and 
arrangements  deemed  by  the  Syn<licate  Managers  necessary,  projier 
or  expedient  to  carry  out  and  |)erform  the  objects  and  terms  of  this 
agreement  substantially  as  herein  set  forth,  or  to  promote  or  protect 
what  they  may  deem  the  best  interests  of  the  Syndicate,  including  full 
power  and  authority  to  make  purchases  and  sales  in  the  market,  or 
otherwise,  for  account  of  the  .syndicate,  of  the  existing  l)onds  antl  stock 
(voting  trust  certificates)  of  the  New  York  &  Buffalo  Railroad  Com- 
pany, or  of  other  existing  securities  for  which  new  securities  are  pro- 
vided to  be  issued  under  the  Pliin;  or  of  Certificates  of  Dejjosit  or 
receipts  for  any  such  bonds  or  stock,  or  in  coujK)ns  now  or  subse- 
quently matured  anil  unpaid  l)elonging  to  any  such  bonds  ;  deposits  of 
the  same  under  the  I'lan ;  purchases  and  sales  of  the  new  securities 
(or  certificates  entitling  the  holders  to  the  new  securities  as  issued), 
and  generally  to  have  such  trans.actions  in  said  existijjg  and  other 
l)onds  and  stock  and  new  securities  or  certificates  therefor  as  they 
may  deem  best  for  the  interests  of  the  Syndicate;  provitled,  however, 
that  the  total  cash  obligation  to  be  incurred  by  the  Syndicate  for  sucli 
purchases  and  for  advances  shall  never  exceed  the  sum  of  twenty -five 
million  dollars  (•'52."),()00,()0())  at  any  one  time  as  stated  in  Paragraph 
First  hereof. 

Tenth.  To  accomplish  the  objects  and  purposes  of  this  Syndicate, 
each  subscriber  hereby  ratifies  and  assents  to  any  action  of  the  Syn- 
dicate Managers  taken  under  this  agreement,  and  agrees  to  perform 
his  undertakiu'jrs  hereunder  from  time  to  time  prom[»tly  on  the  call  of 
the  Syndicate  M;inagers  to  the  full  extent  of  the  amount  of  his  sulv 
scription  set  oj^posite  his  name  hereto  subscribed.  The  enumeration 
of  particular  or  specific  powers  in  this  agreement  shall  not  be  con- 
sidered as  in  any  way  limiting  or  abridging  the  general  powers  and 
discretion  intended  to  be  conferred  upon  and  reserved  to  the  Syn- 
dicate Managers  in  order  to  fully  authorize  them  to  do  any  and  all 


APPENDIX    OF   COPvFORATE    FORMS.  1035 

things  by  them  in  their  discretion  deemed  necessary,  proper  or  expe- 
dient to  carry  out  the  purposes  of  this  agreement,  and  to  aid,  effectu- 
ate or  consummate  the  Flau  for  readjusting  the  finances  of  the  New 
York  &  Buffalo  Railroad  Company. 

Eleventh.  The  Syndicate  Managers  shall  not  be  liable  under  anj- 
of  the  provisions  of  this  agreement  or  any  matter  connected  therewith, 
and  in  like  manner,  the  Eeadjustment  Managers  shall  not  be  liable 
under  any  of  the  provisions  of  this  agreement  or  any  matter  connected 
therewith,  except  in  each  instance  for  good  faith  and  the  exercise  of 
reasonable  diligence.  The  Syndicate  Managers  and  the  Readjustment 
^lanagers,  and  each  of  the  above-named  firms  or  any  member  of  any 
of  said  firms,  may  respectiveh*  become  Syndicate  subscribers  hereto, 
and  in  that  event  they  shall  be  liable  for  their  Syndicate  subscriptions, 
and  shall  participate  in  the  profits  and  losses  of  the  Syndicate  in  the 
same  way  as  and  ratably  with  other  Syndicate  subscribers.  All  ex- 
penses of  the  Syndicate  Managers,  including  counsel  fees,  brokerages 
paid  in  marketing  bonds,  &c.,  shall  be  charged  to  the  S^Tidicate  and 
all  profits  and  losses  of  the  Syndicate  divided  and  borne  pro  rata,  and 
each  Syndicate  subscriber  agrees  to  pay  to  the  Syndicate  ^Managers  on 
demand  his  ratable  share  of  any  such  losses. 

Ticelfth.  So  far  as  practicable,  the  three  firms,  as  such  Syndicate 
Managers,  shall  act  and  concur  in  all  steps  and  proceedings  hereunder, 
but  in  event  of  the  three  firms  not  concurring,  the  concurrent  action 
of  any  trwo  of  said  firms  shall  be  the  action  of  the  Syndicate  Managers, 
and  no  action  shall  be  taken  except  with  the  assent  of  at  least  two  of 
said  firms.  The  said  firms  shall  each  act  as  a  co-partnership,  and  in 
case  of  any  change  in  any  of  said  firms  the  respective  firms  of  Talbot 
&  Company,  Watkins  &  Company,  and  Weill  &  Company,  or  their 
respective  successor  firms  as  from  time  to  time  constituted,  shall  con- 
tinue as  Syndicate  Managers,  with  all  the  powers,  rights  and  title 
vested  in  the  Syndicate  Managers  hereunder. 

Thirteenth.  Each  and  every  party  hereto  upon  reasonable  request, 
will  from  time  to  time  execute,  deliver  and  perform  all  written  agree- 
ments necessary  or  proper  to  carry  this  agreement  into  effect. 

Fourteenth.  All  notices  to  American  members  of  the  Syndicate  shall 
be  signed  by  or  for  Watkins  &.  Company  and  by  or  for  Weill  &  Com- 
pany, for  the  Syndicate  Managers,  but  if  for  any  reason  it  be  imprac- 
ticable to  have  the  signature  of  both  firms  the  signature  of  either  firm 
shall  be  sufficient,  provided  the  notice  has  been  authorized  by  the  Syn- 
dicate Managers,  as  provided  in  Paragraph  Twelfth  hereof.  All  notices 
to  other  members  shall  be  sufficient  if  signed  by  or  for  Talbot  &  Com- 
pany. 

Fifteenth.  This  agreement  shall  be  deemed  to  apply  to  and  bind  the 
legal  representatives  and  assigns  of  the  respective  subscribers,  but  no 
assignment  hereunder  shall  be  valid  unless  assented  to  in  writing  by 
the  Syndicate  Managers. 

Sixteenth.  Xothing  herein  contained  shall  be  construed  as  creating 


1036 


APPENDIX   OF   CORPORATE   FORMS. 


any  trust  or  obligation  whatsoever  in  favor  of  the  New  York  &  Buffalo 
Railroad  Company,  or  in  favor  of  any  person  or  corporation  other  than 
the  subscribers,  nor  any  obligation  in  favor  of  the  subscribers,  except 
only  as  is  herein  expressly  provided. 

Seventeenth.  Six  copies  of  this  agreement  shall  be  signed  by  the 
Syndicate  Managers  and  the  Readjustment  Managers,  and  one  of  such 
copies  lodged  with  each  of  the  firms  composing  the  Syndicate  Man- 
agers and  one  with  each  of  the  firms  composing  the  Readjustment 
Managers,  and  other  copies  may  be  signed  by  any  of  the  subscribers, 
but  all  of  the  different  copies  so  signed  shall  together  constitute  but 
one  agreement. 

In  witness  vherenf,  the  parties  of  the  first  and  second  parts  hereto 
have  hereunto  subscribed  their  names,  and  the  Subscribers,  parties  of 
the  third  part,  have  hereunto  subscribed  their  names,  addresses  and 
the  amounts  of  subscriptions  made  by  them  respectively  the  day  and 
year  aforesaid. 

Buowx  &  Co. J  "^ 

JoNKs  &  Co.,    >  Readjustment  Managers. 

Smith  &  Co.,   ) 

Talijot  &  Co.,    \ 

"NVatkin's  &  Co.,  ]-  Si/ndkate  Managers. 

Weill  &  Co.,      ) 


NAME  OF   SUBSCRIBER. 


ADDRESS  TO   WHICH 

NOTICES   ARE   TO 

BE  SENT. 


AMOUNT   OF 
SUBSCRIPTION. 


APPENDIX   OF   CORPORATE   FORMS.  1037 


ALBEMARLE   AND  BRISTOL  RAILROAD 
COMPANY. 

VOTING  TRUST   AGREEMENT. 

Dated  April  5th,  1909. 

Agreement,  made  the  5th  day  of  April,  1909,  by  and  between 
Norcross  &  Co.,  Robinson,  Cromwell  &  Co.,  and  Tracy  Brothers,  all  of 
New  York  City  (hereinafter  called  the  Managers),  as  Readjustment 
INEanagers  under  a  certain  plan  and  agreement  for  the  readjustment 
of  The  Albemarle,  Charlton,  and  Bristol  Railroad  Company,  dated  the 
1st  day  of  October,  1908,  parties  of  the  first  part ;  George  A.  Norcross, 
William  A.  Robinson,  and  Edward  C.  Tracy  (hereinafter  called  the 
Voting  Trustees),  parties  of  the  second  part ;  and  holders  of  the  trust 
certificates,  hereinafter  mentioned,  parties  of  the  third  part, 

Witnesseth : 

Whereas,  Albemarle  and  Bristol  Railroad  Company  has  been  organ- 
ized under  the  laws  of  the  State  of  Alabama,  and,  pursuant  to  said 
plan  and  agreement  of  readjustment,  has  acquired  certain  railroads 
and  property  formerly  of  The  Albemarle,  Charlton,  and  Bristol  Rail- 
road Company ;  and 

Whereas,  said  Albemarle  and  Bristol  Railroad  Company  has  au- 
thorized an  issue  of  its  First  Mortgage  Gold  Bonds,  payable  January 
1,  1939,  with  interest  from  January  1,  1909,  at  the  rate  of  four  per 
cent  per  annum,  secured  by  a  mortgage  or  deed  of  trust  dated  April 
5,  1909,  to  Interborough  Trust  Company  of  New  York,  as  Trustee,  on 
certain  of  its  railroads  and  property  ;  and  has  also  authorized  an  issue 
of  its  First  Consolidated  Mortgage  Gold  Bonds,  payable  January  1, 
1959,  with  interest  from  January  1,  1909,  at  the  rate  of  four  per  cent 
per  annum,  secured  by  a  mortgage  or  deed  of  trust  dated  April  5, 1909, 
to  Mutual  Trust  Company  of  New  York,  as  Trustee,  on  its  railroads 
and  property ;  and 

Whereas,  in  piu'suance  of  said  plan  and  agreement  of  readjustment, 
the  Managers,  as  additional  protection  to  said  mortgage  bonds,  have 
delivered  to  the  Voting  Trustees  certificates  for  two  hundred  and 
ninety-nine  thousand,  nine  hundred  and  fifty  full-paid  shares,  of  one 
hundred  dollars  each,  of  the  capital  stock  of  Albemarle  and  Bristol  Rail- 
road Company,  and  said  certificates,  together  with  such  other  similar 
certificates  as  hereafter  from  time  to  time  may  be  delivered  hereunder, 
are  to  be  held  and  disposed  of  by  the  Voting  Trustees  under  and  pursu- 
ant to  the  terms  and  conditions  hereof; 


1038  APPENDIX  OF  COUPOUATE  FOUMS. 

Now,  therefore,  the  Voting  Trustees  do  agree  with  the  Managers, 
and  with  each  and  every  holder  of  certificates  issued  as  hereinafter 
provided,  as  follows : 

First:  The  Voting  Trustees  will  from  time  to  time,  upon  request, 
cause  to  be  issued  to  the  Managers,  or  upcm  their  order,  in  respect  of 
all  certificates  of  stock  received  from  them,  certificates  in  substan- 
tially the  following  form : 

[Here  take  in  form  of  trust  certificate.] 

Second :  On  the  first  day  of  January,  1914,  if  Albemarle  and  Bris- 
tol Railroad  Company  shall  then  have  paid,  for  two  consecutive  years,  a 
four  per  cent  cash  dividend  on  its  stock,  or,  if  not,  then  as  soon  as  such 
dividend  shall  for  two  consecutive  years  have  been  so  paid;  or  when- 
ever, although  prior  to  the  payment  of  such  dividends,  the  Voting 
Trustees  shall  decide  to  make  such  delivery,  the  Voting  Trustees,  in 
exchange  for  and  upon  surrender  of  any  trust  certificate  then  out- 
standing, will,  in  accordance  with  the  terms  hereof,  deliver  certifi- 
cates of  stock  of  Albemarle  and  Bristol  Railroad  Company,  and  may 
require  the  holders  of  tioist  certificates  to  exchange  them  for  certifi- 
cates of  stock. 

Third :  The  Voting  Trustees  possess  and  shall  be  entitled  to  ex- 
ercise until  the  actual  delivery  of  certificates  of  stock  in  exchange 
for  trust  certificates,  all  rights  and  powers  of  owners  of  said  stock 
including  the  unrestricted  right  to  vote  for  every  purpose  and  to 
consent  to  any  corporate  act  of  said  Railroad  Company,  it  being  ex- 
pressly stipulated  that  no  voting  right  passes  by  or  under  said  trust 
certificates,  or  by  or  under  this  agreement,  or  by  or  under  any  agree- 
ment express  or  implied.  The  Voting  Trustees  will  not,  however, 
during  the  pendency  of  this  agreement,  vote  in  respect  of  tlie  shares 
of  stock  held  by  them  to  authorize  any  mortgage,  additional  to  the 
First  ^lovtgage  and  the  First  Consolidated  Mortgage  of  said  Railroad 
Company,  upon  the  property  acquired  under  said  plan  and  agreement 
of  readjustment  dated  October  1,  1908,  or  to  authorize  the  issue  of 
preferred  stock  of  said  Railroad  Company,  except  with  the  consent  in 
each  instance  of  the  holders  of  trust  certificates  representing  a  major- 
ity of  the  whole  amount  of  the  stock  of  said  Railroad  Company  held 
by  the  Voting  Trustees,  such  consent  to  be  given  in  person  or  by 
proxy  at  a  meeting  called  by  the  Voting  Trustees  for  that  purpose. 

Fourth:  The  trust  certificates  issued  hereunder  shall  be  transfer- 
able upon  the  books  of  the  Voting  Trustees  by  the  registered  holder, 
either  in  person  or  by  attorney,  on  surrender  of  the  trust  certificates, 
properly  indorsed,  and  according  to  the  rules  established  by  the  Voting 
Trustees  for  the  regulation  of  transfers.  Until  so  transferred,  every 
registered  holder  for  the  time  being  of  every  such  trust  certificate 
may  be  treated  by  the  Voting  Trustees  as  the  owner  thereof  for  all 
purposes  whatsoever. 


APPENDIX    OF   CORPORATE   FORMS.  1039 

Fifth:  So  long  as  any  trust  certificate  is  properly  outstanding  the 
registered  holder  thereof  shall  be  entitled  to  the  payment  of  a  sum 
equal  in  amount  to  any  and  all  dividends  that  liave  been  declared  on 
the  shares  held  by  the  Voting  Trustees  against  such  trust  certificates 
as  soon  as  such  dividends  liave  been  collected  by  the  Voting  Trustees, 
less  such  fraction  of  the  expenses  of  the  Voting  Trustees  herein  pro- 
vided for  as  the  shares  so  held  against  such  trust  certificate  are  of  the 
total  number  of  the  shares  held  by  the  Voting  Trustees  at  the  time 
such  expenses  were  incurred. 

Sixth :  In  voting  the  stock  held  by  them,  the  Voting  Trustees  will 
exercise  their  best  judgment  from  time  to  time  in  selecting  suitable 
directors  to  the  end  that  the  affairs  of  the  said  Kailroad  Company 
shall  be  properly  managed ;  and  in  voting  and  in  taking  action  on 
other  matters  which  may  come  before  them  as  stockholders  they  will 
likewise  exercise  their  best  judgment ;  but  they  assume  no  responsi- 
bility in  respect  to  such  management  or  in  respect  of  any  action  taken 
pursuant  to  their  consent  thereto  as  such  stockholders. 

The  Voting  Trustees  may  execute  any  of  the  trusts  or  powers 
hereof  and  perform  any  duty  hereby  required  by  or  through  their  at- 
torneys, officers,  agents,  or  servants,  and  shall  be  entitled  to  advice  of 
counsel  in  all  matters  concerning  the  trusts  hereof  and  their  duties 
hereunder.  The  Voting  Trustees  shall  be  answerable  only" for  their 
own  several  acts,  receipts,  neglects,  and  defaults,  and  not  for  those  of 
each  other,  nor  for  those  of  any  person  employed  by  them  and  selected 
with  reasonable  care,  nor  for  loss  unless  the  same  shall  happen 
through  the  individual  wilful  default  of  the  individual  trustee  charged 
therewith. 

The  Voting  Trustees  shall  be  authorized  in  all  cases  to  pay  such 
reasonable  remuneration  as  they  shall  deem  proper  to  all  attorneys, 
officers,  agents,  and  employees  that  they  may  reasonably  employ  in  the 
management  of  the  trusts  and  powers  hereof,  and  all  such  remunera- 
tion and  all  other  reasonable  expenses  and  disbursements  of  the 
Voting  Trustees  including  their  own  reasonable  remuneration  shall  be 
paid  out  of  dividends  received  in  respect  of  the  shares  of  stock  held 
by  them. 

Any  Voting  Trustee  may  act  as  a  director  or  officer  of  the  saidEail- 
road  Company. 

Seventh  :  Any  Voting  Trustee  may,  at  any  time,  resign  by  deliver- 
ing to  the  other  Voting  Trustees  his  resignation  in  writing  to  take 
effect  ten  days  thereafter ;  and,  in  every  case  of  death  or  resignation 
or  of  the  inability  of  any  Voting  Trustee  to  act,  the  vacancy  so  occur- 
ring shall  be  filled  as  follows  :  the  successor  or  successors  from  time 
to  time  of  George  A.  Norcross  shall  be  appointed  by  Xoi-cross  &  Co., 
or  the  successors  of  said  firm  ;  the  successor  or  successors  from  time 
to  time  of  William  A.  Robinson  shall  be  appointed  by  Eobinson, 
Cromwell  &  Co.,  or  the  successors  of  said  firm ;  the  successor  or  suc- 
cessors from  time  to  time  of  Edward  C.  Tracy  shall  be  appointed  by 


1040  APPENDIX    OF   CORPOKATE   FORMS. 

Tracy  lirothors,  or  the  successors  of  said  liiin,  the  instruments  of 
a[»pointinent  being  lodged  with  the  other  Voting  Trustees.  The  term 
Voting  Trustees,  as  herein  used,  shall  apply  to  the  parties  of  the  sec- 
ond part  and  their  successors  hereunder. 

Ehjhth  :  All  action  to  be  taken  by,  or  questions  arising  among,  the 
Voting  Trustees  from  time  to  time  shall  be  determined  by  the  de- 
cision of  a  majority  of  those  then  acting  as  Voting  Trustees.  Such 
decision  may  be  evidenced  by  a  writing  signed  by  the  Voting  Trus- 
tees, or  a  majority  thereof,  and,  if  so  evidenced,  no  meeting  of  the 
Voting  Trustees  for  the  purpose  of  considering  the  matter  so  decided 
shall  be  requisite. 

JVinth :  All  notices  to  be  given  to  the  liolders  of  trust  certificates 
shall  be  mailed  to  such  holders  at  the  addresses  last  furnished  by 
them  to  the  Voting  Trustees,  provided  they  shall  have  furnished 
addresses.  No  holder  of  a  trust  certificate  who  fails  to  furnish  an 
address  to  the  Voting  Trustees  shall  be  entitled  to  receive  any  notice 
from  the  Voting  Trustees  of  any  proceedings  taken  liereunder. 

l\-nth:  The  term  Albemarle  and  Bristol  Railroad  Company  for  the 
purpose  of  this  agreement,  and  for  all  rights  hereunder,  including  the 
issue  and  delivery  of  stock,  shall  be  taken  to  mean  the  said  corpora- 
tion organized  under  the  laws  of  the  State  of  Alabama  or  any  successor 
or  consolidated  corporation. 

Eleventh :  From  time  to  time  hereafter,  the  Voting  Trustees  may 
receive  certificates  for  additional  full-paid  shares  of  the  stock  of  said 
Railroad  Company,  and,  in  respect  of  all  such  certificates  so  received, 
the  Voting  Trustees  may  issue  and  deliver  trust  certificates  similar 
to  those  above  mentioned,  entitling  the  holders  to  the  rights  therein 
specified. 

In  witness  whereof,  the  parties  of  the  first  and  second  parts  have 
hereunto  set  their  hands  in  the  city  of  New  York  the  day  and  year 
first  above  written.  This  agreement  shall  become  binding  upon  the 
holders  of  trust  certificates  upon  their  acceptance  of  such  certifi- 
cates. 

NORCROSS  &   Co., 
Robinson,  Cromwell  &  Co., 
Tracy  Brothers, 

Readjustment  Managers. 

George  A.  Korcross, 
William  A.  Robinson, 
Edward  C.  Tracy, 

Voting  Trustees. 


CouuterniifiieJ  :  April  0«.  1909, 

Security  Trust  Cum|i«iiy,  I  nuisfer  At;eut. 

By  O.  E.  Gootlapeed,  Tr«aaurer. 


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For  value  Eeceived hereby  sell,  assign,  and  transfer  untc 


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of  the  Capital  Stock  represented   by  the  within  Certificate  and  do 

hereby  irrevocably  constitute  and  appoint 

Attorney,  to  transfer  the  said  stock  on  the  Bocks  of  the  within  named 
Company  with  full  power  of  substitution  in  the  premises. 
Dated 1 9 


In  Dresence  of 


CounternigneJ  :  April  28,  1909, 

Security  Truit  Compauy,  Trauifer  Agent. 

By  O.  E.  UooUapeed,  Treaaurer. 


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_shares 


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hereby  irrevocably  constitute  and  appoint 

Attorney,  to  transfer  the  said  stock  on  the  Books  of  the  within  named 
Company  with  full  power  of  substitution  in  the  premises. 
Dated 19 . 


In  presence  of 


CONSOLIDATED   STEEL   COMPANY 

yiRST   MORTGAGE   TWENTY   YEAR   FIVE  PER  CENT. 

GOLD   BOND 
No.  M  1783  $1000 

CotlfiolitiateD  ,S>ted  Companp,  a  corporation  created  under  the  laws  of  the  State  of 
New  Jersey,  for  value  received  hereby  promises  to  pay  to  the  bearer  or,  if  rejjistertd,  to  the 
registered  "holder  hereof,  on  the  first  day  of  January,  1929,  at  the  office  of  Black  and  Com- 
pany, or  the  successors  of  said  firm,  in  the  city  of  New  York, 

ONE   THOUSAND   DOLLARS 

in  gold  coin  of  the  United  States  of  America  of  or  equal  to  the  present  standard  of  weight 
and  fineness,  and  to  pay  interest  thereon  fiom  the  1st  day  of  January,  l'J09,  at  the  rate  of 
five  per  cent,  per  annum  in  like  gold  coin  semi-annually  on  the  first  days  of  January  and 
July  in  each  year  at  said  office  upon  presentation  and  surrender  of  the  coupons  hereto 
annexed  as  they  severally  mature. 

Both  the  principal  and  interest  of  this  bond  are  payable  without  deduction  for  any  tax 
or  taxes  which  the  company  may  be  required  to  pay  or  to  retain  therefrom  under  any  present 
or  future  law  of  the  United  States  of  America  or  of  any  state,  county,  or  municipality 
thereof,  the  company  hereby  agreeing  to  pay  all  such  tax  or  taxes. 

This  bond  is  one  of  a  series  of  bonds  known  as  the  First  Mortgage  Five  Per  Cent.  Gold 
Bonds  of  the  company,  all  of  which  bonds  have  been  issued  or  are  to  be  issued  under  and 
in  pursuance  of,  and  are  to  be  secured  ratably  by,  a  mortgage  or  deed  of  trust  bearing  date 
the  27th  day  of  April,  1909,  executed  by  the  company  to  Interborough  Trust  Company  of 
New  York,  as  Trustee,  known  as  the  First  Mortgage.  Said  bonds  are  numbered  from  one 
consecutively  upwards  and  are  limited  to  the  princi]>al  sum  of  twenty  million  dollars 
(.•!?-20,0(iO,00())  at  any  one  time  outstanding.  For  a  description  of  the  properties  mortgaged, 
the  nature  and  extent  of  the  security,  the  rights  of  the  holders  of  bonds,  and  the  terms  and 
conditions  upon  which  bonds  of  said  series  may  be  issued  and  are  secured,  reference  is 
made  to  the  said  First  Mortgage. 

This  bowl  is  subject  to  redemption  at  the  option  of  the  company  on  six  months'  notice 
on  January  1st,  1919,  or  at  any  interest  day  thereafter,  at  five  per  cent,  premium  and  accrued 
interest  as  provided  in  the  said  First  Mortgage. 

This  bond  may,  at  the  holder's  option,  be  registered  as  to  the  principal  thereof  on  the 
t)ooks  of  the  company  at  its  transfer  agency  in  the  city  of  New  York,  and  be  made  payable 
onlv  to  the  registered  holder  named  therein,  but  such  registration  shall  not  affect  the  nego- 
tiability of  the  coupons  by  delivery.  After  suc<i  registration,  certified  hereon,  no  transfer 
except  on  the  books  of  the  company  shall  be  valid,  unless  the  last  transfer  on  said  books 
shall  have  been  to  bearer  and  transferability  by  deliverj'  thereby  restored;  but  successive 
registrations  and  transfers  to  bearer  as  aforesaid  may  be  made  at  the  option  of  the  holder. 

Neither  this  bond  nor  any  coupon  for  interest  thereon  shall  become  valid  or  obligatory 
until  the  certificate  indorsed  hereon  has  been  duly  executed  by  the  Trustee  under  said  First 
Mortgage. 

In  Witness  Whereof,  the  company  has  caused  these  presents  to  be  signed  by  its  presi- 
dent or  a  vice-president,  and  its  corporate  seal  to  be  hereunto  affixed  and  attested  by  its 
secretarj'  or  an  assistant-secretary,  and  coupons  for  such  interest  with  the  engraved  fac- 
simile signature  of  its  treasurer  to  be  hereunto  attached  this  27th  day  of  April,  1909. 

CONSOLIDATED  STEEL   COMPANY. 

Attest:  /        Seal  of       )  By  Philip  Livermore, 

Hugh  Knowles,  \   Consolidated   [  Vice-President. 

Secretary.  ^  Steel  Company  ) 


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Consolidated  Steel  Company.  $25 

On  the  Ist  day  of  July,  1000,  Consolidated 
Steel  Company,  a  New  Jersey  corporation,  will 
pay  to  bearer  at  the  oflJce  of  Black  and  Company 
in  the  city  of  New  York  twenty-five  dollars  ($'ii>) 
in  gold  coin,  without  deduction  for  taxes,  for  six 
months'  interest  tbeu  due  on  its  First  Mortgat^e 
Gold  Bond,  No.  M  1783 

John  O.  Holmes,  ^Q 

Treasuitr. 


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,tlie  within 


certificate  subject  to  the  terms  and  conditions  of  the  Voting  Trust 
Agreement  within  referred  to,  and  of  all  rules  concerning  such  trans- 
fer which  may  from  time  to  time  or  at  any  time  be  established  by  the 
within  named  Voting  Trustees,  to  which  agreement  and  rules  the 
transferee  and  every  holder  hereof  does  assent  by  the  acceptance 

hereof,  and  do  appoint attorney 

to  transfer  said  certificate  on  the   books  of  said  Voting  Trustees 
accordingly,  with  full  power  of  substitution  in  the  premises. 
Dated 19 


In  presence  of 


CAMBRIDGE  •  MASSACHUSETTS 
USA 


LAW  LIBRARY 
DHIVERSITY  OF  CALIFORNIA 


DC  SOUTHER',  REG:0'.-. 


AA    000  869  325    i 


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■^1.^ 


